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Economic Performance
of the Airline Industry
End year 2015 presentation
Brian Pearce
Chief Economist
Outlook for 2016
Favorable economic environment
Travel business remains strong
Cargo remains weak
A second year of ‘normal’ profits
‘Normality’ not yet widespread or secure
Economic growth uneven but rising
-6
-4
-2
0
2
4
6
8
10
2000 2002 2004 2006 2008 2010 2012 2014 2016
year
-on
-yea
r %
ch
ange
IMF forecasts for economic growth
Emerging economiesDevelopedeconomies
Forecast
Source: IMF World Economic Outlook, October 2015
Oil price outlook uncertain but low
0
20
40
60
80
100
120
140
2010 2011 2012 2013 2014 2015
US$
per
bar
rel
Brent crude oil price
Goldman Sachs
International Energy Agency
Source: Platts, IEA, Press reports
Exchange rate volatility behind us?
40
50
60
70
80
90
100
110
120
130
2014 2015
Ind
exed
to
eq
ual
10
0 in
20
14
Exchange rates against the US dollar
US dollar basket of currencies
Chinese Renminbi
Euro
Brazilian Real
Russian Rouble
Source: Datastream
Very different businesses
30
40
50
60
70
80
90
200
300
400
500
600
700
800
1995 2000 2005 2010 2015
Car
go r
even
ues
, US$
bill
ion
Pass
enge
r re
ven
ue,
US$
bill
ion
Airlines revenues from passengers and cargo
Revenue from tickets and ancillaries
Revenue from cargo
Source: ICAO, IATA Economics
Strong demand to travel helped by falling prices
300
400
500
600
700
800
900
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
2000 2002 2004 2006 2008 2010 2012 2014 2016
Ret
urn
far
e in
20
15
US$
Pass
enge
r n
um
ber
s, m
illio
n
Passenger departures and the real average return fare
Average return farecompared to the CPI
Passenger departures
Source: ICAO, PaxIS, IATA Statistics and Economics
Wide variation driven by economic environment
-5
0
5
10
15
20
25
India China US Eurozone Brazil Russia
% c
han
ge o
ver
pre
vio
us
year
Economic and passenger growth in 2015 to date
GDP Pax
Source: Datastream, IATA Statistics
Cargo hit by weak trade growth and weak yields
1.50
2.00
2.50
3.00
3.50
-20
-15
-10
-5
0
5
10
15
20
2000 2002 2004 2006 2008 2010 2012 2014 2016
20
15
US$
per
kilo
% c
han
ge o
ver
pre
vio
us
year
International trade growth and real freight rates
Average freight rate compared to the CPI
International trade growth
Source: Netherlands CPB, EIU, CargoIS
Globalization has paused
Source: Netherlands CPB
0.6
0.7
0.8
0.9
1.0
1.1
1.2
1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
Ind
ex r
atio
, 20
05
eq
ual
s 1
International trade compared to global industrial production
Finally airline profits become ‘normal’
0
5
10
15
20
25
30
35
% o
per
atin
g re
ven
ues
US Pre-tax profits, year to Q3 2105
Source: A4A
Record for the airline industry
Source: ICAO, IATA Economics
-40
-30
-20
-10
0
10
20
30
40
-10.0
-8.0
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
2000 2002 2004 2006 2008 2010 2012 2014 2016
US$
bill
ion
% r
even
ues
Global commercial airline profitability
Net post-tax
EBIT margin
Paying investors a ‘normal’ return for 1st time
Source: ICAO, IATA Economics
0.0
2.0
4.0
6.0
8.0
10.0
2000 2002 2004 2006 2008 2010 2012 2014 2016
% o
f in
vest
ed c
apit
al
Return on capital invested in airlines
Cost of capital (WACC)
Return on capital (ROIC)
Not simply due to low oil prices
0
2
4
6
8
10
5
10
15
20
25
30
2000 2002 2004 2006 2008 2010 2012 2014 2016
% r
etu
rn o
n in
vest
ed c
apit
al
US
cen
ts p
er A
TK
Fuel unit costs and airline return on capital
Airlines return on capital
Fuel unit cost
Source: ICAO, McKinsey, IATA Economics
Asset utilization raised and sustained
Source: ICAO, IATA Economics
58
60
62
64
66
68
2000 2002 2004 2006 2008 2010 2012 2014 2016
% A
TKs
Breakeven and achieved weight load factor
Achieved LF
Breakeven LF
Capital has also become more productive
Source: ICAO, IATA Economics
0.0
0.2
0.4
0.6
0.8
1.0
1.2
-6
-4
-2
0
2
4
6
8
10
2000 2002 2004 2006 2008 2010 2012 2014 2016
Cap
ital
pro
du
ctiv
ity,
re
ven
ue/
inve
sted
cap
ital
, US$
Op
erat
ing
mar
gin
, % r
even
ue
Capital productivity
Operating margin
Improvement still not widespread
-5
0
5
10
15
20
25
30
35
40
2010 2011 2012 2013 2014 2015 2016
US$
bill
ion
Net post-tax profit by region
Africa
Latin America
Middle East
Asia Pacific
Europe
N America
Source: ICAO, The Airline Analyst, IATA Economics
Only two regions have seen significant gains
-5%
0%
5%
10%
15%
N America Europe Asia Pacific Middle East LatinAmerica
Africa
% r
even
ues
Operating profit margins by region, 2016 vs 2010
2010 2016
Source: ICAO, The Airline Analyst, IATA Economics
Outlook for 2016
Favorable economic environment
Travel business remains strong
Cargo remains weak
A second year of ‘normal’ profits
‘Normality’ not yet widespread or secure