To represent, lead and serve the airline industry

Cycle turns up but risks and structural challenges remain

September 2010Brian Pearcewww.iata.org/economics

Confidence was still high in July survey Airline CFO question: what change in profits do you expect

0102030405060708090

100

Mar

200

6

Sep

2006

Apr 2

007

Oct

200

7

Apr 2

008

Oct

200

8

Apr 2

009

Oct

200

9

Apr 2

010

Wei

ghte

d Sc

ore

(50

= N

o C

hang

e)

Last Three Months

Next Twelve Months

Source: IATA

Markets rebound from Great Recession

Source: IATA

International air freight and passenger volumesseasonally adjusted

160

180

200

220

240

260

2005 2006 2007 2008 2009 2010

RP

K, b

illio

ns

9

10

11

12

13

14

FTK

, bill

ions

FTK

RPK

World trade slowing but still above trend

World trade in goods and air FTKsSource: Netherlands CPB and IATA

8

9

10

11

12

13

14

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Billio

n FT

Ks

90

100

110

120

130

140

150

160

170

inde

x of

wor

ld tr

ade,

200

0=10

0

International FTKs(left scale)

World goods trade volumes(right scale)

Air travel driven by business passengers

Source: IATA Premium Traffic Monitor

Premium passengers and world trade growthSource: IATA, CPB Netherlands

-30

-25

-20

-15

-10

-5

0

5

10

15

20

25

Jan-

06

Apr

-06

Jul-0

6

Oct

-06

Jan-

07

Apr

-07

Jul-0

7

Oct

-07

Jan-

08

Apr

-08

Jul-0

8

Oct

-08

Jan-

09

Apr

-09

Jul-0

9

Oct

-09

Jan-

10

Apr

-10

% c

hang

e ov

er y

ear

Developed countries trade in goods

Premium passenger numbers

Business confident, consumers less so

Source: JP Morgan/Markit and Haver

Business and consumer confidence in major economies

60

65

70

75

80

85

90

95

100

105

2006 2007 2008 2009 2010

Inxd

ex to

100

in 2

007

Business confidence

Consumer confidence

Consumer confident in ‘emerging’ markets

Consumer confidenceSource: Haver Analytics

0

20

40

60

80

100

120

Jan-2004 Jan-2005 Jan-2006 Jan-2007 Jan-2008 Jan-2009 Jan-2010

Bal

ance

exp

ectin

g im

prov

emen

t, in

dex

-35

-30

-25

-20

-15

-10

-5

0

Bal

ance

exp

ecte

ting

impr

ovem

ent,

net %

China

Europe(right scale)

US

Large geographical differences in travel

Source: IATA Premium Traffic Monitor

Growth in passenger numbers by flight segment

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

2007 2008 2009 2010

Cha

nge

over

yea

r

Middle-East - Asia

Within Asia

North & Mid Pacific

North Atlantic

Freight market growth converging

Source: IATA

International Freight growth by major routesSource: IATA ODS

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

Jan-09

Feb-09

Mar-09

Apr-09

May-09

Jun-09

Jul-0

9Aug-09Sep

-09Oct-

09Nov-0

9Dec

-09Ja

n-10Feb

-10Mar-

10Apr-1

0May

-10Ju

n-10

YoY

Gro

wth

Within Far East

Europe - Far East

North Atlantic

North and Mid Pacific

Fares rebounding but so are fuel prices

Source: IATA and Platts

Average international fares and jet kerosene prices

300

320

340

360

380

400

420

2006 2007 2008 2009 2010

US

$ pe

r one

-way

fare

100

150

200

250

300

350

400

450

US

cen

ts p

er g

allo

n

Jet kerosene price(right scale)

Average one-way international fare(left scale)

Yields up 45% from Asia, flat from Europe

Air Freight Yields US$ per KiloSource: IATA CASS

1.1

1.2

1.2

1.3

1.3

1.4

1.4

1.5

1.5

1.6

1.6

2005

Q1

2005

Q2

2005

Q3

2005

Q4

2006

Q1

2006

Q2

2006

Q3

2006

Q4

2007

Q1

2007

Q2

2007

Q3

2007

Q4

2008

Q1

2008

Q2

2008

Q3

2008

Q4

2009

Q1

2009

Q2

2009

Q3

2009

Q4

2010

Q1

2010

Q2

0.4

0.9

1.4

1.9

2.4

2.9

3.4

Global Total

Europe (RHS) to North America

SE Asia to Europe (RHS)

Asset utilization not as good as it appears

Source: IATA

Aircraft utilization and passenger load factor

71%

72%

73%

74%

75%

76%

77%

78%

79%

80%

2005 2006 2007 2008 2009 2010

Pas

seng

er lo

ad fa

ctor

, % A

SK

s

10.2

10.4

10.6

10.8

11.0

11.2

11.4

11.6

Airc

raft

utili

zatio

n, d

aily

hou

rs

Passenger load factor

Twin aisle utilization

Utilization of freighters looks much better

Source: IATA, Boeing

Freighter utilization and freight load factor

40%

42%

44%

46%

48%

50%

52%

54%

56%

58%

2005 2006 2007 2008 2009 2010

Frei

ght l

oad

fact

or, %

AFT

K

7.5

8

8.5

9

9.5

10

10.5

11

Frei

ghte

r util

izat

ion,

dai

ly h

ours

Freight load factor

Freighter utilization

Operational cash flow rebounds (partly)

