Taking the Dismal Science to 30,000 Feet:

The Need for Speed

John P. Heimlich

VP and Chief Economist

Aircraft Builders Council Annual Conference

September 21, 2010

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Why do people travel, or ship, by air?

―Cross country skiing is great

if you live in a small country.‖

— Steven Wright

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Warm-Up Trivia

3

In 2007-2009, what airline was most profitable in the world?

How about in Europe?

United States?

Asia?

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Competing Globally Will Require Strength at HomeConstraining U.S. Carriers Domestically Will Have Lasting Implications

-5%

0%

5%

10%

15%

Co

pa

Ryan

air

Alleg

ian

t

Sin

gap

ore

LA

N

Qan

tas

Lu

fth

an

sa

So

uth

wes

t

Cath

ay P

acif

ic

Bri

tish

Air

ways

JetB

lue

Air

Tra

n

All N

ipp

on

Co

nti

nen

tal

Th

ai

Air

Fra

nce

-KL

M

US

Air

ways

Am

eri

ca

n

Delt

a

Un

ited

Source: ATA and Morgan Stanley

Net Profit Margins: Calendar Years 2007-2009

4

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Warm-Up Trivia (Cont’d)

5

What U.S. passenger airline has the youngest operating fleet?

What U.S. passenger airline has the oldest operating fleet?

Who has a younger fleet – FedEx or UPS?

Who has more airplanes: Continental or US Airways?

Who has more airplanes: Southwest or United (pre-merger)?

True or False: The new United will have more planes than Delta

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The Air Transport Association of America, Inc.

When America Flies, It Works

6

Combination Services

AirTran Airways

Alaska Airlines

American Airlines

Continental Airlines

Delta Air Lines

Hawaiian Airlines

JetBlue Airways

Southwest Airlines

United Airlines

US Airways

All-Cargo Services

ABX Air

ASTAR Air Cargo

Atlas Air Worldwide Holdings

Evergreen Int’l Airlines

FedEx Corporation

UPS Airlines

Associate Members

Air Canada

Air Jamaica

Mexicana

Founded in 1936, ATA is the nation’s oldest and largest airline trade association.

Its fundamental purpose is to foster a business and regulatory environment that

ensures safe and secure air transportation and enables U.S. airlines to flourish,

stimulating economic growth locally, nationally and internationally.

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Sample of ATA Functions/Issues

Environmental Affairs

Taxation

Air Traffic Management

Cabin/Flight Operations

Safety and Security

Fuel Quality/Technical Matters

Passenger and Cargo Facilitation

Legal/Regulatory Matters

State and Local Affairs

International Affairs

Airports/Slots/Infrastructure

Manufacturing Sector

Alternative Fuels

Communications/Media Relations

Maintenance/Engineering

Medical/Emergency Personnel

7

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Each Decade, U.S. Airline Safety Has Improved MarkedlyFatal Accidents per Million Aircraft Departures in Scheduled Service

8

0.8810

0.5050

0.2919

0.1230

1970-79 1980-89 1990-99 2000-09

Source: ATA analysis of data from the National Transportation Safety Board

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Doing Better and Doing Well Are Not the Same Thing

9

3

4

5

6

7

8

9

10

11

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

Sources: Bureau of Labor Statistics (http://www.bls.gov/cps) and Bureau of Economic Analysis (http://www.bea.gov/national/index.htm#gdp)

U.S. Unemployment RatePercent

$12.5

$12.6

$12.7

$12.8

$12.9

$13.0

$13.1

$13.2

$13.3

$13.4

$13.5

1Q

05

1Q

06

1Q

07

1Q

08

1Q

09

1Q

10

Real U.S. GDPTrillions of Chained 2005 Dollars, SAAR

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The Industry Is Climbing Out of a Deep Hole

Net Income ($Billions) for U.S. Passenger and Cargo Airlines*

10

$2.9

($10.7)

$23.1

($58.2)

