John P. Heimlich

Vice President & Chief Economist

A4A Media Briefing

August 17, 2016

A4A Operational and Financial Review of 1H 2016

A4A Projects U.S. Airlines to Carry 15.6M Passengers Over Labor Day* 2016: +4%

Growth in Available Seats Will Exceed Growth in Passenger Volume

airlines.org 2

15.0

15.6

2015A

2016F

Source: A4A, Innovata (via Diio Mi) TSA and BTS T100 segment data, scheduled service on U.S. carriers only

U.S. Airline Onboard Labor-Day Period Passengers (Millions)

Airlines will carry 2.23M passengers/day (up 81.5K)

Airlines will offer 2.54M seats/day (up 98.2K)

The Thursday (#2) and Friday (#1) preceding LD

are typically the busiest days of the period

Wed., Sept. 2 – Tues., Sept. 8

Wed., Aug. 31 – Tues., Sept. 6

U.S. Economy Still Expanding But Decelerating, Job Growth Volatile

airlines.org

1.7

2.4 2.6

1.6

0

1

2

3

2013 2014 2015 2016F

Real GDP Growth Rate (% CAGR)

3

Monthly Employment Growth (000)

251 229

168

233

186

144

24

292 255

0

100

200

300

2014 2015 Jan Feb Mar Apr May Jun Jul

Sources: BEA, BLS, Federal Reserve and IHS Economics; U.S. GDP real annual average growth rate (%), U.S. nonfarm payroll employment growth (month-over-month, in

000s, seasonally adjusted), U.S. disposable personal income per capita (chained 2009 dollars, SAAR); U.S. household net worth in current dollars, not seasonally adjusted

36.4

37.4

38.4 38.9 38.9

36

37

38

39

40

2013 2014 2015 1Q16 2Q16

Th

ou

san

ds

Real ($2009) Personal Incomes ($000) Household Net Worth ($ Trillion, NSA)

79.4

84.2 87.2 88.1

60

70

80

90

2013 2014 2015 1Q16

Mil

lio

ns

Amid Competitive Pressures, U.S. Carrier Air Fares* Continue to Fall in 2016

Systemwide, Fares* Down 5.2% in 2015 and 5.9% Thus Far in 2016

airlines.org 4

Source: A4A analysis of data from Alaska, American, Hawaiian, JetBlue, Southwest, United, Virgin America and regional affiliates

% Change YOY in Domestic Yield*

1.0

(1

.1)

0.3

(2

.5)

(3.7

) (5

.6) (3.8

) (7

.1)

(5.4

) (6

.3) (4

.1)

(8.9

) (6.4

) (4.4

) (4

.0)

(6.1

) (4

.9)

(4.7

) (4

.1)

Ja

n-1

5

Ma

r

Ma

y

Jul

Sep

No

v

Ja

n-1

6

Ma

r

Ma

y

Ju

l

Sep

No

v

(4.3

) (2.4

) (4

.3)

(6.0

) (9

.1)

(10

.4) (8.6

) (1

1.3

) (1

1.7

) (1

0.4

) (1

2.1

) (9.9

) (1

1.8

) (1

0.4

) (1

1.2

) (9.3

) (8

.8)

(8.3

) (5.5

)

Ja

n-1

5

Ma

r

Ma

y

Ju

l

Sep

No

v

Ja

n-1

6

Ma

r

Ma

y

Ju

l

Sep

No

v

% Change YOY in International Yield*

2015 vs. 2014: (4.1%); YTD16 vs. YTD15: (4.9%)

* Fare per mile (cents per RPM)

2015 vs. 2014: (8.6%); YTD16 vs. YTD15: (9.1%)

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

airlines.org 5

U.S. Airlines Seeing Improvements in DOT Core-Four Operational Metrics in 2016

Gains Driven by More Benign Weather and Investments in Systems, Procedures, Staffing

