John P. Heimlich, VP & Chief EconomistPresentation to the CAAFI Biennial General MeetingDecember 5, 2018

Air Service and Airline Economics in 2018Growing, Competing and Reinvesting

Source: A4A and Bureau of Transportation Statistics for U.S. passenger and cargo airlines

2 airlines.org

The ~720,000 Employees* of U.S. Passenger and Cargo Airlines Offer an Extensive Worldwide Network Facilitating the Safe and Rapid Movement of People and Goods

27,000 daily flightsto/from 800+ airports in

nearly 80 countries

55,000 tons of cargo per day

2.3 million passengersper day

* Headcount as of July 2018

U.S. Airlines Are Moving More People and More Goods Over Longer DistancesSignificant Growth of Demand for Air Transportation Services in the Deregulated Era

airlines.org3

Source: U.S. Bureau of Transportation Statistics (T1 systemwide for U.S. airlines)

0

200

400

600

800

1,000

1,200

1978

1982

1986

1990

1994

1998

2002

2006

2010

2014

2018

Passenger Traffic Up 4.1xRevenue Passenger Miles (Billions)

0

5

10

15

20

25

30

35

40

45

1978

1982

1986

1990

1994

1998

2002

2006

2010

2014

2018

Cargo Traffic Up 5.6xRevenue Ton Miles (Billions)

In 2014-2018, Domestic Airline Capacity Grew at Twice the Rate of the U.S. Economy

airlines.org

Source: Bureau of Economic Analysis and published airline schedules via Diio Mi

1.6 1.1

0.2

1.6

2.3

5.1 4.9

4.0

5.3

2.6

1.6

2.2 1.8

2.5 2.9

1.6

2.2 2.5

0

1

2

3

4

5

6

2010 2011 2012 2013 2014 2015 2016 2017 2018

Domestic Airline Capacity (ASMs) Real US GDP

4

(Airlines 1.3%, Economy 2.0%)

(Airlines 4.8%, Economy 2.3%)

2,274 2,289 2,366 2,454 2,542 2,651 2,618 2,713 310 330 351 368 390 405 401 415 2,584 2,620 2,717 2,823 2,932 3,056 3,019 3,128

0

500

1,000

1,500

2,000

2,500

3,000

3,500

2013 2014 2015 2016 2017 2018 1H18 1H19

Domestic International

Customers Will See All-Time High of 3.07M Daily Seats Departing U.S. AirportsDaily Seats (000) Departing U.S. Airports: Up 4.2% YOY in 2018 and 3.6% in 1H 2019

airlines.org5

Source: Innovata (via Diio Mi) published schedules as of Nov. 23, 2018, for all airlines providing scheduled passenger service from U.S. airports to all destinations

airlines.org6

Among 11 U.S. Airline Brands, Smaller Carriers Have Been Growing the FastestDifferent Types of Carriers Market Their Prices and Services Differently

(50)

0

50

100

150

200

250

300

350

400

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

% C

hang

e in

Cap

acity

* S

ince

200

7

Spirit

Sun Ctry

HawaiianAlaska

JetBlue

SouthwestAA/DL/UA

Source: Innovata (via Diio Mi) schedules as of Oct. 5, 2018, for selected marketing airlines including predecessors

Allegiant

Frontier

* Systemwide scheduled available seat miles

From 2000-2017, Global Network Carrier Domestic Share Fell From 73% to Just 53%Share (%) of U.S. Domestic Origin-and-Destination Passengers by Airline Business Model

airlines.org

Source: DOT Data Bank 1B (each airline shown on a marketing-carrier basis and tracked with its respective merged/acquired predecessors [e.g., UA/CO]

7

73 71 69 68 67 67 65 62 60 59 58 57 57 57 56 55 54 53 53

18 19 20 21 21 21 22 23 24 25 25 25 25 24 24 24 24 24 23

9 10 10 11 12 13 13 15 16 16 17 18 19 19 20 21 22 23 24

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

1H18

Global Network (AA, DL, UA) Southwest Other

Los Angeles-Seattle Is Among Countless Domestic City Pairs on Which Competition* Increased From 2007-2017 (Real Fares Down 20%, Passengers Up 78%)

airlines.org8

2007 O&D Passenger Share 2017 O&D Passenger Share

64%

17%

8%

7%

52%

19%

8%

5%

7%

7%

* Defined as carrying at least 5 percent of O&D passengers between BUR/LAX/LGB and SEASource: DOT Data Bank 1B and Innovata published schedules via Diio Mi

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 between BOS and CAK/CLESource: DOT Data Bank 1B and Innovata published schedules via Diio Mi

airlines.org9

63%

30%

47%

28%

12%

6%

2007 O&D Passenger Share 2017 O&D Passenger Share

YTD 3Q18 Expenses Rose Faster Than Revenues, Reducing Profitability Yet AgainCarriers Under Cost Pressure in Every Major Category, Driving Margins Lower in 2018

airlines.org10

Change (%) in Operating Revenues and ExpensesFirst Nine Months 2018 vs. First Nine Months 2017

