U.S. Airline Industry Summer Air Travel Forecast & First Quarter 2013 Financial/Operational Review

John HeimlichVP & Chief Economist

May 16, 2013

Dan ElwellSVP-Safety, Security & Operations

airlines.org2

Executive Summary

» A4A projects an increase in summer air travel on U.S. airlines, narrowing the gap to the 2007 peak

» Continued restructuring helped U.S. airlines report a narrower net loss in seasonally difficult 1Q

» Improving financial results are leading many analysts to forecast that U.S. airlines will finally generate an economic profit (not merely accounting profit) in 2013, enabling airlines to attract new investors, lower their costs of borrowing and reinvest in the product and customer experience

o Restoring air service – adding back flights and seats domesticallyo CAPEX at highest level in 11 years (in part reflecting several hundred passenger aircraft on order)o Significant new investment in aircraft, operational spares, premium seating, airport terminals, customer

lounges, ground equipment, mobile technology, customer kiosks, in-flight entertainment and wirelesso Also intense focus (and results) on improving baggage handling – equipment , software, staffing,

training, internal reporting and communication, airport/agency partnerships, performance incentives, logistics, etc.

» Despite challenging year-over-year deterioration of weather, affirmed by FAA data and analysis, U.S. airline operations remained strong in 1Q13, notably second best 1Q on-time arrival rate since 2003

» Along with airline reinvestments in the product, advances in flight operations, expansion of expedited screening (Pre ™) and continued affordability of air travel make it a great time for ✓customers to fly

A4A Projects Summer 2013 Air Travel to Rise Modestly, Narrowing Gap to 2007 PeakExpecting Record Number of Passengers to Fly Internationally on U.S. Carriers

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2007 2008 2009 2010 2011 2012 2013F

192,4

44,1

00.

0

184,5

10,5

34.

0

176,2

27,8

52.

0

177,2

95,5

13.

0

179,8

15,6

76.

0

179,8

69,1

69.

0

181,2

18,1

87.

8

25,1

13,3

84.0

25,6

55,7

94.0

24,0

83,3

98.0

25,8

07,3

26.0

26,3

10,0

94.0

26,7

10,9

93.0

27,4

32,1

89.8

Domestic InternationalSource: A4A and BTS T100 segment data

U.S. Airline Onboard Passengers (Millions)Scheduled Service, June 1 through August 31

217.6210.2

200.3 203.1 206.1 206.6 208.7

Nearly 209M passengers (2.27M per day)• Up 1% from 2012; busiest since 2008• Remains 4% below 2007 all-time high• YOY Seats: DOM +0.6%, INT +2.5%• Average load factor: 86%-87%

Includes 27.4M travelers (~298K per day) on international flights – a new record

Includes 9 of 11 busiest air travel days of the year for U.S. airports (esp. Thu/Fri in mid-June through first week of August)

Key drivers include:• Rising household net worth, corporate profits• Abating energy prices, affordable airfares• Improved airline financial condition

Summer 2013 Forecast Highlights

In Tough Quarter, 1Q 2013 Bottom Line for 10 U.S. Airlines* Improved from 1Q 20122.5% Increase in Revenues and 1.0% Reduction in Costs Drive Smaller Net Loss

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

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1Q 2013 vs. 1Q 2012 % Better/(Worse)

Operating Revenues ($34.3B) 2.5

Operating Expenses (% of ) (2.3)

Fuel (35%) (0.1)

Wages & Benefits (24%) (3.0)

Landing Fees & Terminal Rents (5%)

(5.0)

Maintenance, Materials & Repairs (6%)

(3.8)

Depreciation, Amortization & Rents (7%)

(3.2)

Other (23%) (4.0)

Non-Op Income / (Expenses) and Tax 54.1

Subtotal Expenses ($34.9B) 1.0

Net Loss (-$552M, or -$3.30 per psgr.) 67.8

1Q12 1Q13

(5.1)

(1.6)

Net Profit MarginEarnings as % of Revenues

In 1Q 2013, U.S. Airlines* Lost 1.6 Pennies per Dollar of Revenue GeneratedWeak Margin – Albeit in Seasonally Weak 1Q – in Stark Contrast to Other Fortune 500s

airlines.org5

U.S. Airlines* 1Q13

Net Income ($ Millions) (552)

Net Margin (Percent) (1.6)

