U.S. Airlines: Mainline Carrier Prospects

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U.S. Airlines Mainline Carrier Prospects
John P. Heimlich (jheimlich_at_airlines
.org) Vice President and Chief Economist 30th An
nual FAA Aviation Forecast Conference
March 18, 2005
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The Air Transport Association of America,
Inc.March 2005
Combination ServicesAlaska AirlinesAloha
AirlinesAmerica West AirlinesAmerican
AirlinesATA AirlinesContinental AirlinesDelta
Air LinesHawaiian AirlinesJetBlue
AirwaysMidwest AirlinesNorthwest
AirlinesSouthwest AirlinesUnited AirlinesUS
Airways
All-Cargo ServicesABX AirASTAR Air CargoAtlas
AirEvergreen Intl AirlinesFedEx
CorporationPolar Air CargoUPS Airlines
Associate MembersAeromexicoAir CanadaAir
JamaicaMexicana
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Wall Street PerspectiveUltimately, all carriers
feeling ill effects
Legacy carriers and LCCs continue to fight
strenuously for market share with a complete lack
of pricing power creating an anemic revenue
environment Fuelremains a major factor in the
industrys inability to make a profit and we
remind investors that this is not the first time
the airlines have been faced with tough year over
year comps. However, this is the first time that
carriers have not been able to pass these costs
on to the consumer as evident by several failed
fare increases and the declining yields.
In the current environment, we doubt that legacy
carriers are even marginally inching forward
since the meager revenue gains are more than
offset by still very high and once again rising
fuel price levels. The near-term prognosis is
quite bleak considering the sector is not even at
the halfway point of what seasonally is by far
its toughest period Ultimately, all carriers
lack any pricing power and are feeling the ill
effects
Reno Bianchi and Steven K. Burton Citigroup
Corporate Bond ResearchAirline Industry Research
Report (December 21, 2004)
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All Aviation Stakeholders Must Engage in
Self-Help Along With Airlines and Suppliers
Congress, Regulators, and Airports Must Adapt
We find ourselves in the grip of a strange
anomaly. The government that embraced
deregulation more than 25 years ago, and whose
members often excoriate airline executives for
failing to change rapidly enough to accommodate
market demands, has itself failed to adapt to the
changing times. Many elements of our aviation
policy are remnants of the past
Robert L. Crandall, Retired Chairman, American
AirlinesKeynote speech, Wright Memorial Dinner
(December 17, 2004)
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Airline Balance Sheets in Disrepair With Heavy
LossesStandard Poors (SP) Corporate Credit
Ratings
AAA Extremely strong capacity to meet financial
commitments. Highest rating.AA Very strong
capacity to meet financial commitments.A Strong
capacity to meet financial commitments, but
somewhat susceptible to adverse economic
conditions and changes in circumstances.
BBB Adequate capacity to meet financial
commitments, but more subject to adverse economic
conditions. (BBB- is the lowest investment grade
rating.) BB Less vulnerable in the near-term but
faces major ongoing uncertainties to adverse
business, financial and economic conditions.
B More vulnerable to adverse business, financial
and economic conditions but currently has the
capacity to meet financial commitments.
CCC Currently vulnerable and dependent on
favorable business, financial and economic
conditions to meet financial commitments.
CC Currently highly vulnerable.
C A bankruptcy petition has been filed or
similar action taken but payments or financial
commitments are continued.D Payment default on
financial commitments.
Investment Grade( BBB-)
Formerly Atlantic Coast Airlines
Airfreight company
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Crude Oil Prices Soaring to Record HighsWTI to
Reach Nominal Record in 04 Little Relief Seen
in 05
it would be a mistake to underestimate the
effect high oil prices have already had on the
world economy. Thelosses suffered by the
airlines mirror the increase in their fuel bills.
We are not that far behind the high prices of
the early 1980s even in real terms
(Daniel Yergin, Chairman, Cambridge Energy
Research Associates, Financial Times, September
16, 2004)
If fuel prices average 50 for 2005, the debt
burden on the network airlines will grow by a
number that rivals the entire combined market
capitalization of these carriers.
(Gary Chase, Lehman Brothers, Fuel Eating the
Upcycle, October 19, 2004)
Average Price of Crude Oil (/Barrel)
West Texas Intermediate at Cushing, Texas
Source PIRA Energy Group and Air Transport
Association
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2005 Jet Fuel Prices Expected to Surpass 2004
RecordHedging and Point-of-Sale Alteration Keep
Jet Price Paid Below Spot
Crude Oil /bbl 2001 26 2002 26 2003 31 20
04F 41
2005F 50
Average Price of Crude Oil (/Barrel)
Jet Fuel Price excl. Taxes (/Gallon)
FORECAST
West Texas Intermediate (WTI) at Cushing, Texas
Sources U.S. Department of Transportation,
Energy Information Administration, Air Transport
Association, and PIRA Energy Group
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Aviation Fuel Efficiency Has Risen Steadily
Conservation Efforts Accelerated Post-9/11,
Paying Off in Better Throughput
Revenue Passenger Miles per Gallon
Source ATA Cost Index for Major and National
Passenger Airlines
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Mainline Passenger Revenue Running Just Above
1995With Express Flying Included, Passenger
Revenue Finally 2001
Express data not available before January 2000.
