Second Meeting of the Advisory Committee on Aviation Consumer Protection

Aug. 7, 2012

U.S. Airlines: Their Nascent Recovery and the

Benefits to the Nation

Overview

• The industry is climbing out of a huge financial hole, to modest profitability

o Diversification of revenues and improved alignment of revenues generated with costs incurred have

been critical elements of the nascent recovery

• A heavy dose of new/proposed regulations in 2012 threaten the recovery

• A financially healthy airline industry means job growth and service reinvestment

• Operational performance is strong and improving, and reflected in a remarkably

low complaint rate – especially compared to other industries with smaller volumes

airlines.org 2

The Value Proposition for U.S. Air Travelers Is Alive and Well

It’s Safer, It’s Greener, It’s ~80 Percent On-Time and It’s Still a Bargain

airlines.org 3

0

20

40

60

80

100

120

140

160

180

199

0

199

2

199

4

199

6

199

8

200

0

200

2

200

4

200

6

200

8

201

0

201

2

201

4

201

6

201

8

202

0

Index (1990 = 100)

* 5-year-moving-average fatal accident rate for U.S. air carriers operating under 14 CFR 121 scheduled service (http://www3.ntsb.gov/aviation/Table6.htm)

On-Time

Fares ($2011)

Fatal Accidents* No

ise

Exp

osu

re

Fuel Efficiency

Modest Profits in 2010 and 2011 Came on the Heels of Massive Losses

Cumulative 2001-2011 Net Loss for U.S. Passenger Airlines = $62.3 Billion

($8.0) ($11.8)

($2.1)

($10.0)

($28.6)

$16.5

$6.3

($24.5)

($2.9)

$2.2 $0.6

($1.1)

($40)

($30)

($20)

($10)

$0

$10

$20

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 1H12

Source: A4A analysis of DOT Form 41 data reported by U.S. airlines for which passenger revenue constitutes at least 25 percent of total operating revenues

airlines.org 4

Profit (Billions)

Even With Ancillary Revenues, 2011 Revenues Exceeded Costs by Just 81 Cents (0.4%)

Excluding $8.06 in Ancillaries, Revenues Would Have Lagged Costs by $7.26 (-3.4%)

airlines.org 5

Cargo & Other $45.14

$211.93

$0.81

Airfare $159.53

Ancillary, $8.06

Revenues Costs Net Income

2011 U.S. Airline Financial Results per Enplaned Passenger

Source: A4A analysis of DOT Form 41 data reported by U.S. airlines for which passenger revenue constitutes at least 25 percent of total operating revenues

$212.73

Historically, Airlines Have Been the Least Profitable Segment of the Value Chain

For Airlines, the Cost of Capital Tends to Exceed Returns

Source: McKinsey & Company as cited in IATA “Value Chain Profitability” Economics Briefing (June 2006)

* Return on invested capital minus weighted average cost of capital

airlines.org 6

4.4 3.7

(1.6)

15.8

0.5 0.3

(1.2)

(5.5)

10.5

(0.4)

(10)

(5)

0

5

10

15

20

Manufacturers Lessors Airlines CRS/GDS Travel Agents

1996-2000

2001-2004

Inve

sto

r R

etu

rns o

n C

ap

ita

l*

IATA worked closely with McKinsey & Company to examine the investors’ returns…over a full industry

cycle (1996 to 2004)… Computer reservation systems (CRS), a sector dominated by just four major

firms, delivered the highest returns, with an annual surplus of $660 million over their cost of capital.

The Airline Industry’s Financial Condition Is Improving, But Far From Stellar

Per S&P, Only One U.S. Passenger Airline Has Investment-Grade Credit

Investment Grade1 (>= BBB-)

Source: Standard and Poor’s as of Jul. 21, 2012; “Guide to Credit Rating Essentials: What are credit ratings and how do they work?”

airlines.org 7

ExxonMobil, Microsoft AAA

GE AA+

Wal-Mart AA

Toyota, UPS AA-

BP, eBay A

Amtrak, Starbucks A-

FedEx, Marriott, QANTAS, Starwood BBB

Lufthansa, Southwest BBB-

Ford Motor Co. BB+

British Airways, TAM BB

Alaska, Allegiant BB-

Avis, GOL, Hertz B+

Delta, United B

Air Canada, JetBlue, SAS, US Airways B-

American D

Speculative2 Grade (< BBB-)

1 Describes issuers with relatively high levels of creditworthiness and credit quality 2 Describes issuers with ability to repay but facing significant uncertainties, such as adverse business or financial circumstances that could affect credit risk

Passenger Airline

Sample of New Regulations on U.S. Airlines Will Add $3.3 Billion in Annual Costs

With More Rules Looming, That Sum Equates to Approximately 39,000 Airline Industry Jobs

airlines.org 8

Existing

Proposed

38,793 ($3.3B)

12,407 ($1.04B)

9,580 ($804M)

9,379 ($787M)

1,703 ($143M)

3,935 ($330M)

1,789 ($150M)

TOTAL BURDEN

Full-Fare Advertising

Flight and Duty Time

Other Consumer Mandates

Fuel-Tank Inerting

Training

Airport Hydrant Fueling Systems

Lithium Batteries (TBD)

Source: A4A and Federal Aviation Administration

Improved Airline Finances Have Translated to 18 Consecutive Months of Job Growth

After Years of Losses, U.S. Passenger Airlines Have Also Been to Reinvest in Equipment

(8)

(6)

(4)

(2)