6.5

15.8 12.4

7.0 5.9

33.9

2.7 6.5

3.2 8.6

12.0 15.6 15.5

12.1 8.2

Pax

Rev

(1)

Car

go R

ev

Oth

er R

ev (2

)

Tota

l OpR

ev

Labo

r

Fuel

Mai

nten

ance

Airp

orts

Airc

raft

Oth

er (3

)

Tota

l OpE

xp

2015

2016

2017

2018

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

1. Traffic (revenue passenger miles) up 4.8 percent; yield (revenue per passenger-mile flown) up 1.6 percent; U.S. CPI up 2.5 percent2. 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 (%)YTD 3Q Four-Year Trend

$10.

8B

$14.

9B

$2.2

0 vs

. $1.

70

$18.

3B

$18.

7B

Airlines Recovered $0.68 in Revenue for Every $1.00 Increase in Operating CostsFuel Alone Accounted for 57 Percent of the Year-Over-Year Increase in Costs

airlines.org11

~ $70M/D

ay

PassengerCargo

Other

Fuel

Labor MaintenanceAirportsAircraftOther

$8,668

$12,767

($4,099)

Op Revenues Op Expenses Op Profits

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

Change ($ Millions) in Revenues and Expenses – First Nine Months 2018 vs. First Nine Months 2017

1 ~75% traffic-driven 2 ~90% price-driven

12

Even in Best Years, Profitability of U.S. Airlines Lags U.S. Corporate AveragePre-Tax Profit Margin (%) Gap Widened in 2016 and 2017, Widening Further in 2018

airlines.org

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

8.2

15.2

(25)

(20)

(15)

(10)

(5)

0

5

10

15

2019

70

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

2020

2022

2024

U.S. Recession

U.S. Passenger Airlines

All U.S. Corporations

12

Note: Recessions highlighted in gray

Jet-Fuel Prices Creeping Up AgainA Penny per Gallon per Year Equates to ~$200M in U.S. Airline Industry Fuel Expenses

airlines.org13

0.81

1.66

2.27

3.05 3.15 3.01 2.86

1.86

1.461.70

2.14

$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)

Jan-

Sep

Crude-Oil Prices Surged Through October, Plunging in NovemberOctober 2018 Averaged 41% More Than October 2017; Remain Highest in Four Years

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

airlines.org14

$0

$20

$40

$60

$80

$100

$120

Jan-

14M

ar-1

4M

ay-1

4Ju

l-14

Sep

-14

Nov

-14

Jan-

15M

ar-1

5M

ay-1

5Ju

l-15

Sep

-15

Nov

-15

Jan-

16M

ar-1

6M

ay-1

6Ju

l-16

Sep

-16

Nov

-16

Jan-

17M

ar-1

7M

ay-1

7Ju

l-17

Sep

-17

Nov

-17

Jan-

18M

ar-1

8M

ay-1

8Ju

l-18

Sep

-18

Nov

-18

Jan-

19M

ar-1

9M

ay-1

9Ju

l-19

Sep

-19

Nov

-19

Jan-

20

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

Airlines Utilize a Wide Array of Tools to Minimize Fuel Consumption

airlines.org15

o Continue to replace older (often smaller) aircraft with typically larger, next-generation or re-engined aircrafto Deploy state-of-the-art flight planning/navigation software to optimize airborne movement of aircraft

o Utilize taxi-management technologies – and single-engine taxi – to minimize ground-based fuel burno Consistently employ ground power while parked at gate instead of aircraft auxiliary power unit (APU)o Reduce onboard weight (e.g., lighter materials/structures, inflight entertainment systems, excess fuel)

Substantial U.S. Airline Capital Investment* Has Continued in 2018 Despite Waning Profits – Bringing Total for This Business Cycle to $115 Billion

airlines.org16

15.513.8

7.76.6 5.8 5.2

6.6

9.8

12.513.9

17.0 17.519.9

13.0

2000

2001

2002

2003

-08

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

Source: SEC filings of Alaska, Allegiant, American, Delta, Hawaiian, JetBlue, Southwest, Spirit, United and merged/acquired predecessors

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

Incl

uded

> 4

50 a

ircra

ft

* Includes payments made for aircraft and other flight equipment, ground and other property and equipment, airport and other facility construction and information technology

Jan-

Sep

Infrastructure Investment Is Robust and Growing at Airports of All SizesU.S. Airport Capital Expenditures ($ Billions) by FAA Hub Size

airlines.org17

5.6 5.7 6.4 6.9 8.7

1.1 1.0 1.0

1.3

1.7

1.0 1.0 1.1

1.0

1.1

1.1 1.1 1.2

1.0

1.1

8.9 8.99.8 10.3

12.7

2013 2014 2015 2016 2017

Large Medium Small Non

Source: FAA Form 5100-127 reports, section 10: “Capital Expenditures and Construction in Progress”

