The Economic Climb-Out for U.S.

Airlines:
Global Competitiveness and Long-Term Viability
ATA Office of Economics
January 29, 2011

The Air Transport Association of America, Inc.

Air transport has become an essential economic and social conduit throughout the
world. Beyond the benefits of fast and inexpensive transcontinental travel, air
transport also has become a vital form of shipping for high-valued items that need
to come to market quickly
World Bank (www.worldbank.org/airtransport)

Combination Services

All-Cargo Services

Associate Members

AirTran Airways
Alaska Airlines
American Airlines
United Airlines*
Delta Air Lines
Hawaiian Airlines
JetBlue Airways
Southwest Airlines
US Airways

ABX Air
ASTAR Air Cargo
Atlas Air Worldwide Holdings
Evergreen Intl Airlines
FedEx Corporation
UPS Airlines

Air Canada
Air Jamaica

* Includes Continental Airlines

www.airlines.org

OVERVIEW
Safety of commercial travel exceeds other modes and continues to improve
DOT statutory mission explicitly recognizes importance of airline industry
viability and global competitiveness
A viable, competitive U.S. airline industry is good for the country, fueling jobs and growth
Numerous stakeholders benefit from a financially viable, competitive U.S. airline industry

Competition among airlines remains intense

Battlefield is increasingly global, with a relatively mature domestic market
U.S. airlines are financially weaker than many non-U.S. airlines

To reinvest in product/people, airlines need substantially improved finances

Competing in the global marketplace is essential for airlines and good for USA
www.airlines.org

The State of the Industry

Fitch: 2011 Outlook: U.S. Airline Balance Sheet Repair to Continue
Fitch [Ratings] expects ratings for most U.S. airlines to improve in 2011, reflecting a
modest strengthening of industry operating fundamentals and steady progress toward
debt reduction and balance sheet deleveraging. As U.S. carriers look to unwind the
lingering effects of historically weak returns, insufficient cash flow generation, and
constrained liquidity, deployment of cash toward debt repayment will be essential if the
ratings momentum witnessed in 2010 is to continue for another year.*

Much like the U.S. economy, U.S. airlines are climbing out of a deep hole and have a long
way to go to be financially strong: (1) attain investment-grade credit and generate a
return on invested capital in excess of cost of capital through a full business cycle
U.S. airlines are focused on shoring up balance sheets to reinvest in product, people and
planes, and to weather the next fuel spike or economic downturn without significant
reductions in personnel or service; the global aviation marketplace, where traffic growth
is most promising, is increasingly relevant and intensely competitive

Restructuring has become a way of business were in a period of continual reinvention

* Fitch Ratings, 2011 Outlook: U.S. Airline Balance Sheet Repair to Continue (Dec. 9, 2010)

www.airlines.org

U.S. Carriers: Competing in a Global Marketplace

Selected M&A and/or Cross-Border Investment: 1995-Present
USA

Non-USA

Republic/Shuttle America

Air France/KLM

US Airways/America West

Copa/AeroRepblica

SkyWest/Atlantic Southeast

Lufthansa/Swiss

Lufthansa/JetBlue*

Air China/Cathay Pacific*

Delta/Northwest

Cathay Pacific/Dragonair

Republic/Midwest

Lufthansa/Brussels*/BMI/Austrian

Republic/Frontier

Avianca/TACA

United/Continental

British Airways/Iberia

SkyWest-ASA/ExpressJet

LAN/TAM

Southwest/AirTran

LAN/Aires*

Source: ATA and Deutsche Bank Global Research

www.airlines.org

* Strategic investment but not full ownership or control

An Analyst/Investor View
Source: Deutsche Bank Global Research (Jan. 13, 2011)
Consolidation, in our review, represents a later stage for a
mature industry that is seeking ways to address its financial
volatility Our view is that consolidation is part of a longer-term
process that should ultimately allow the global airline industry
to efficiently allocate capital and assets such that a positive
return on invested capital can be achieved
On the surface, airlines pursue mergers as a means to improve
profitabilityand their competitive positioning via an expanded
network. Longer-term, consolidation should improve industry
viability while mitigating industry volatility and consequently
lower its cost of capital.
Source: Global Airline Sector Laying the Foundation for Global M&A, Deutsche Bank Global Research (Jan. 13, 2011)

www.airlines.org

Air Travel Safer Than Other Forms of Intercity Transport

U.S. Passenger Fatalities per 100 Million Passenger Miles, 1998-2007

0.75

Auto (1)