Source: Bloomberg

EBITDA as % revenuesseasonally adjusted

-5%

0%

5%

10%

15%

20%

2005 2006 2007 2008 2009 2010

% re

venu

es

US airlines

Asia-Pacific airlines

European airlines

Business inventory cycle boost ending

Source: IATA Cargo eChartbook

Total Business inventories to sales ratio and FTKsSource: US Census Bureau and IATA

0.8

1

1.2

1.4

1.6

Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-108

9

10

11

12

13

14

15

16

17

18

Inventories to sales ratio

FTKS

Large reversal of fiscal stimulus ahead

Source: US CBO

US federal budget position, $ billion

-2000

-1500

-1000

-500

0

500

1956

1959

1962

1965

1968

1971

1974

1977

1980

1983

1986

1989

1992

1995

1998

2001

2004

2007

2010

US

$ bi

llion

Bank bailout & fiscal stimulus

Europe exposed to govt debt pressures

Source: Haver

Credit Default Swap Spreads

0

100

200

300

400

500

600

700

800

900

1000

May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10

basi

s po

ints

Greece

Portugal

SpainUK

GermanyUS

Western consumers also in bad shape

Source: Haver

Consumer debt-income and unemployment in the US

3

4

5

6

7

8

9

10

11

1997 1999 2001 2003 2005 2007 2009

Une

mpl

oym

ent r

ate

0.8

0.9

1.0

1.1

1.2

1.3

1.4

Hou

seho

ld d

ebt-i

ncom

e ra

tio

Consumer debt

Unemployment

Developed economies to weaken in 2011

Source: EIU

Forecasts for GDP growth source: EIU

0

1

2

3

4

5

6

7

8

US Japan Europe ASPAC exJapan

Middle EastNorth Africa

LatinAmerica

World

% c

hang

e ov

er y

ear

2010 2011

Volumes will slow, revenues slow furtherGrowth in air cargo volume and world trade

-15

-10

-5

0

5

10

15

20

25

1999 2001 2003 2005 2007 2009 2011F

% c

hang

e ov

er y

ear

Cargo growth

World trade in goods growth

Source: IATASource: IATA

Fuel prices appear range-bound

Jet Fuel and Crude Oil Price ($/barrel)Source: Platts, bloomberg

0

20

40

60

80

100

120

140

160

180

200

2003 2004 2005 2006 2007 2008 2009 2010

Jet Fuel

Crude oil (Brent)

Forward curve

Capacity now coming out of storage

Aircraft Retirements and DeliveriesSource: Ascend

-110

-70

-30

10

50

90

130

2006

2007

2008

2009

Jun-09

Jul-0

9 A

ug-09 Sep

-09 O

ct-09

Nov-0

9 D

ec-10

Jan-10

Feb-10

Mar-

10 A

pr-10

May

-10 Ju

n-10 Ju

l-10

Airc

raft

per m

onth

Deliveries Retirements Storage

MonthlyAverage

Passenger fleet utilization will rise

Daily hours of aircraft utilisation seasonally adjusted

7.9

8.0

8.1

8.2

8.3

8.4

8.5

8.6

2005 2006 2007 2008 2009 2010

Sin

gle

aisl

e, h

ours

10.2

10.4

10.6

10.8

11.0

11.2

11.4

11.6

Twin

ais

le, h

ours

Twin aisle

Single aisle

Source: IATA

Delivery of new capacity set to riseScheduled deliveries of new aircraft, jets and turboprops

0

200

400

600

800

1000

1200

1400

1600

2004 2005 2006 2007 2008 2009 2010 2011

Ann

ual d

eliv

erie

s

OtherMiddle EastNorth AmericaEuropeAsia Pacific

Source: Ascend

So yield gains likely to stall in 2011Global revenues/tkp, costs/tkp and fuel cost/tkp

65.0

70.0

75.0

80.0

85.0

90.0

95.0

100.0

105.0

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

Yield

Cost per TKP

Fuel cost/TKP(right scale)

Source: ICAO, IATA

Profits cycle up in 2010 but slips in 2011

Global commercial airline profitability

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

F

2011

F

% re

venu

es

-20

-15

-10

-5

0

5

10

15

20

US

$ bi

llion

Net losses(right scale)

EBIT margin (left scale)

Source: IATA

Asia strongest, Europe weakest

Source: ICAO, IATA

Airline net profits by region

-6

-4

-2

0

2

4

6

Europe Asia-Pacific N America L America Middle east Africa

US

$ bi

llion

2009 2010 2011

Still unable to deliver ‘normal’ returnsReturn on invested capital in the airline industry vs the cost of capital

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.019

93

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

F

2011

F

% o

f inv

este

d ca

pita

l

Return on capital(ROIC)

Cost of capital(WACC)

Forecast

Source: IATA