1Q 2018 Review & Summer Air Travel Forecast

John P. Heimlich

Vice President & Chief Economist

Media Briefing

May 23, 2018

1Q 2018 OPERATIONS AND FINANCIAL RESULTS

airlines.org 2

1Q 2018 Was a Very Challenging Operating Environment for U.S. Airlines

airlines.org 3

Source: A4A research, FAA Air Traffic Organization and masFlight (subsidiary of Global Eagle)

Airport Construction

Atlanta (ATL)

Chicago (MDW & ORD)

Dallas/Fort Worth (DFW)

Honolulu (HNL)

Houston (IAH)

Los Angeles (LAX)

Miami (MIA)

New York (EWR & LGA)

Orlando (MCO)

Philadelphia (PHL)

Phoenix (PHX)

San Diego (SAN)

Tampa (TPA)

Washington (DCA)

Air Traffic Control

Understaffing at many major facilities*

Critically low staffing at New York TRACON (N90)*

Power Outages/Airport Equipment

Jan 1 (U.S. CBP) nationwide outage

Jan 7 (JFK T4 water main break / evacuation)

Major Weather

Jan 3-5 (“bomb cyclone”)

Jan 7-8, 12, 16-18, 21-22

Feb 4-5, 7, 9, 11, 15, 20

Mar 2 (Winter Storm Riley northeaster)

Mar 7 (Winter Storm Quinn northeaster)

Mar 13 (Winter Storm Skylar northeaster)

Mar 20-22 (Winter Storm Toby northeaster)

* Staffing is routinely cited as the basis for many traffic management initiatives (ground delay programs, ground stops, airspace flow programs, miles-in-trail) across the NAS

Sources: BTS and DOT Air Travel Consumer Report (http://www.dot.gov/airconsumer/air-travel-consumer-reports)

airlines.org 4

1Q 2018 Featured the Lowest-Ever Recorded Rate of Involuntary Denied Boardings

January-March Airline Flight Ops Impacted by Storms, Airport Construction, CBP Outage

96.90

98.28

98.24

97.45

2015

2016

2017

2018

1Q Flight Completion Factor (%)

99.64

99.72

99.74

99.71

2015

2016

2017

2018

1Q Properly Handled Bag Rate (%) 1Q On-Time Arrival Rate (%)

76.26

82.11

79.42

79.98

2015

2016

2017

2018

Best ever

8.5

6.0

6.2

1.2

2015

2016

2017

2018

1Q Involuntary Denied Boardings per 100K Psgrs.

1.92 1.86

1.19

0.98

0.00

0.25

0.50

0.75

1.00

1.25

1.50

1.75

2.00

1Q15 1Q16 1Q17 1Q18

Sources: DOT Air Travel Consumer Report (http://www.dot.gov/airconsumer/air-travel-consumer-reports)

airlines.org 5

The Rate of Customer Complaints Continued to Fall in 1Q 2018

Customer Complaints to DOT per 100,000 Passengers

Jet-Fuel Prices Creeping Up Again

A Penny per Gallon per Year Equates to ~$200M in U.S. Airline Industry Fuel Expenses

airlines.org 6

0.81

1.66

2.27

3.05 3.15 3.01

2.86

1.86

1.46 1.70

2.03

$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

2000 2005 2010 2011 2012 2013 2014 2015 2016 2017 2018

Systemwide Average Paid Price of Jet Fuel per Gallon

Source: A4A and Bureau of Transportation Statistics (all U.S. carriers, scheduled an nonscheduled services)

Ja

n-M

ar

1Q 2018 Revenues Rose 7% But Expenses Rose 10%, Reducing Profitability Again

Labor and Fuel Costs Continue to Surge, Pressuring Margins; Other Costs Rising, Too

airlines.org 7

Change (%) in Operating Revenues and Expenses, 1Q18 vs. 1Q17

6.0

18.7 18.3

7.0 6.8

23.3

(0.9)

5.0 3.1

9.3 9.9

6.7 4.9

Pax R

ev (

1)

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o R

ev

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2)

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pE

xp

1Q

17

1Q

18

Source: A4A analysis of reports by Alaska, Allegiant, American, Delta, Hawaiian, JetBlue, Southwest, Spirit and United

1. Traffic (revenue passenger miles) up 4.5 percent; yield (revenue per passenger-mile flown up 2.3 percent; U.S. CPI up 2.2 percent

2. Sale of frequent flyer award miles to airline business partners, transportation of pets, in-sourced aircraft and engine repair, flight simulator rentals, inflight sales, etc.