0.04

0.04

Bus (2)

Rail (3)

0.01
Airline (4)

1. Passenger cars/taxis; drivers considered passengers; data from the NSC Fatality Analysis Reporting System
2. Does not include school buses; data from the NSC Fatality Analysis Reporting System
3. Data from the Federal Railroad Administration (FRA)
4. Large and commuter airlines, excluding cargo; data from the National Transportation Safety Board (NTSB)
Source: National Safety Council Injury Facts 2010 Edition, 1998-2007 averages (most recent available)

www.airlines.org

Each Decade, U.S. Airline Safety Has Improved Markedly

Fatal Accidents per Million Aircraft Departures in Scheduled Service

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

www.airlines.org

DOT Statutory Mission Explicitly Recognizes Importance of

(and Role in) Industry Viability and Competitiveness
U.S. Code, Title 49, Sec. 40101. Policy, Subsection A: Economic Regulation

(6) placing maximum reliance on competitive market forces and on actual and
potential competition (A) to provide the needed air transportation system; and (B)
to encourage efficient and well-managed air carriers to earn adequate profits and
attract capital, considering any material differences between interstate air
transportation and foreign air transportation.
(14) promoting, encouraging, and developing civil aeronautics and a viable, privatelyowned United States air transport industry.
(15) strengthening the competitive position of air carriers to at least ensure equality
with foreign air carriers, including the attainment of the opportunity for air carriers to
maintain and increase their profitability in foreign air transportation.
(16) ensuring that consumers in all regions of the United States, including those in
small communities and rural and remote areas, have access to affordable, regularly
scheduled air service.

www.airlines.org

A Viable, Competitive U.S. Airline Industry Is Good for The

Country, Fueling Jobs and Economic Growth
Aviation is the glue that keeps the global economy together. Without widely accessible and
well-priced air travel, the global economy will quickly become less global.
Dr. Mark Zandi, Chief Economist & Co-Founder, Moodys Economy.com (August 2008)

The Economic Impact of Civil Aviation on the

U.S. Economy (FAA, Dec. 2009)
Commercial aviation helps drive:
$1.225 trillion/year in economic activity
$371 billion/year in personal earnings
10.9 million jobs
Commercial aviation contributes:
$731.5 billion/year to U.S. GDP
5.2% of U.S. GDP

Economic growth and prosperity are determined

in large part by access to the global economy.
And, just as islands require bridges to the
mainland.communities require bridges to the
global economy. Air transportation is that bridge,
providing the necessary access for U.S. citiesto
enjoy a Virtuous Circle of Economic Growth.
The Plane Truth About Air Service and Economic Development,
Global Aviation Improvement Network, Booz Allen (March 2001)

Every day, the airline industry propels the economic takeoff of our nation. It is the great
enabler, knitting together all corners of the country, facilitating the movement of people and
goods that is the backbone of economic growth. It also firmly embeds us in that awesome
process of globalization that is defining the 21st century.
Daniel Yergin, Author, Commanding Heights: The Battle for the World Economy, in the ATA 2005 Economic Report

www.airlines.org

10

Commercial Aviation Drives Nearly 11 Million U.S. Jobs

U.S. Job Impact by Aviation Activity, In Millions
Travel
Arrangements
0.2

Air Transport
3.0

Visitor
Expenditures
5.9

Airport
Operations
0.6
Aircraft
Manufacturing
1.1

Source: Federal Aviation Administration, The Economic Impact of Civil Aviation on the U.S. Economy, (December 2009)

www.airlines.org

11

Numerous and Varied Stakeholders Benefit From a

Financially Viable, Competitive U.S. Airline Industry
Service Continuity, Job Security, Reinvestment in Product and People
Airline/Airport/Aerospace Workers

