John P. Heimlich, VP and Chief EconomistMedia BriefingAug. 29, 2012

Midyear Economic Review and Outlook

Overview

• The value proposition for U.S. air travelers is strong

o Airlines achieving record operational performance on several fronts

o Customer satisfaction is reflected in a remarkably low complaint rate – especially compared to other industries with smaller volumes

• The industry has done a lot of work to return to modest profitability

o Diversification of revenues and improved alignment of revenues generated with costs incurred have been critical elements of the nascent recovery

• Airlines still face a difficult tax and regulatory environment, curbing growth

• A financially healthy airline industry means job growth and service reinvestment

airlines.org2

The Value Proposition for U.S. Air Travelers Is Alive and WellIt’s Safer, It’s Greener, It’s ~80 Percent On-Time and It’s Still a Bargain

airlines.org3

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

0

20

40

60

80

100

120

140

160

180

Index (1990 = 100)

* 5-year-moving-average fatal accident rate for U.S. air carriers operating under 14 CFR 121 scheduled service (http://www3.ntsb.gov/aviation/Table6.htm)

On-Time

Fares ($2011)

Fatal Accidents*Noi

seEx

posu

reFuel Efficiency

2007 1H 2012 Improvement (%)

On-Time Arrival Rate(% of domestic flights within 00:15) 73.4 83.7 → 14

Involuntary Denied Boardings(per 10,000 passengers) 1.12 0.98 → 13

Mishandled Bags(per 1,000 domestic passengers) 7.05 2.97 → 58

Flight Cancellations(as % of sched. domestic departures)

2.16 1.07 → 50

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

airlines.org4

U.S. Airline Operations Have Improved Substantially Over Past Five YearsRecord Performance Enabled by Reinvestment in Product, Cooperative Weather, Etc.

Hence, the Rate of Customer Complaints Against Airlines is Remarkably LowRail Customers Express Far Greater Levels of Dissatisfaction

Sources: U.S. Department of Transportation, Federal Communications Commission, National Cable & Telecommunications Association, WMATA, Capital Metro (Austin), Los Angeles County Metropolitan Transportation Authority, American Public Transportation Association, AMTRAK

AMTRAK

Metro North RR (NYC)

WMATA (Wash., DC)

U.S. Cable Companies

Los Angeles Metrobus

Capital Metro (Austin, TX)

U.S. Passenger Airlines

627.54

16.28

12.50

6.56

2.92

2.50

1.18

Complaints received per 100,000 customers, CY2011

airlines.org5

Sample Route

RateCapitol Corridor (Cal.)

15.5Keystone

78.9Acela

204.3NE Regional

248.6Chicago-Carbondale

419.7Chicago-St. Louis

487.2California Zephyr

6,138.2

632

0.466

362

30

83

367

97

Mill

ions

of C

usto

mer

s

Boston-Los Angeles Air Travel, 70 Years After the Evening Post38 Percent of the Journey Time, 11 Percent of the Price (in Real* Terms)

airlines.org6

1941 Actual (15hrs 15mins, 12 stops)

1941 Inflation-Adjusted*

2011 Actual (5hrs 52mins)

$281.56

$4,308.36

$471.93

Average Round-Trip BOS-LAX Airfare and One-Way Block Time

Source: DOT Data Bank 1B via Diio Mi; “Air Travel Is Not Expensive,” The Saturday Evening Post (Mar. 22, 1941), p. 59; Campbell-Hill Aviation Group

* Adjusted using 2011 constant dollars from the Bureau of Labor Statistics (http://www.bls.gov/cpi/#tables)

Per Enplaned Passenger, 2011 Revenues Exceeded Costs by Just 77 Cents (0.4%)Excluding $8.06 in Ancillaries, Revenues Would Have Lagged Costs by $7.29 (-3.4%)

airlines.org7

Revenues Costs Net Income

Cargo & Other$45.15

$212.37

$0.77

Airfare$159.93

Ancillary, $8.06

2011 U.S. Airline Financial Results per Enplaned Passenger

Source: A4A analysis of DOT Form 41 data reported by U.S. airlines for which passenger revenue constitutes at least 25 percent of total operating revenues