3. Professional fees, food/beverage, insurance, commissions, GDS fees, communications, advertising, utilities, office supplies, crew hotels, nonfuel payments to regionals

Pre-Tax

Profit Margin (%)

$1.9B $2.5B $2

.03

vs

. $

1.6

7

In 1Q 2018, U.S. Passenger Airline* Profitability Well Below Average

Pre-Tax Profit Margin (% of Operating Revenues)

airlines.org

36.7

30.1

26.4 24.4

18.4 17.5 16.6 13.5

12.1 10.0

8.2 6.9 4.9 4.6

1.4

McD

on

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oad

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lines (

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8

1 Alaska, Allegiant, American, Delta, Hawaiian, JetBlue, Southwest, Spirit and United 2 CSX, Norfolk Southern and Union Pacific Source: Company SEC filings

Crude-Oil Prices Rising Swiftly, to Highest Level Since Late 2014

May 2018 Averaging 50 Percent More Than May 2017

Spot Price* of Brent Crude Oil ($ per Barrel)

airlines.org 9

$0

$20

$40

$60

$80

$100

$120

Ja

n-1

4

Ma

r-14

Ma

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4

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4

Sep

-14

Nov-1

4

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Nov-1

8

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Source: A4A and Energy Information Administration (http://www.eia.gov/dnav/pet/pet_pri_spt_s1_d.htm)

AFFORDABILITY, COMPETITION AND

ACCESS TO AIR TRAVEL

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When Choosing an Airline, Leisure Travelers Value Affordability Above All Else

2017 Rankings Identical to 2016 (Schedule Solidly Second, Followed by Reliability)

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Criteria 2017 (2016) Score

Affordability (airfare / ancillaries / taxes) 1 (1) 2.50 (2.65)

Flight schedule (routes, timings) 2 (2) 3.12 (3.23)

Reliability of on-time departure and arrival 3 (3) 4.22 (4.28)

Airline seat comfort 4 (4) 4.54 (4.45)

Customer service (reservation/gate agents, flight attendants) 5 (5) 4.82 (4.95)

Airline frequent flyer program (earn / redeem / upgrade / status) 6 (6) 5.19 (5.00)

Quality of inflight amenities (food / entertainment / WiFi) 7 (7) 5.32 (5.17)

Environmental responsibility 8 (8) 6.28 (6.26)

When traveling for personal reasons, how would you rank the following in terms of choosing

which airline to fly, with 1 being your first priority and 8 being your last priority?

Source: Ipsos survey of American adults (January 2018)

(Base = all 2017 flyers with at least 1 personal leisure trip)

Inflation-Adjusted Fares Continued to Fall in 2017, Averaging Less Than in 2010

In Real Terms, Price of Domestic Air Travel Fell 12.5 Percent From 2014-2017

airlines.org 12

Source: A4A analysis of data from DOT Data Bank 1B (all cabins and fare basis codes) and DOT Form 41 via Airline Data Inc.

$355

$340

$380

$363

200

210

220

230

240

250

$320

$340

$360

$380

$400

$420

2010 2011 2012 2013 2014 2015 2016 2017

U.S. CPI (right axis) Fare Only Fare + Ancillary

Ro

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d-T

rip

Tic

ke

t P

rice

($

20

17

)*

U.S

. CP

I (19

82

-84

= 1

00

)

* Excluding taxes

airlines.org 13

Smaller U.S. Carriers Are Serving More and More Domestic Markets

Competitive Presence of Low-Cost and Ultra Low-Cost Carriers Continues to Expand

0

20

40

60

80

100

120

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Nu

mb

er

of U

.S. A

irp

ort

s S

erv

ed

*

Spirit

Alaska

JetBlue

Source: Innovata (via Diio Mi) schedules as of April 20, 2018, for selected marketing airlines including predecessors