Air Travelers and Shippers

Hub Cities

People Whove Never Flown

Spoke Communities

Agriculture Interests

U.S. Treasury

Manufacturing Sector

Small Businesses

Importers/Exporters

Corporate America

Travel and Tourism

Aviation Suppliers

Humanitarian/Relief Workers

National Defense

Medical/Emergency Personnel

www.airlines.org

12

Inter-Airline Competition Remains Intense

The purpose of this study is to examine the competitiveness of the U.S.

domestic airline industry following a period of unprecedented financial turmoil
and considerable change in industry structure. [T]he industry is more
competitive now than at any other time in the 12-year period examined.
One area of promise for the network airlines is the prospect for continued
international expansion to provide support for their domestic networks.
Although the airlines (and consumers) have benefited from the international
network development enabled by the liberalization created by open skies
agreements, the potential for much greater progress is large.
Former DOT officials Randy Bennett, Patrick Murphy and Jack Schmidt,
A Competitive Analysis of An Industry in Transition (July 2007)

www.airlines.org

13

Economic Forces Continue Toll on Airline Jobs*

379.7

378.1

Oct-09

Oct-10

394.2
Oct-08

417.9
Oct-07

403.4
Oct-06

413.6
Oct-05

440.6
Oct-04

Oct-03

Oct-02

Oct-01

Oct-00

Oct-99

431.7

476.4

530.9

499.3

478.1
Oct-98

454.8
Oct-97

442.4

433.1
Oct-95

Oct-96

426.8

442.0
Oct-93

Oct-94

446.8
Oct-92

430.3
Oct-91

Oct-90

461.9

All-Time Peak (May 2001) = 544.4

509.0

U.S. Passenger Airline Full-Time Equivalent (FTE) Employees in Thousands*

* Full-time equivalent employees in thousands (see http://www.bts.gov/programs/airline_information/number_of_employees/)

www.airlines.org

14

The Lost Decade: Industry Climbing Out of a Deep Hole

Net Income ($Billions) and Profit Margin (%) for U.S. Airlines*

$16.3
$0.6

$1.6

$3.6

(0.3%)

3.2%

2.7%

1.9%

($1.5)

(~4%)
1.6%

($53.7)
1951-1960

1961-1970

1971-1980

1981-1990

1991-2000

2001-2010E

* All U.S. passenger airlines and cargo airlines reporting to DOT Form 41 P-12, Accounts 9899 and 4999

www.airlines.org

15

A Quarter or Two of Profit Will Not Suffice

Meaningful Profitability Needed to Reinvest, Compete Abroad
EBITDAR* Profit Margins: U.S. Passenger Airlines
10%
5%
0%
-5%
-10%
-15%
-20%
-25%
-30%
4Q10

3Q10

2Q10

1Q10

4Q09

3Q09

2Q09

1Q09

4Q08

3Q08

2Q08

1Q08

-35%

Source: ATA analysis of DOT Form 41 reports

* Earnings before interest, taxes, depreciation, amortization and rents; an approximate measure of a companys operating cash flow based on data from the companys income
statement. Rent is included in the measure to evaluate the financial performance of airlines and other companies (e.g., casinos, restaurants) that have significant rental and
lease expenses derived from business operations.

www.airlines.org

16

Doing Better and Doing Well Are Not the Same Thing
U.S. Unemployment Rate (9.4%)

Real U.S. GDP

Percent

Trillions of Chained 2005 Dollars, SAAR

11

$13.5

10

$13.4
$13.3

$13.2

$13.1

$13.0

$12.9
$12.8

1Q10

1Q09

1Q08

1Q07

1Q06

2010

2007

2004

2001

1998

1995

1992

1989

$12.5
1986

3
1983

$12.6
1980

1Q05

$12.7

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

www.airlines.org

17

DOT Airline Customer Service Metrics

Flight Cancellations
(as % of sched. domestic departures)