97.83

98.75

2015

2016

Flight Completion Factor (%) – Jan-Jun

99.67

99.74

2015

2016

Properly Handled Bag Rate (%) – Jan-Jun

0.78

0.62

2015

2016

Oversales per 10,000 Customers – Jan-Jun

On-Time Arrival Rate (%) – Jan-Jun

77.67

82.02

2015

2016

1H16 Airline Operating Revenues* Fell 1.3% on Lower Fares and Cargo

Passenger Revenue Fell 2.4% on 5.7% Higher Traffic and 7.7% Lower Yield (Fares/Mile)

$78.17

$3.87

$5.49 $0.22

$0.82

$77.15

Operating Revenues* ($ Billions)

airlines.org 6

* A4A analysis of reports by Alaska, Allegiant, American, Delta, Hawaiian, JetBlue, Southwest, Spirit, United and Virgin America

Revenue Gain

Revenue Loss

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

+5.7% (7.7%) (15.6%) +9.2% -1.3%

1H16 Airline Operating Expenses* Fell 1.9% As Lower Fuel Offset Higher Labor

Airlines Also Saw Increases in Airport and Aircraft Costs

$65.29

$4.12

$1.81 $0.01 $0.03 $0.30 $0.74

$64.04

Operating Expenses* ($ Billions)

airlines.org 7

* A4A analysis of reports by Alaska, Allegiant, American, Delta, Hawaiian, JetBlue, Southwest, Spirit, United and Virgin America

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

Cost Reduction

Cost Increase

(26.3%) +9.3% +0.8% +4.3% +5.9% (0.2%) (1.9%)

In 1H16, U.S. Airlines* Posted Respectable Margins, Averaging 15.5% Before Taxes

U.S. Passenger Airline* Profitability Was Substantially Below Starbucks/McDonald’s/Apple

airlines.org

35.1

28.0 26.9 26.3 24.0

19.1 18.8 15.5

12.9

8.7 7.3 6.5

(0.2)

Altria

Dis

ne

y

Ap

ple

McD

on

ald

´s

CS

X

Sta

rbucks

Com

ca

st

Air

lines*

S&

P 5

00

Ma

rrio

tt

Fo

rd

Sta

rwoo

d

Chip

otle

8

* A4A analysis of reports by Alaska, Allegiant, American, Delta, Hawaiian, JetBlue, Southwest, Spirit, United and Virgin America

1H16 Pre-Tax Profit Margin (% of Operating Revenues)

$1

2.0

B

$2

5.0

B

Since the Great Recession,* U.S. Airlines Have Been Closing the Gap to Average

U.S. Corporate Profitability; 2015 Gap (14.1% vs. 16.5%) Was Narrowest on Record

airlines.org

Source: ATA Annual Reports (1970-1976), A4A Passenger Airline Cost Index (1977-present); Bureau of Economic Analysis NIPA Table 1.14

(25)

(20)

(15)

(10)

(5)

0

5

10

15

20

19

70

19

72

19

74

19

76

19

78

19

80

19

82

19

84

19

86

19

88

19

90

19

92

19

94

19

96

19

98

20

00

20

02

20

04

20

06

20

08

20

10

20

12

20

14

1H

16

20

18

20

20

U.S. Recession

U.S. Passenger Airlines

All U.S. Corporations

Pre-Tax Profit Margin (%)

9

* Dec-2007-Jun-2009

Investment Grade1 (>= BBB-)

Source: Standard and Poor’s; “Guide to Credit Rating Essentials: What are credit ratings and how do they work?”

airlines.org 10

Johnson & Johnson, Microsoft AAA

GE, ExxonMobil, USG AA+

Google, Wal-Mart AA

Toyota AA-

UPS A+

McDonald’s, PepsiCo, Target A

BP, Amtrak, Starbucks A-

Ryanair, eBay BBB+

FedEx, Ford, Marriott, SWA, Starwood BBB

ALK, Lufthansa, Qantas, WestJet BBB-

Delta, Turkish BB+

British Airways BB

ALGT, AAL, HA, JBLU, LATAM, UAL,

Avis, Sabre BB-

AC, Virgin Australia, Hertz B+

SAS B

Gol Linhas Aereas (GOL) CCC

Speculative2 Grade (< BBB-)

1 Describes issuers with relatively high levels of creditworthiness and credit quality 2 Describes issuers with ability to repay but facing significant uncertainties, such as adverse business or financial circumstances that could affect credit risk

Airline Creditworthiness Remains Far From Stellar

Per S&P, Only Two U.S. Passenger Airlines Have Investment-Grade Credit

“Standard & Poor’s ratings express the agency’s opinion about the ability and

willingness of an issuer…to meet its financial obligations in full and on time.”