Source ATA research
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U.S. Economy Remains Relatively Strong But GDP
Decelerating Post-2004, Partly on Higher Energy
Costs
Real GDP Growth vs. Preceding Year ()
Source U.S. Bureau of Economic Analysis
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Air Travel Demand Disconnecting from Cyclical
FactorsHistorically 0.90 of GDP, Passenger
Revenue Now Just 0.70
Historical Band
Four-quarter rolling passenger revenue derived
from government filings of major and national
passenger airlines
Sources U.S. Bureau of Economic Analysis U.S.
Department of Transportation Form 41 reports
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Planes, Trains, and Automobiles . . .Domestic
Air Travel Volumes Ahead of 2000 but Still Lag
Amtrak/Autos
Annualized Psgr. Volume Index (12ME Dec-00100)
Sources Seabury APG (Domestic Onboards-T100)
Amtrak (Ridership) Federal Highway
Administration (Rural Arterial Vehicle Miles)
Travel Industry Association
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Short-Haul Domestic Travel Down Long-Haul
UpHassle/Taxes Take Toll Where Substitutes
Abound LCCs Offer Long-Haul Alternative
Because much mainline service has been replaced
with commuter service since 2000 and DB1A fails
to capture a significant portion of commuter
traffic, volume declines for short-haul trips may
be overstated.
Source U.S. Department of Transportation Data
Bank 1A (DB1A) Origin and Destination (OD)
Survey Data Base Products
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Pricing Power Remains ElusiveDomestic Fares
(Excl. Taxes) Down Sharply From 2000
International Recovering
Internet pricing, low-cost carrier growth and
higher taxation of airline revenue remain as
obstacles to an airline recovery. It may be
years before we experience a return to the late
1990's absolute level of revenue. (William
Greene, Morgan Stanley September 24, 2004)
Many industries, still saddled with excess
capacity, cant raise prices. The biggest
carmakers and airlines.(Rich Miller, Pricing
Power Is BackBut Inflation Isnt Likely to
Follow, BusinessWeek December 27, 2004)
Change in Mainline Psgr. Yield (/RPM) vs. 2000
Source ATA research
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Aviation Taxes Have Outpaced Inflation and
FaresTaxes the Leader of the Pack, at Expense of
Fares
Segment Fee CPI Security Fee
PFC Segment Fee phase-in
PFC Index (1991100)
Itinerary assumes one-stop domestic round-trip
with maximum passenger facility charge (PFC) per
airport 200 total includes taxes and fees.
Source ATA research
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Notwithstanding Tax Hikes, Fare Compression
UnderwaySince 2000, All Buckets Have Declined
Except 100-300 Round-Trips
Source ATA analysis of DOT Databank 1A
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Even With Tax Hikes, Total Ticket Prices Down 40
per R/TTwo-Thirds of Domestic Passengers Now Pay
Total Price Under 300
Avg. Ticket Price 316
Avg. Ticket Price 276
Tickets Tickets Tickets Tickets Including taxes
Source ATA analysis of DOT Databank 1A
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Passenger Unit Revenue Weak at Home Strong
AbroadDomestically, Record Load Factors
Insufficient to Offset Sharply Lower Fares
The industry continues to face a demand curve
characterized by very accentuated price
elasticity and thus the needed objective to
achieve simultaneously capacity and traffic
growth as well as improved price realization
continues to be a very elusive task. (Citigroup
October 24, 2004)
12-Month Rolling Psgr. Revenue per ASM ()
ATA research of Alaska, American, America West,
Continental, Delta, Northwest, United, US Airways
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Since 2000, Breakeven Load Factor Well Above
Actual Prices, Less Cargo, Higher Costs More
Seats Must be Filled
Passenger Load Factor ()Majors and Nationals
Source ATA research
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Capital Expenditures Just One-Third of 2000
LevelsATA Member Passenger Airlines
Capital Expenditures (Billions)
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Productivity Improvements Driving Cost
ReliefNetwork Restructuring, Work Rules, Human
Capital, Outsourcing, Technology
Source ATA Airline Cost Index for U.S. major and
national passenger airlines
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Airline Headcount Down 126,000 (17) from
9/11Low Fares, High Fuel Prices, Productivity
Gains Driving Cuts or Curbing Growth
U.S. Airline Employment (000s)
American, Continental, Delta, Northwest,
United, US Airways AirTran, Alaska, America W
est, ATA (formerly American Trans Air), Frontier,
JetBlue, Southwest, Spirit Air Transport Int
l, ASTAR/DHL, Express.Net, Evergreen, FedEx,
Gemini, Kalitta, Kitty Hawk, Polar, Ryan Intl,
Southern, Tradewinds, UPS, World
Sources U.S. Department of Transportation P1a
employment report carrier reports for full-time
and part-time workers
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Consumer/CEO OutlookCEO Confidence
Deteriorating Energy Costs Swinging Consumers
CEO Business Confidence Index (Quarterly)
Consumer Sentiment Index (Monthly)
Sources Conference Board and University of
Michigan
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Volumes Up But Four Years Behind Pre-9/11
ExpectationsFAA Expects Demand to Exceed a
Billion Passengers in Fiscal Year 2014
Revenue Passengers Enplaned (Millions)
Scheduled Revenue Passenger Enplanements
(Millions), Certificated U.S. Carriers Source
FAA Aerospace Forecasts, based on DOT Forms 41
and 298-C
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