0

2

4

200

7

200

8

200

9

201

0

201

1

201

2

airlines.org 9

$1

6.9

$9

.7

$6

.6

$5

.8

$4.8

$5

.8

$4

.2

$3

.4 $

5.7

$9

.2

00-0

1

02

03

04

05

06-0

9

10

11

12

F

13

F

Aircraft Capital Spending on the Rise Average Annual Estimated Aircraft/Engine CapEx (Billions)

Airline Jobs Added in 18 Months in a Row YOY Change (%) in Full-Time Equivalent Employees

Source: BTS for U.S. scheduled passenger airlines Source: Bank of America Merrill Lynch airline equity research (Jan. 5, 2012)

Rising Costs and Constraints on Revenue Production Translate to Air Service Cuts

Domestically, the United States Has a 9 Percent Smaller Industry Than Five Years Ago

Source: Innovata (via Diio Mi) published schedules as of Aug. 3, 2012; an available seat mile (ASM) is one seat flown one mile

airlines.org 10

186.2

169.0

160

165

170

175

180

185

190

4Q07 4Q12

Scheduled Domestic Seating Capacity: Five-Year Comparison

Ava

ilab

le S

ea

t M

iles (

Bill

ion

s)

Product (Unit) 2000 2011 Change (%)

College Tuition: Public (Year) $3,508 $8,244 135.0

Gasoline (Gallon, Unleaded) $1.51 $3.53 133.8

Costs Faced by U.S. Passenger Airlines (Index) 100.0 195.0 95.0

Eggs (Dozen, Grade A, Large) $0.91 $1.77 94.5

College Tuition: Private (Year) $16,072 $28,500 77.3

Baseball Game (Nonpremium MLB Ticket) $16.22 $26.91 65.9

Movie Ticket $5.39 $7.92 46.9

Single-Family Home (New) $169,000 $227,200 34.4

U.S. CPI (All Urban Consumers)1 172.2 224.9 30.6

Vehicle (New) $24,923 $30,659 23.0

Air Travel (Round-Trip Domestic Fare + Ancillary)2 $316.95 $365.23 15.2

Air Travel (Round-Trip Domestic Fare Only)2 $314.46 $343.46 9.2

Apparel: Clothing/Footwear/Jewelry (Index) 129.6 122.1 (5.8)

Television (Index) 49.9 6.6 (86.8)

Relative to Most Goods/Services (and Airlines’ Costs), Air Travel Remains a Bargain

The U.S. Consumer Price Index (CPI) Has Risen at Twice the Rate of Domestic Air Travel

1. Bureau of Labor Statistics “measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services .”

2. A4A analysis of data collected by the Bureau of Transportation Statistics – excludes taxes; “ancillary” includes revenue from reservation changes and baggage

airlines.org 11

Sources: A4A analysis of BTS Data Bank 1B (from the Department of Transportation)

Even With Ancillaries Included, Price of Domestic Air Travel Lags U.S. Inflation

From 2000 to 2011, Price in Key States Either Decreased or Rose Less Than U.S. CPI

airlines.org 12

15.2

16.8

7.7

(2.9)

U.S. Domestic Average

California

Illinois

Massachusetts

U.S

. CP

I: +30

.6%

More Than U.S. CPI % Change (2011 vs. 2000) Less Than U.S. CPI

U.S. Airline Operations Have Improved Substantially Over Past Five Years

Record Performance Enabled by Reinvestment in Product, Cooperative Weather, Etc.

Sources: Bureau of Transportation Statistics and DOT Air Travel Consumer Report (http://airconsumer.dot.gov/reports/index.htm)

airlines.org 13

2007 YTD 2012 Better Success Rate

On-Time Arrival Rate

(% of domestic flights within 00:15) 73.4 84.3 ~11 pts. 84.3%

Involuntary Denied Boardings

(per 10,000 passengers) 1.12 0.91 ~19% 99.991%

Mishandled Bags

(per 1,000 domestic passengers) 7.05 3.01 ~57% 99.699%

Flight Cancellations

(as % of sched. domestic departures) 2.16 1.06 ~51% 98.940%

Hence, the Rate of Customer Complaints Against Airlines is Remarkably Low

Rail Customers Express Far Greater Levels of Dissatisfaction

Sources: DOT, Federal Communications Commission, National Cable & Telecommunications Association, WMATA, Capital Metro (Austin), Los Angeles County

Metropolitan Transportation Authority, American Public Transportation Association, AMTRAK

627.54

16.28

12.50

6.56

2.92

2.50

1.18

AMTRAK

Metro North RR (NYC)

WMATA (Wash., DC)

U.S. Cable Companies

Los Angeles Metrobus

Capital Metro (Austin, TX)

U.S. Passenger Airlines

Complaints received per 100,000 customers, CY2011

airlines.org 14

Sample Route Rate

Capitol Corridor (Cal.) 15.5

Keystone 78.9

Acela 204.3

NE Regional 248.6

Chicago-Carbondale 419.7

Chicago-St. Louis 487.2

California Zephyr 6,138.2

632

0.466

362

30

83

367

97

Mill

ions o

f C

usto

mers

Conclusion

• The industry is climbing out of a huge financial hole, to modest profitability

• New/proposed/looming regulations in 2012 alone threaten the recovery, jobs

• A financially healthy airline industry means job growth and service reinvestment

• Operational performance is strong and improving, and reflected in a remarkably

low complaint rate – especially compared to other industries with smaller volumes

airlines.org 15

www.airlines.org