Taxi-Out* Times > Three Hours

(per 10,000 domestic departures)

On-Time Arrival Rate

(% of domestic flights within 00:15)

Involuntary Denied Boardings

(per 10,000 passengers)

Mishandled Bags
(per 1,000 domestic passengers)

Customer Complaints
(per 100,000 systemwide passengers)

2000

2007

2008

2009

1Q-3Q10

3.30

2.16

1.96

1.39

1.75

2.92

2.22

1.76

1.40**

0.25**

72.6

73.4

76.0

79.5

79.8

1.04

1.12

1.11

1.19

1.19

5.29

7.05

5.26

3.91

3.59

2.98

1.38

1.13

0.97

1.30

* Time elapsed between departure from the origin airport gate and wheels off
** Effective October 2008, BTS monthly reports on tarmac times included, for the first time, data from flights which were subsequently cancelled, diverted,
and/or had multiple gate departures (see http://www.bts.gov/help/about_tarmac.html)
Sources: Bureau of Transportation Statistics and DOT Air Travel Consumer Report (http://airconsumer.dot.gov/reports/index.htm)

www.airlines.org

18

Breakeven Load Factor Finally Below 80% Again

Yields (Fares per Mile) Closing Gap to Unit Costs of Operation

90%

Four-Quarter
Moving Average

85%

80%

75%

70%

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

65%

Source: ATA Passenger Airline Cost Index

www.airlines.org

19

Airline Energy Costs Are High and Poised to Rise

Average U.S. Price per Gallon of Jet Fuel

$2.72

$2.61
$2.20

$1.05
$0.59

1991-2000

2001-2005

2006-2010

2011 (EIA-F)

2012 (EIA-F)

Source: Energy Information Administration, including Short-Term Energy Outlook (Jan. 11, 2011) forecast of Jet Fuel Refiner Price to End Users

www.airlines.org

20

Jet Fuel Prices: Not Just a Crude Story

Crack Spread (Refining Margin) Back to $20-$25/bbl Territory
$120
Crack Spread

$110

Jet Fuel (Gulf Coast)

$100
$90
$80

Crude Oil (WTI)

$70

30-Mar-11

13-Feb-11

30-Dec-10

15-Nov-10

1-Oct-10

17-Aug-10

3-Jul-10

19-May-10

4-Apr-10

18-Feb-10

4-Jan-10

$60

Source: ATA and Energy Information Administration

www.airlines.org

21

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

Expenditures Trending Up Despite Lower Consumption
$60

57.8

21

Billion Gallons
$50

20
38.8

$40
33.2

41.9
37.4

19

32.3

$30

18
22.7

Billion Dollars

$20

16.8

15.0

12.8

15.5

$10

17

16
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009 YE 9/10
($0.82) ($0.78) ($0.72) ($0.85) ($1.16) ($1.66) ($1.97) ($2.11) ($3.07) ($1.90) ($2.19)
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
Sources: ATA, Energy Information Administration, Department of Transportation

www.airlines.org

22

Tax Bite on a $300 One-Stop Round Trip*

Growing Governmental Take Leaves Less Revenue for Carriers

1972 Taxes
7% ($22)*

1992 Taxes
13% ($38)*

2011 Taxes
20% ($61)*

TAX

AIRFARE

* Sample itinerary assumes one-stop domestic round trip with maximum passenger facility charge (PFC) per airport; $300 total price includes taxes and fees.
Source: ATA analysis of federal tax code

www.airlines.org

23

Special Aviation Tax Burden* Exceeded $16B in 2010

In Addition to Typical Federal/State/Local Corporate Taxes (e.g., Income, Property)
2010 collections ($millions) from airlines
Federal Aviation Administration (FAA)

$2,324

Department of Homeland Security (DHS)