Apple 1Q13

Net Income ($ Millions) 9,547

Net Margin (Percent) 21.9

Ford Motor Co. 1Q13

Net Income ($ Millions) 1,578

Net Margin (Percent) 4.9

Starbucks 1Q13

Net Income ($ Millions) 390

Net Margin (Percent) 11.0

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

Post-Recession, as Economic Conditions Improve and Airlines Begin to Generate Healthy Returns on Capital, Levels of Domestic Air Service Are Growing Yet Again

airlines.org

1Q08

2Q08

3Q08

4Q08

1Q09

2Q09

3Q09

4Q09

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

(10.0)

(8.0)

(6.0)

(4.0)

(2.0)

0.0

2.0

4.0

6.0 Scheduled Flights Scheduled Seats

% C

ha

ng

e Y

OY

6

Source: Innovata (via Diio Mi) published schedules as of May 11, 2013

Improving Balance Sheets Enable Reinvestment in Product and Customer Experience2012 Annual Airline Cash Capital Expenditures (Billions) at Highest Level Since 2001

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2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012$0

$2

$4

$6

$8

$10

$12

$14

$16

$18

$16

.27

$13

.92

$7.

75

$6.

61

$6.

12

$5.

39

$6.

07

$7.

83

$8.

27

$5.

88

$5.

16

$6.

62

$9.

77

Source: Cash flow statements of AirTran, Alaska, Allegiant, America West, American, Continental, Delta, Hawaiian, JetBlue, Northwest, Southwest, Spirit, United, US Airways

» Aircraft, engines, winglets, spare parts» Ground equipment, loading bridges» Passenger terminals, aircraft hangars» Premium seats, new aircraft interiors

» Maintenance facilities and machinery» Bag carousels, carts, scanners» In-flight entertainment systems, wireless» Computers, kiosks, mobile technology

Billions invested

Balance Sheet Recovery Enabling Significant Fleet Renewal for Airline CustomersA4A Passenger Airlines Have 1,299 Aircraft* on Order for Delivery through End of 2022

Source: Carrier SEC filings for deliveries from April 2013 through December 2022

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66

325

118

34

114

321

249

72

* Consists of 1,102 narrowbody aircraft and 197 widebody aircraft

2007 2008 2009 2010 2011 2012 1Q13

On-Time Arrival Rate(% of domestic flights within 00:15)

73.4 76.0 79.5 79.8 79.6 81.9 80.1

Involuntary Denied Boardings(per 10,000 passengers)

1.12 1.10 1.19 1.09 0.82 0.99 1.06

Mishandled Bags(per 1,000 domestic passengers)

7.05 5.26 3.91 3.57 3.39 3.09 3.15

Flight Cancellations(% of scheduled domestic departures)

2.16 1.96 1.39 1.76 1.91 1.29 1.82

Customer Complaints(per 100,000 systemwide passengers)

1.37 1.13 0.97 1.20 1.18 1.42 1.13

Sources: NTSB, BTS and DOT Air Travel Consumer Report (http://www.dot.gov/airconsumer/air-travel-consumer-reports)

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U.S. Airline Operations Remain Strong and Substantially ImprovedImprovements Enabled by Profitability (Reinvestment), Fewer Flights, Better Weather

Source: FAA Air Traffic Organization, AvMet Applications and National Oceanic and Atmospheric Administration

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FAA Analysis of Monthly Snow Cover: “Much more winter weather in First Quarter 2013 compared to 2012, especially DEN, MSP, ORD, MDW, DTW, BOS, EWR, LGA, JFK”

Jan 2012 Feb 2012 Mar 2012

Jan 2013 Feb 2013 Mar 2013

Source: FAA Air Traffic Organization and AvMet Applications (http://www.avmet.com/avmet/)

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FAA Analysis: 1Q 2013 Precipitation (including Snow) Up YOY at Key U.S. Airports

Airport Jan-Mar 2012 Jan-Mar 2013

BOS 4.88” 7.54”

JFK 4.51” 7.68”

ATL 10.89” 16.82”

ORD 6.18” 8.31”

DFW 13.80” 8.01”

DEN 1.14” 1.90”

CLT 7.48” 11.18”

MSP 3.48” 4.17”

SFO 7.59” 1.36”

SEA 17.66” 8.48”

More precipitation

“Overall, more weather (including snow

storms and 1-2 crippling blizzards) in

Northeast-ORD-MSP to ATL/CLT (more

rain) in 2013; more significant West Coast

systems and TX convection in 2012”

-- FAA Air Traffic Organization and AvMet

Industry’s Commitment to Customer-Centric Ops Has Outpaced USG’s Commitment

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“The costs of air traffic control also have undoubtedly been inflated by the delays and cost overruns attributable to the FAA’s inability to adopt new technology to upgrade and modernize the system. The long-anticipated next generation satellite-based air traffic control system…is billions over budget and years behind schedule. It may need to be renamed PastGen at the rate of its deployment.”