Allegiant

Frontier

* July 15-21 of each year

Hawaiian

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

Competition* Increased From 2007-2017 (Real Fares Down 20%, Passengers Up 23%)

* Defined as carrying at least 5 percent of O&D passengers in the city pair Source: DOT Data Bank 1B and Innovata published schedules via Diio Mi

airlines.org 14

63%

30%

47%

28%

12%

6%

Calendar Year 2007 Share of BOS-CAK/CLE Passengers

Calendar Year 2017 Share of BOS-CAK/CLE Passengers

Los Angeles-Seattle Is Among Countless Domestic City Pairs on Which Competition*

Increased From 2007-2017 (Real Fares Down 20%, Passengers Up 78%)

airlines.org 15

Calendar Year 2007 Share of BUR/LAX/LGB-SEA Passengers

Calendar Year 2017 Share of BUR/LAX/LGB-SEA Passengers

64%

17%

8%

7%

52%

19%

8%

5%

7%

7%

* Defined as carrying at least 5 percent of O&D passengers in the city pair Source: DOT Data Bank 1B and Innovata published schedules via Diio Mi

2,274 2,289 2,366 2,454 2,542 2,622 310 330 351 368 390 405 2,584 2,620 2,717 2,823

2,931 3,027

0

500

1,000

1,500

2,000

2,500

3,000

3,500

2013 2014 2015 2016 2017 2018

Domestic International

Customers Are Seeing All-Time High of 3M+ Daily Seats Departing U.S. Airports

Daily Seats (000) Departing U.S. Airports in Scheduled Service: Up 3.3% YOY

airlines.org 16

Source: Innovata (via Diio Mi) published schedules as of May 18, 2018, for all airlines providing scheduled passenger service from U.S. airports to all destinations

DOM +3.2%

INT +4.0%

SYS +3.3%

Almost Every Major* U.S. Airport Has Seen Supply of Seats Rise Over Past 5 Years

% Change in Scheduled-Service Seats Available: July 2018 vs. July 2013

airlines.org

67

64

5

5

54

4

9

43

4

2

38

3

5

35

3

3

33

3

2

31

3

0

29

2

9

29

27

2

7

26

2

4

23

2

3

23

2

2

21

2

0

20

1

9

19

1

8

18

1

8

17

16

1

6

16

1

5

13

1

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10

1

0

10

1

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8

8

7

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6

6

6

5

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0

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20

30

40

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60

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DA

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17

Source: Innovata (via Diio Mi) published schedules as of May 18, 2018, for all airlines providing scheduled service * FAA large and medium hub airports

SUMMER 2018 AIR TRAVEL FORECAST

airlines.org 18

U.S. Economy and Employment Growing; Household Net Worth at All-Time High

airlines.org

2.6 2.9

1.5

2.3

2.7

2014 2015 2016 2017 2018F

U.S. Real GDP Growth (% CAGR)

19

2017-2018 U.S. Employment Growth (000)

25

9

20

0

73

17

5

15

5

23

9

19

0

22

1

14

27

1

21

6

17

5

17

6

32

4

13

5

16

4

J F M A M J J A S O N D J F M A M J J

Sources: U.S. GDP and gross output (Bureau of Economic Analysis); U.S. nonfarm payroll employment growth (month-over-month, in 000s, seasonally adjusted) from BLS;

median personal and household pre-tax income (Census); U.S. household net worth in current dollars, not seasonally adjusted (Federal Reserve)

U.S. Real Gross Output Growth (% CAGR) U.S. Household Net Worth ($ Trillion, NSA)

63.0 68.7 78.4 83.3 86.3 91.6

98.7

2011 2012 2013 2014 2015 2016 2017

IHS

Fo

rec

as

t

1.4 2.2 2.4 2.5 2.8 2.5

2.1

4.7

1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17

A4A Projects Summer* 2018 Air Travel to Rise 3.7 Percent to All-Time High

Airlines Adding 116,000 Seats/Day to Accommodate 96,000 More Passengers/Day

airlines.org 20

21

8.7

211.0

20

1.1

20

4.1

207.3

20

7.8

20

8.2

21

4.0

22

3.5

22

8.2

23

7.3

24

6.1

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018F

Source: A4A and BTS T100 segment data – U.S. carriers only; scheduled and nonscheduled services