$395

$351

$16,558

$7,261

U.S. Airports

DHS = $3.4B

$1,808
$2,787

$282

$599

$291

$460

FAA = $10.3B

* Federally levied/approved commercial aviation taxes/fees only; some taxes/fees shown include collections from non-U.S. carriers; PFCs reflect FAA estimate as of Nov. 2010
Sources: Department of Homeland Security, FAA, Office of Management Budget, Transportation Security Administration, ATA

www.airlines.org

24

Demand for Domestic Air Travel Has Not Recovered

Domestic Passenger Revenue () per $100 of U.S. Gross Domestic Product
75

Shortfall = $34B

70
65
60
55
50

www.airlines.org

2010E

2009

2008

2007

2006

2005

2004

2003

2002

2001

1991-2000

45

Source: ATA analysis of BEA and BTS data

25

The Price of Air Travel Has Not Kept Pace With U.S. Inflation
The Price of Many Common Goods and Services Has Outpaced the CPI
Product (Unit)
Grade-A Large Eggs (Dozen)
Unleaded Gasoline (Gallon)
Movie Ticket
Prescription Drugs (Index)
First-Class Domestic Stamp
New Single-Family Home
U.S. CPI (All Items)1
Whole Milk (Index)
New Vehicle
Systemwide Airfare + Ancillary Fees2
Domestic Round-Trip Airfare + Taxes3
Television (Index)

2000
$0.91
$1.51
$5.39
285.4
$0.33
$169,000
172.2
156.9
$24,923
$144.57
$339.03
49.9

2009
$1.66
$2.35
$7.50
391.1
$0.44
$216,700
214.5
183.2
$28,966
$145.17
$310.06
10.6

% Change
82.9
55.6
39.1
37.0
33.3
28.2
24.6
16.7
16.2
0.4
(8.5)
(78.7)

1. BLS measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.
2. BTS average airfare and ancillary fees generated per passenger enplaned, excluding government-imposed charges.
3. BTS National-Level Average Fare Series, the average domestic airfare paid per round-trip itinerary, including government-imposed charges.

www.airlines.org

26

The Price* of Air Travel Has Not Kept Pace With U.S. Inflation

$84.49

2Q10

2Q09

$301.26

$346.10
2Q08

$325.39

$306.68
2Q05

2Q07

$309.45
2Q04

$341.58

$314.52
2Q03

2Q06

$317.93
2Q02

$328.67
2Q01

$339.16
2Q00

$329.34
2Q99

$300.97
2Q98

$289.44
2Q97

$275.78
2Q96

2Q95

$296.80

CPI-Linked Prices (hypothetical)

Average Nominal Prices* (actual, including taxes)

$340.72

$425.21

U.S. CPI Rose 43.3% from 2Q95 to 2Q10, Leaving Ticket Prices $84.49 Short

* BTS reports average fares based on domestic itinerary fares (round-trip or one-way for which no return is purchased). [Averages do not include frequent-flyer or zero fares.]
Fares are based on the total ticket value, which consists of the price charged by the airlines plus any additional taxes and fees levied by an outside entity at the time of purchase.
Sources: BTS National-Level Average Fare Series (http://www.bts.gov/xml/atpi/src/avgfareseries.xml) and BLS (http://www.bls.gov/cpi/tables.htm)

www.airlines.org

27

2009 Domestic Seating Capacity Fell Most Since 1942

100
80
60

40
20

(40)

(16.2)

(20)

Sources: ATA, BTS (T1 Scheduled Service)

www.airlines.org

(6.9)

1932
1934
1936
1938
1940
1942
1944
1946
1948
1950
1952
1954
1956
1958
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010

Annual Percent Change in Domestic ASMs*

Market Forces, Policy Resulted in Largest Post-WWII Contraction in Aviation History