$1.0

1979-1989 1990-1994 1995-2000 2001-2009 1H 2010

* DOT Form 41 P-12, Account 9899

―The industry hasn’t seen a real upcycle. 2006-2007 in retrospect now looks more like a

brief reprieve from a downcycle… The industry has not been profitable enough to justify

investment.‖ (Lehman Brothers, ―Implications of a Profound U.S. Airline Industry Restructuring,‖ 6/27/08)

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Average U.S. Price per Gallon of Jet Fuel

$0.59

$1.05

$2.37

$1.69

$2.14$2.32

1991-2000 2001-2005 2006-2008 2009 2010 (EIA-F) 2011 (EIA-F)

Airline Energy Costs Are High and Poised to Rise

Source: Energy Information Administration

11

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For U.S. Passenger and Cargo-Only Airlines, Fuel

Expenditures Trending Up Despite Lower Consumption

12

Sources: ATA, Energy Information Administration, Department of Transportation

Note: Value in parentheses below year is average price paid per gallon excluding taxes, into-plane fees, pipeline tariffs and hedging costs; YE = year ended

16.815.0

12.815.5

22.7

33.2

38.841.9

57.8

32.3

36.6

16

17

18

19

20

21

$10

$20

$30

$40

$50

$60

2000 ($0.82)2001 ($0.78)2002 ($0.72)2003 ($0.85)2004 ($1.16)2005 ($1.66)2006 ($1.97)2007 ($2.11)2008 ($3.07)2009 ($1.90)YE 7/10 ($2.16)

Billion Gallons

Billion Dollars

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2009 Domestic Seating Capacity Fell Most Since 1942Market Forces, Policy Resulted in Largest Post-WWII Contraction in Aviation History

13

Sources: ATA, BTS and Innovata (via APGDat)

(16

.2) (6.9

)

(40)

(20)

0

20

40

60

80

100

19

32

19

34

19

36

19

38

19

40

19

42

19

44

19

46

19

48

19

50

19

52

19

54

19

56

19

58

19

60

19

62

19

64

19

66

19

68

19

70

19

72

19

74

19

76

19

78

19

80

19

82

19

84

19

86

19

88

19

90

19

92

19

94

19

96

19

98

20

00

20

02

20

04

20

06

20

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20

10A

nn

ua

l P

erc

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t C

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in

Do

me

sti

c A

SM

s*

* An available seat mile (ASM) is one seat flown one mile

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Domestic Departures Down Sharply From 2000

14

Scheduled Domestic Flights per Day

Source: Innovata (via APG) published schedules as of Sept. 17, 2010

Scheduled International* Flights per Day

30

,08

2

25

,10

2 26

,38

4

26

,50

0

28

,08

9

27

,14

4

27

,05

2

26

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9

24

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5

23

,42

3

23

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6

4…

4…

4…

4…

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4…

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4…

1,9

00

1,5

15

1,6

19

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13

1,6

94

1,7

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4

1,8

30

1,7

76

1,7

15

1,7

31

4…

4…

4…

4…

4…

4…

4…

4…

4…

4…

4…

* Scheduled U.S.- and non-U.S.-airline flights departing U.S. airports for non-U.S. destinations

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The Future Lies Across the Pond(s)

Thinking Outside the [Domestic] Box

2.0

4.0 4.2

6.8

Do

mesti

c U

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US

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ific

Airbus Global Market Forecast

Annual Traffic Growth: 2009-2028

Boeing Current Market Outlook

Annual Traffic Growth: 2009-2028

15

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Population-Weighted Map With 2010 Real GDP Growth Rates (%)

The World Is Changing; Growth Is Occurring On A Global Scale

16

+11%

+8%

+3%

+5%

+6%

+3%

+1%

+1%

+5%

+5%

+2%

+4%

+6%

+5%

Sources: Cartogram of the World's Population (2007); Global Insight (WMM), real GDP growth rates for 2010 (base year as 2005).