$213.14

Combined Industry and Customer Taxes Equate to

Approximately $25 per Enplaned Passenger

1H U.S. Airline* Losses PersistNegative Profit Margin Prevails, in Stark Contrast to Other Fortune 500s

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

airlines.org8

U.S. Airlines* 1H 2012Net Income ($ Millions) (1,065)Net Margin (Percent) (1.5)

Apple Inc. 1H 2012Net Income ($ Millions) 20,446Net Margin (Percent) 27.6

U.S. Airlines* ex. AMR 1H 2012Net Income ($ Millions) 835Net Margin (Percent) 1.4

Ford Motor Co. 1H 2012Net Income ($ Millions) 2,436Net Margin (Percent) 3.7

1H 2012 U.S. Passenger Airline* Losses Worsened, Constituting -1.5% of RevenuesDespite 8.2% Stronger Revenue, Margins Deteriorated on 9.4% Higher Costs

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

airlines.org9

First Half 2012 % Better/(Worse)

Operating Revenues 8.2

Operating Expenses (7.3)

Fuel (13.1)

Wages and Benefits (6.2)

Other (3.6)

Other Income/(Expenses) (77.1)

Subtotal Expenses (9.4)1H 2011 1H 2012

(0.4)

(1.5)

Net Profit Margin (%)

Price of Jet Fuel Running Slightly Higher in 2012 Than in Record 2011At Highest Level Since Early May

3-Ja

n19

-Jan

4-F

eb20

-Feb

7-M

ar23

-Mar

8-A

pr24

-Apr

10-M

ay26

-May

11-J

un27

-Jun

13-J

ul29

-Jul

14-A

ug30

-Aug

$70

$80

$90

$100

$110

$120

$130

$140

WTI Brent Jet

Price per Barrel (Five-Day Moving Average)

Source: A4A and EIA (for WTI and Brent crude oil and U.S. Gulf Coast jet fuel)

airlines.org10

1991

-199

5

1996

-200

0

2001

-200

5

2006

-201

0

2011

YTD

201

2

$53.

96

$58.

42

$102

.09 $2

16.7

7 $299

.85

$304

.54

Price per Gallon (Gulf Coast Jet Fuel)

Sample of New Regulations on U.S. Airlines Will Add $3.3 Billion in Annual CostsEstimated Annual Costs of Selected Existing or Proposed Regulations

airlines.org11

Source: A4A and Federal Aviation Administration

1.04B

804M

787M 143M330M 150M $3.3B

Existing ≈ $2.8B Proposed ≈ $0.5B

?

Rising Costs and Constraints on Revenue Production Translate to Air Service CutsDomestically, the United States Has a Smaller Industry Than Five Years Ago

Source: Innovata (via Diio Mi) published schedules as of Aug. 24, 2012; an available seat mile (ASM) is one seat flown one mile

airlines.org12

Scheduled Domestic U.S. Air Service: 4Q 2012 vs. 4Q 2007

Flights

Seats

ASMs

(15.2)

(12.0)

(9.2)

“We’ve lost a lot of markets that were served only with the 50-seat (aircraft). We’d like more flights. But you’re not going to have any flights if the airlines don’t make money, so we understand their predicament.” (Larry Cox, president and CEO of the Memphis-Shelby County Airport Authority)

Improved Airline Finances Have Translated to 18 Consecutive Months of Job GrowthAfter Years of Losses, U.S. Passenger Airlines Have Also Been to Reinvest in Equipment

2007 Jun

Nov Apr

Sep Feb

Jul

Dec

May Oct

Mar

Aug

2012 Jun

Nov

(8)

(6)

(4)

(2)

0

2

4

airlines.org13

00-0

1 02 03 04 05

06-0

9 10 11 12F

13F

$16,

920.

0

$9,7

40.0

$6,6

00.0

$5,8

40.0

$4,8

20.0

$5,7

70.0

$4,2

40.0

$3,4

00.0

$5,7

00.0 $9

,240

.0

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

Airline Jobs Added in 18 Months in a RowYOY Change (%) in Full-Time Equivalent Employees

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

Conclusion

• The value proposition for U.S. air travelers is strong

• The industry has done a lot of work to return to modest profitability

• Airlines still face a difficult tax and regulatory environment, curbing growth

• A financially healthy airline industry means job growth and service reinvestment

airlines.org14

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