Almost Every Major* U.S. Airport Has Seen Supply of Seats Rise Over Past 5 Years% Change in Scheduled-Service Seats Available: 2018 vs. 2013

airlines.org

70

57

56

51

45

44

43

35

35

35

33

33

32

32

31

30

30

29

26

25

24

24

24

24

22

22

22

21

20

20

19

19

18

17

16

16

15

15

14

14

12

11

10

9 9 9 9 9 8 7 7 5 5 5 3 2 1 1 (2

)(3

)(4

)

(10)

0

10

20

30

40

50

60

70

80

DA

LA

US

SJC FL

LS

EAC

VG

BN

AM

CO

RD

UM

SY

PD

XB

OS

SM

FS

ANO

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LGA

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LP

HL

MD

WM

KE

CLE

BU

FA

BQ SJU

18

Source: Innovata (via Diio Mi) published schedules as of Nov. 23, 2018, for all airlines providing scheduled service * FAA large and medium hub airports

In Addition to Expanding Schedules, Airlines Are Deploying Larger AircraftReplacement of 50-Seaters With Larger Regional Jets Is Primary Driver

airlines.org19

% of Domestic U.S. Departures by Aircraft Size

Source: Innovata (via Diio Mi) published schedules as of Dec. 29, 2017

Factors include availability of pilots, fuel efficiency, congested airspace/airfields, improving economics of large regional jets, lack of new-generation in-production small aircraft

45 38 27 22

8 1520 22

47 48 53 56

2005 2010 2015 2018

≤ 50 Seats 51-100 Seats > 100 Seats

In 2017, the Average Airline Flight Departing a U.S. Airport Traveled 16 Percent Farther and Carried an 19 Percent Larger Payload Than It Did in 2007

airlines.org20

Source: Innovata (via Diio Mi) published schedules as of Dec. 29, 2017

726

844

29,675

35,354

20,000

22,000

24,000

26,000

28,000

30,000

32,000

34,000

36,000

38,000

40,000

0

100

200

300

400

500

600

700

800

900

1,000

2007 2017

Aver

age

Sta

ge L

engt

h (M

iles) Average P

ayload (Pounds)

Jet-Fuel Demand Growth at U.S. Airports Varied Widely From 2007 to 2017% Change in Gallons Dispensed at 65 U.S. Airports: 2007 to 2017

airlines.org21

Source: A4A Fuel Portal

175

94

62

57

42

40

39

36

35

33

33

26

25

22

21

20

20

17

17

16

12

11

11

10

10

8 8 7 7 7 6 5 4 4 2 1 0 (0

)(3

)(3

)(4

)(5

)(6

)(6

)(6

)(6

)(6

)(8

)(1

0)(1

1)(1

3)(1

4)(1

6)(1

7)(2

0)(2

0)(2

0)(2

3)(2

8)(2

9)(3

0)

DA

LLI

HA

US

MS

YC

LT FLL

KO

AIT

OS

EAB

OS

SFO SJC

CV

GD

CA

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NA

OAK

CO

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FR

NO

RO

CM

KE

STL

• Changes in law (DAL–Wright Amendment, DCA-perimeter rule)• Airline change of hubs (AA-PIT/STL, UA-CLE, DL-MEM)• Airline focus city growth (B6-BOS, B6/NK/WN-FLL)• Organic economic/tourism growth (AUS, BNA, DEN, Hawaii)• Growth of international flights (BOS, HOU, JFK, SJC)• Amazon (cargo) effect (CVG)• Fuel-efficiency gains (aircraft, flight mix – IAD, PDX)

Total U.S.-Based Jet Fuel Demand1 Back to 2000 All-Time High

U.S. Product Supplied2 of Kerosene-Type Jet Fuel (Thousand Barrels per Day)84

2 77

1 79

1 78

9 83

1 85

8 87

6 85

1 80

9 80

4 83

9 953

1,00

5 1,

105

1,18

1 1,

236

1,28

4 1,

340

1,29

6 1,

310

1,35

7 1,

480

1,49

7 1,

575

1,59

8 1,

623

1,67

5 1,

725

1,65

6 1,

621

1,57

8 1,

630

1,67

9 1,

633

1,62

2 1,

539

1,39

3 1,

432

1,42

5 1,

398

1,43

4 1,

470

1,54

8 1,

614

1,68

2 1,

720

0

200

400

600

800

1,000

1,200

1,400

1,600

1,80019

73

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

2015

2017

2019

airlines.org22

Source: U.S. Energy Information Administration

1 Jet fuel supplied within the United States to all users (i.e., U.S. and foreign airlines, recreational and business aviation, civilian government, military)2 Per EIA, approximates consumption by measuring the disappearance of these products from primary sources (i.e., refineries, natural gas processing plants, blending plants, pipelines, bulk terminals). Generally computed as follows: field production, plus renewable fuels and oxygenate plant net production, plus refinery and blender netproduction, plus imports, plus net receipts, plus adjustments, minus stock change, minus refinery and blender net inputs, minus exports.