State of the Industry and Economic Outlook Brian Pearce ... · PDF fileBoosting trade and tourism 1000 2000 3000 4000 5000 ... Ratio of foreign value added to domestic ... 6.0%Philippines

State of the Industry and Economic Outlook

Brian Pearce Chief Economist

Global Media Day

Geneva, 8th December 2016

Airline Industry Economics Advisory Workshop 2016 2

Connecting more cities at lower prices

0.50

0.70

0.90

1.10

1.30

1.50

1.70

1.90

2.10

2.30

2.50

0

2000

4000

6000

8000

10000

12000

14000

16000

18000

20000

1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

US

$/R

TK

in

2014U

S$

Num

ber

of

uniq

ue c

ity-p

air

s

Unique city-pairs and real transport costs

Unique city pairs

Cost of air transport,

after CPI inflation

Source: IATA Economic Performance of the Airline Industry – end year 2016 report


Creating value for the wider economy

40

50

60

70

80

90

100

110

120

130

35

40

45

50

55

60

65

70

75

2000 2002 2004 2006 2008 2010 2012 2014 2016

$ b

illi

on

Millio

n

Tax revenues paid and global supply chain jobs supported

Supply chain jobs

supported

Tax revenues paid



Boosting trade and tourism

1000

2000

3000

4000

5000

6000

7000

8000

200

300

400

500

600

700

800

2000 2002 2004 2006 2008 2010 2012 2014 2016

Tra

ded

go

od

s,

US

$ b

illio

n

Tourist

spend, U

S$ b

illio

n

Value of trade carried by air and the spending of tourists

Spending by tourists carried by air

Value of traded goods carried by air



Now creating value for investors

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

% o

f in

veste

d c

ap

ital

Return on capital invested in airlines

Cost of capital (WACC)

Return on

capital (ROIC)



2017 less profitable but still value creating

-35

-30

-25

-20

-15

-10

-5

0

5

10

15

20

1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

US

$ b

illio

n

Difference between investing in airlines and investing in similar assets elsewhere



Industry level profits momentum has weakened

Source: IATA seasonal adjustment of data from The Airline Analyst and airline public reports

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

2011 2012 2013 2014 2015 2016

Airline industry average EBIT margin

Unadjusted data

Adjusted for

seasonality

% o

f re

ven

ue


As unit costs and unit revenues crossed over

Source: IATA using data from The Airline Analyst

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

2011 2012 2013 2014 2015 2016

Growth in unit revenues and unit costs

Unit costs

Unit revenues

% c

han

ge o

ver

year

earl

ier


Industry profitability is more resilient to the cycle

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

EBIT or operating margins and global GDP growth

Airline industry

EBIT margin

Global GDP

growth

Source: IATA using data from ICAO, the IMF and our own forecasts


And it’s not just about low fuel prices

Source: IATA using data from Haver

50

52

54

56

58

60

62

64

66

68

1

1.5

2

2.5

3

3.5

2011 2012 2013 2014 2015 2016

OPEC spare capacity and OECD crude oil inventories

OECD crude oil inventories

(right scale)

OPEC spare capacity

(left scale)

Millio

n b

arr

els

pro

du

cti

on

per

day

Days o

f su

pp

ly


Structural changes in asset utilization

58

59

60

61

62

63

64

65

66

67

68

2000 2002 2004 2006 2008 2010 2012 2014 2016

% A

TK

s

Breakeven and achieved weight load factor

Achieved LF

Breakeven LF



Structural changes in the product

0.8

0.9

1.0

1.1

1.2

1.3

1.4

-6

-4

-2

0

2

4

6

8

10

2000 2002 2004 2006 2008 2010 2012 2014 2016

Ca

pit

al p

rod

uc

tivit

y, r

eve

nu

e/i

nve

ste

d

ca

pit

al,

US

$

Op

era

tin

g m

arg

in, %

re

ve

nu

e

Airlines' operating or EBIT margin and capital productivity

Capital productivity

Operating

margin



Some regions doing much better than others


-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

ROIC in 2016 (part year) by region and airline

North America Europe Asia Pacific Latin

America Middle

East Africa

Average cost of

capital


There is a wide range of business models


-0.10

-0.05

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

0.40

0.45

0.00 0.50 1.00 1.50 2.00 2.50

Capital productivity ($ revenue per $ invested capital)

2015 ROIC = adjusted EBIT/revenue * revenue/invested Capital

WALMART

PFIZER

Allegiant

Lufthansa

Easyjet

Southwest

Alaska

Spirit

Ryanair

Jazeera

Delta

IAG

AF - KLM

Hawaiian

AMR JAL

Qantas

United

Thai

Volaris

Mesa

Spring

Air Canada PIA

GOL Korean

SIA

Air China

Cathay

Aeromexico

JetBlue

LATAM ANA

Increasing return

on capital (ROIC)

Comair

EB

IT m

arg

in ,

ad

juste

d E

BIT

/reven

ue


Balance sheet metrics remain divergent


2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

2011 2012 2013 2014 2015

Adjusted net debt/EBITDAR by region

North

America

Europe

Asia Pacific

Latin America

Ad

jus

ted

net

deb

t/E

BIT

DA

R


Where now for the fragile economic cycle?

Source: IATA using data from Markit, Haver, Netherlands CPB

40

45

50

55

60

65

70

-10%

-5%

0%

5%

10%

15%

20%

2010 2011 2012 2013 2014 2015 2016

Indicators of the economic cycle

Business

confidence

(right scale)

World trade growth

(left scale)

Industrial production growth (left scale)


This time is different for global GDP growth?

-3

-2

-1

0

1

2

3

4

5

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

IMF forecasts of global economic growth (using market exchange rates) April

2013 April

2014 April

2015 Jan

2016

July 2016

Trade

restrictions

scenario

Source: IATA using data from the IMF’s World Economic Outlook


The problem with world trade remains

Source: IATA using data from the Netherlands CPB

30

32

34

36

38

40

42

44

46

48

50

52

50

60

70

80

90

100

110

120

1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

Index (Oct 2008=100)

World trade/IP ratio vs. measure of global supply chains

Share (%)

World trade/IP ratio

Ratio of foreign value added to domestic

value added in world gross exports


Travel demand has been strong

30

35

40

45

50

55

60

65

-12%

-8%

-4%

0%

4%

8%

12%

16%

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Growth in RPKs and the level of business confidence % year-on-year Diffusion index

Growth in industry RPKs

Global PMI index

(adv. 2 months)

Source: IATA using data from IATA statistics and Markit


Over the next two decades considerable growth

Source: IATA using data from TE/IATA Air Passenger Forecasts, October 2016

4.2%

3.0%

6.0%

2.6%

5.2%

8.2%

3.5%

6.7%

2.6%

5.2%

0 100 200 300 400 500 600 700 800

Mexico

Australia

Philippines

Brazil

Turkey

Vietnam

Indonesia

India

United States

China

Change in domestic O-D markets (millions, 2015-2035) -

Corresponding CAGR


Next year will be slower but still close to trend

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

-4

-2

0

2

4

6

8

10

12

14

16

2000 2002 2004 2006 2008 2010 2012 2014 2016

Nu

mb

ers

of

passen

gers

, m

illio

n

% c

han

ge o

ver

pre

vio

us y

ear

Global RPK growth and passenger numbers

Passenger

numbers

Growth in global

RPKs

20-year trend

growth rate



Documents

State of the Industry and Economic Outlook Brian Pearce ... · PDF fileBoosting trade and tourism 1000 2000 3000 4000 5000 ... Ratio of foreign value added to domestic ... 6.0%Philippines