Passenger Airline

U.S. Airlines Are Putting More Than $25 per Passenger* Right Back Into the Product

Primary Uses of Operating Cash from 2010-1H16 Included $74B of Capital Reinvestment

airlines.org 11

* SEC filings of Alaska/Allegiant/American/Delta/Hawaiian/JetBlue/Southwest/Spirit/United/Virgin America; denominator is enplaned passengers

$9.0B

Enhance

Product

$9.4B

Reward

Shareholders

$4.3B

Retire

Debt

1H 2016 2010-2015

$64.9B

Enhance

Product

$17.4B

Reward

Shareholders

$54.3B

Retire

Debt

airlines.org 12

Following Enormous Losses of 2001-2009, U.S. Airlines Have Retired $58.6B in Debt

Adjusted Net Debt Now Just 32% of Operating Revenues, Down from 45% in 2010

Source: SEC filings of AAL/ALGT/AAL/DAL/HA/JBLU/LUV/SAVE/UAL/VA

$0

$2

$4

$6

$8

$10

$12

2010 2011 2012 2013 2014 2015 1H16

Th

ou

san

ds

Payments on Debt* (Billions) Debt** as % of Operating Revenues

Average = $9B per year 45.3

31.6

25

30

35

40

45

50

2010 2011 2012 2013 2014 2015

** Includes 7x annual aircraft rents (capitalized operating leases)

* Payments on long-term debt and capital lease obligations

Improving Finances Enabling Significant Reinvestment in Customer Experience

airlines.org 13

» New or refurbished aircraft, larger overhead bins for luggage

» Availability of lie-flat seating with AC power and USB, proliferation of Wi-Fi and inflight entertainment

» Expanded route networks (scope and frequency) and schedules (seat growth)

» Improved airport check-in areas, lounges, gate amenities, baggage systems, ground equipment

» Continued development and roll-out of mobile technology and website/kiosk functionality

» Increasing operational reliability (controlled for weather conditions)

» Enhanced tools (computers, tablets, software) and training for customer-contact employees

Improving Finances Enabling Significant Reinvestment in Customer Experience

1H 2016 Capital Outlays Averaged $1.5B per Month, Exceeding 2015 Rate

airlines.org 14

1.29

1.15

0.64

0.47 0.43

0.55

0.82

1.04

1.16

1.41 1.49

2000 2001 2002 2003-09 2010 2011 2012 2013 2014 2015 1H16

* SEC filings of Alaska, Allegiant, American, Delta, Hawaiian, JetBlue, Southwest, Spirit, United and Virgin America

U.S. Passenger Airline* Capital Expenditures ($ Billions per Month)

airlines.org 15

In 1H 2016, U.S. Airlines Continued Efforts to Retain and Lure New Equity Investors,

Returning $9.4B to Shareholders Via Stock Buybacks ($8.8B) and Dividends ($601M)

Stock Repurchases (Billions) Dividends (Millions)

$0

$100

$200

$300

$400

$500

$600

$700

$800

$900

$1,000

2010 2011 2012 2013 2014 2015 1H16

$0

$1

$2

$3

$4

$5

$6

$7

$8

$9

$10

2010 2011 2012 2013 2014 2015 1H16

* SEC filings of Alaska, Allegiant, American, Delta, Hawaiian, JetBlue, Southwest, Spirit, United and Virgin America

2.5

5

2.4

5

2.2

9

2.2

8

2.2

9

2.2

6

2.2

7

2.2

9

2.3

7

2.4

6

2.20

2.25

2.30

2.35

2.40

2.45

2.50

2.55

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

As Airlines Generate Normal Returns on Capital, Customers Are Seeing More Seats

Domestic Supply at Highest Point in Eight Years; International Supply at All-Time High

airlines.org

Domestic USA (Million Daily Seats)