U.S. Airline Onboard Passengers (Millions) – Summer* 2007-17 and 2018 Forecast

2.68M/day (2.32M domestically, 354K internationally) + 3.7%

* For this purpose, defined as June 1 through August 31

Drivers of growth

• Expanding presence of low-cost carriers, low-fare products and city-pair (O&D) competition

• Rising GDP, employment, disposable income and household net worth (savings, stocks, value of homes)

In 2017, 22 of the 25 Busiest Days at U.S. Airports Fell in the Summer Travel Season*

Thursdays and Fridays in Mid-June to Mid-August Are Especially Popular

airlines.org 21

Source: A4A analysis of data from the Transportation Security Administration * Memorial Day weekend through Labor Day weekend

Rank DOW 2017

1 Fri Jun 30

2 Sun Nov 26

3 Thu Jun 29

4 Fri May 26

5 Fri Jul 21

6 Fri Dec 22

7 Thu Jul 27

8 Fri Aug 4

9 Fri Jun 23

10 Fri Jul 14

11 Fri Jul 28

12 Thu Aug 3

13 Fri Jun 16

Rank DOW 2017

14 Thu Jul 20

15 Sun Jun 25

16 Sun Jul 16

17 Sun Jul 23

18 Wed Nov 22

19 Sun Jul 30

20 Fri Aug 11

21 Sun Aug 6

22 Thu Jun 15

23 Thu Jun 22

24 Thu Jul 13

25 Thu Aug 10

Air Travelers Are Enjoying More Choices, More Available Seats Across the Atlantic

Airlines Offering More Seats From U.S. Airports to Regions Across the Globe

airlines.org 22

Sources: Innovata (via Diio Mi) published schedules (May 18, 2018) and Scott McCartney, “Where the Travel Deals Are This Summer,” Wall Street Journal (May 9, 2018)

“Ticket prices are down, interest is up and Europe is hot.” David Solomito, VP, NA Marketing, KAYAK

“It’s crazy. There are some real deals to be had here.” Mark Okerstrom, Chief Executive, Expedia Group

6.2

4.3 4.3 4.1 3.2 2.7

1.3

(0.5) (1.6)

Europe Mexico USA LatAm Canada S. Pac ME & Afr Asia Caribbean

Change (%) in Scheduled Seats From USA by Destination, July 2018 vs. July 2017

DEREGULATION OF U.S. AIR SERVICE:

40 YEARS OF PROGRESS

airlines.org 23

By Almost Every Measure, Air Travel Has Improved Dramatically Since Deregulation

airlines.org 24

Source: A4A and Patrick Smith, “There Was No ‘Golden Age’ of Air Travel,” New York Times (May 27, 2017)

Pre-Deregulation Today

Safety Feared by many; fatality risk = 1 in 1M Safest travel mode; fatality risk = 1 in 29M

Competition CAB allowed just 1 or 2 airlines per route

CAB set fares, disallowed price competition

No limit on number of carriers per route

Vigorous price competition

Affordability Average domestic R/T $600-700 incl. fees Average domestic R/T ~ $363 incl. fees

Accessibility Accessible to affluent – 63% had flown

Luxury good; predominantly high-income

Accessible to all – 88% have flown

Common form of intercity transportation

Small-market service Often propeller aircraft, suboptimal times Widespread jets, market-driven flight times

International service Flights, carriers, cities, sales limited by law Plentiful, cheaper due to “Open Skies”

Routings & frequency Often multiple stops, few flights/day/week Plentiful nonstop/1-stop, multiple flights/day

Shopping Phone calls, ticket offices, travel agents A few clicks online

Ticket delivery By mail only Universally electronic, retrievable

Checking in Lined up at the ticket counter Online, kiosk, mobile

Inflight entertainment Occasional movie, far-away shared screen Unlimited options, streaming to PED

Bag tracking No tools at customers’ disposal Mobile tools becoming universal

Environmental impact Not very fuel efficient; more CO2 per flight ~120% more efficient; avoidance of CO2