Clifford Winston, Senior Fellow, Brookings Institution, “How to Avoid Another FAA Fiasco,” Wall Street Journal (May 8, 2013)

Equipage (percent of Part 121 fleet)

• 99% Area Navigation (RNAV)• 49% Required Navigation Performance (RNP)

High-capacity, real-time weather modeling

High-tech, 24-hour communications, including use of social media and smartphone alerts

Early decision-making, preemptive cancellations

Concerted multi-stakeholder collaboration• Airlines, airports, FAA, DHS, CBP, TSA

U.S. Airlines

Glacial roll-out of NextGen; few benefits to be had from airline investments made thus far

Few Performance Based Navigation (PBN) procedures at even fewer key airports• Many in place at general-aviation airports

• Development process is protracted, unproductive

• FAA generally reluctant or unable to correctly produce efficient, timely procedures where and when airlines and their customers need them

• Impediments include handbook changes, procedural approvals, controller training

U.S. Government (Congress and Administration)

Airlines Collaborating Actively with TSA to Expand Pre ™ Expedited Screening✓Recently, Partnership Yielding Significant Progress in Enhancing the Air Travel Experience

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TSA Pre ™ (an expedited screening initiative) now ✓available at 40 U.S. airports

To date, almost 9 million U.S. airline travelers have experienced expedited screening

By end of 2013, TSA expects that one out of four enrolled travelers will have experienced Pre✓

On April 25, TSA announced that passengers could receive notification of TSA Pre eligibility on boarding ✓passes (Delta, United and US Airways have commenced)

As of May 7, Pre participants now eligible for expedited ✓screening when traveling internationally on Alaska, AA, Delta, United or US Airways from TSA Pre airports✓

Source: Transportation Security Administration

Policy Focus: Allocation of U.S. Customs and Border Protection (CBP) ResourcesAbu Dhabi International Airport (AUH) Ranks 80th Among Aviation Gateways to the USA

Avg. Daily Air Psgr. Arrivals to USA, 2012

Rank Foreign Gateway Airport

> 10,000 1-3 London Heathrow (LHR), Toronto (YYZ), Tokyo Narita (NRT)

5,000 to 9,999 4-10 Frankfurt (FRA), Paris (CDG), Cancun (CUN), Mexico City (MEX), Seoul (SEL), Vancouver (YVR), Amsterdam (AMS)

1,000 to 4,999 11-60

YUL / YYC / GRU / HKG / NAS / GDL / MBJ / PTY / MAD / SDQMUC / DXB / FCO / SYD / SJD / PEK / BOG / SJO / TPE / ZRHPUJ / PVG / KIX / DUB / LIM / SAL / TLV / LGW / EZE / MANPVR / AUA / YEG / CCS / BRU / IST / GCY / PAP / GIG / STIKIN / POS / DUS / MNL / MTY / SCL / YOW / SXM / NGO / GCM

574 to 999 61-79 BCN / AKL / BDA / MGA / MXP / KEF / DOH / LIR / CPH / PLSSVO / UIO / SAP / DEL / BZE / YWG / BGI / ARB / GYE

573 80 Abu Dhabi International Airport (AUH)

1 to 572 81-479 Too many to list in this space

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Source: DHS Advance Passenger Information System via U.S. Department of Commerce

U.S. CBP preclearance location

CBP Has a Huge Opportunity to Better Align Its Resources and Improve the Travel Experience for the 90M Airline Customers Who Arrived at U.S. Airports in 2012

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Source: CBP “Airport Wait Times” (http://www.cbp.gov/xp/cgov/travel/wait_times/), Department of Commerce and DHS Advance Passenger Information System (APIS)

Last year ~90M passengers (~246K/day) arrived at U.S. airports on international flights

15 airports saw more than 5K arrivals/day

Average 2012 wait times as high as 1 hour

Maximum 2012 wait times as high as 3 hours

Some of longest CBP processing times occurred in July (and again in March 2013)

JFK

MIA

LA

XE

WR

OR

DA

TL

SF

OIA

HIA

DD

FW

HN

LB

OS

PH

LM

CO

FL

L0

10,000

20,000

30,000

40,000

Top 15: Daily International Pax Arrivals (000)

~100K per day

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