16

Source: Innovata (via Diio Mi) published schedules as of Aug. 12, 2016, for all airlines providing scheduled passenger service from U.S. airports to all destinations 288

292

275

282 292

299

310

330

351

368

260

280

300

320

340

360

380

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

International (Thousand Daily Seats)

Exceeding 2008 Highest Ever

In Addition to Expanding Schedules, Airlines Are Deploying Larger Aircraft

Replacement of 50-Seaters With Larger Regional Jets Is Biggest Driver of 15% Jump

airlines.org 17

102.0

117.2

2010 2016

Seats per Sched. Domestic Departure

Source: Innovata (via Diio Mi) as of August 5, 2016

45 45 43 42 39 38 38 37 36 35 32 27 25

7 8 9 10 12 15 15 15 15 16 18

20 21

48 47 48 49 49 47 48 48 49 49 51 53 54

2004 2006 2008 2010 2012 2014 2016

1-50 51-100 >100

Share (%) of Departures by Aircraft Size

U.S. Airline Jobs Are Exceeding 400,000 for First Time Since 2008

May 2016 Was 31st Consecutive Month of YOY Gains

airlines.org 18

Source: Bureau of Transportation Statistics for scheduled U.S. passenger airlines

520.6

407.6 385.9 378.3

395.5 406.1

2000 2008 2009 2010 2015 2016

Employment at U.S. Passenger Airlines (Thousand FTEs)

YTD May

U.S. Airlines* Continue to Pump More Wages and Benefits into the Economy

Airlines* Spending $3.44 Billion per Month on the Workforce – Up 35 Percent from 2010

airlines.org 19

2.55 2.61

2.73 2.76

2.99

3.35

3.44

2010 2011 2012 2013 2014 2015 1H16

* SEC filings of Alaska, Allegiant, American, Delta, Hawaiian, JetBlue, Southwest, Spirit, United and Virgin America

Total Employee Wages and Benefits*

($ Billions per Month)

Flyer Satisfaction Rises Markedly With Enrollment in Expedited Screening Programs

airlines.org

36%

49%

67%

All Pax

TSA Pre✓®

Global Entry

% of 2015 Flyers Indicating “Very Satisfied” With Overall Air Travel Experience

Sources: http://www.theacsi.org/news-and-resources/press-releases/press-2016/press-release-travel-2016, http://www.jdpower.com/press-releases/2016-north-

america-airline-satisfaction-study, http://ipsos-na.com/news-polls/pressrelease.aspx?id=7208

20

» April 2016: UMich-based American Customer Satisfaction Index® (ACSI) for U.S. airlines ties

all-time high as “data show passengers are perceiving a better value for their money”

» April 2016: Ipsos survey (see below) finds overall flyer satisfaction is 80 percent, with fraction

who are “very satisfied” rising sharply with enrollment in TSA PreCheck and/or Global Entry

» May 2016: J.D. Power reports that North American airline satisfaction climbs to 10-year high,

as “we see satisfaction rising across all touch points of the passenger experience”

First Quarter 2016 Operational and Financial Recap: U.S. Passenger Airlines

airlines.org 21

» 1H 2016 saw continuation of consummate airline safety performance, as well as

significant year-over-year improvements in operational reliability

» Declining fares exceeded traffic gains to drive operating revenues lower, but reduced

fuel costs more than offset increases in labor, airport, aircraft and other expenses to

drive modestly improved profitability, with airlines realizing a pre-tax margin of 15.5%

Airline profitability continued to lag that of Starbucks, McDonald’s and Apple

» Among other uses beneficial to stakeholders, cash flow generated during this period

allowed U.S. airlines to retire expensive debt; acquire new, larger aircraft; deploy more

seats in the marketplace; boost staffing and wages; and reward investors

» Sharp airfare declines and U.S. job growth are fueling record passenger volumes,

including 4 percent projected growth for the seven-day Labor Day travel period

» Market research affirms that participation in expedited screening programs markedly

improves the air travel experience

www.airlines.org