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U.S.-Carrier Access to Some of the World’s Largest and

Fastest-Growing Markets Remains Legally Restricted

17

Open Skies Agreement

Restrictive Agreement

No Agreement

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Alliances Have Helped Carriers Compete Effectively

in Response to Regulatory Barriers in Restricted Markets

18

Online Non-U.S. Destinations Served – August 2010

Source: OAG, August 2010

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Three Highly Competitive Global Airline Alliances

19

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Healthy Investment Requires Healthy CreditNo Passenger Airline in the World Enjoys an A-Minus or Better Rating from S&P

20

< BBB- (speculative or ―junk‖)

>= BBB- (investment-grade)

Ex

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ite

d

US

Air

wa

ys

AA

A

BB

B

BBBB

B-

BB

-

B+

B+

BB

B

B-

B-

B-

B-

B-

B-

AA

A

AA

+

AA

AA

A A A B-

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Healthy Investment Requires Healthy Equity

Equity Market Capitalization (Billions) as of Sept. 17 at 0950 EDT

$311.0

$253.4

$220.4

$192.7

$174.4

$119.4

$112.6

$78.4

$37.9

$35.1

$31.5

ExxonMobil

Apple

Microsoft

Wal-Mart

GE

Toyota

BP

Goldman Sachs

Deutsche Bank

U.S. airline industry*

eBay

* AAI, ALGT, ALK, AMR, CAL, DAL, HA, JBLU, LCC, LUV, MESA, PNCL, RJET, SKYW, UAUA, XJT

21

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What’s Wrong With This Picture?Testimony of David R. Strine, Impala Asset Management (June 16, 2010)

―The poor financial performance of the industry through full

business cycles can be attributed to its high fixed cost structure,

overleveraged balance sheets, low barriers to entry, high barriers

to exit, fragmentation, and fierce competition from low-cost

domestic carriers and recently-consolidated, well-funded

international carriers…

As you weigh policy objectives for the airlines, you may want to

consider the benefits from having airlines in a better position to

generate a return on invested capital in excess of their cost of

capital through a full business cycle…. Only then will there be a

solid foundation for increased capital expenditures, rising wages,

and increased service.‖

22

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The USG Answer to Global Transport?

High-Speed Sail !

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The ATA Climate Change Commitment:

A Global, Sectoral Approach

24

Improve fuel efficiency by 1.5% per year from 2009 to 2020

Carbon-neutral growth from 2020

Reduce CO2 emissions by 50% in 2050 (relative to 2005)

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Airlines Have Opportunity to Reinvent Supply Chain,

Alleviate Dependence on Traditional Refining Economics

25

19.6

Propane|Butane|Propylene|Butylene

Kerosene | Jet Fuel

Heating Oil and

Diesel Fuel

Finished

Motor Gasoline(including Naphtha*)

* Feedstock for high-octane gasoline, petrochemicals and solvents

Lubricants|Wax|Asphalt|Tar|Fuel Oils

Petroleum Coke and Other

Light (52%)

Distillates

26%

Heavy (13%)

Distillates**

11.7

4.1

2.5

3.3

3.5G

allo

ns t

ota

l 4

4.7

du

e t

o ―

pro

ce

ssin

g g

ain

‖

Sources: EIA and American Petroleum Institute

** Includes heavy oils and residuum used in industry, marine

transportation and electric-power generation

9%

Middle (35%)

Distillates

8%

44%

7%

6%

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Alternative Energy Is Inevitable,

But Aviation Must Not Be Left Behind

26

―The Stone Age did not end for lack of stone, and the Oil

Age will end long before the world runs out of oil.‖

— Sheikh Zaki Yamani, former oil minister of Saudi Arabia, Oct. 23, 2003

“The Stone Age did not end for lack of stone, and the Oil

Age will end long before the world runs out of oil.”

— Sheikh Zaki Yamani, former oil minister of Saudi Arabia, Oct. 23, 2003

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When America Flies, It Works