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

28

Capacity Being Re-Balanced With Size of U.S. Economy

Domestic ASMs* per $1K of Real U.S. GDP** at Lowest Level Since 1979

75
70
65
60
55
50
45
40

Sources: BTS (T1 Domestic, All Services) and Bureau of Economic Analysis

www.airlines.org

2014

2012

2010E

2008

2006

2004

2002

2000

1998

1996

1994

1992

1990

1988

1986

1984

1982

1980

1978

1976

1974

35

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

** Chained 2005 dollars

29

Capacity Over the Past Decade: A Tale of Two Markets

Down 11% Domestically, Up 20% to/from USA

2.89
2.64

2.74

2.66
2.49

2.42

1Q11

1Q10

1Q09

1Q08

1Q07

1Q06

2.10
1Q04

2.05
1Q03

1Q02

1Q01

1Q00

1.94

2.23

12.76

12.51
1Q10

1Q11

12.56
1Q09

1Q06

1Q05

14.02
1Q08

2.85

Billion International* ASMs per Week

2.41

14.02
1Q07

13.62

14.05
1Q05

1Q04

12.92
1Q03

1Q02

1Q01

1Q00

12.65

13.69

14.39

13.99

Billion Domestic ASMs per Week

* U.S. airlines only; an available seat mile (ASM) is one seat flown one mile and is the standard unit of capacity in the passenger airline sector
Source: Innovata (via APG) published schedules as of Jan. 21, 2011

www.airlines.org

30

Departures Over the Past Decade: A Tale of Two Markets

Down 22% Domestically, Down 3% to/from USA

1,816
1Q10

1,836

1,816

1,921
1Q09

1,806
1Q06

1,864

1,811
1,669

1,654

1Q11

1Q08

1Q07

1Q04

1Q03

1,541
1Q02

1Q01

23,452
1Q11

1Q00

23,299
1Q10

23,991
1Q09

1Q08

1Q07

1Q06

1Q05

1Q04

1Q05

1,898
1,759

26,282

26,895

28,000
26,359

26,077
1Q03

26,826

25,947
1Q02

1Q01

1Q00

Scheduled International* Flights per Day

29,953

29,673

Scheduled Domestic Flights per Day

* Scheduled U.S.- and non-U.S.-airline flights departing U.S. airports for non-U.S. destinations
Source: Innovata (via APG) published schedules as of Jan. 21, 2011

www.airlines.org

31

Thinking Outside the [Domestic] Box

The Future Lies Across the Ponds
Airbus Global Market Forecast
Annual Traffic Growth: 2009-2028

Boeing Current Market Outlook

Annual Traffic Growth: 2009-2028

4.7

4.9

NorthAm to LatAm

Transpacific

4.0

4.6

North Atlantic

6.8
4.2
2.5

www.airlines.org

Within NorthAm

China-US

Japan-US

US-Europe

Domestic US

2.0

32

Healthy Investment Requires Healthy Equity

Equity Market Capitalization (Billions) as of Jan. 5 at 1800 EST
eBay

$37.5

U.S. airline industry*

$40.9

Deutsche Bank
Goldman Sachs
BP
Toyota
Wal-Mart
GE
Microsoft
Apple
ExxonMobil

www.airlines.org

* AAI, ALGT, ALK, AMR, DAL, HA, JBLU, LCC, LUV, PNCL, RJET, SKYW, UAL

$50.9
$89.0
$125.8
$145.6
$193.8
$198.4
$239.6
$306.4
$376.7

33

www.airlines.org

BBB
BBBBBB+
B+
B
B
BBBBBB-

Southwest
Lufthansa
British Air
Alaska
TAM
Delta
United
Air Canada
AirTran
American
JetBlue
SAS
US Airways

Goldman Sachs

BBB

eBay

QANTAS

BP

AA

Wal-Mart

AA+

GE

AA

AAA

Microsoft

Toyota

AAA

ExxonMobil

Healthy Investment Requires Healthy Credit

No Passenger Airline in the World Enjoys an A-Minus or Better Rating from S&P

>= BBB- (investment-grade)

< BBB- (speculative or junk)

34

S&P Corporate Credit Ratings (July 12, 2010) for North

American Transportation Companies, Strongest to Weakest
AA- to A-

BBB+ to BBB-

BB to B

B- to CCC-

1.
2.
3.
4.
5.

7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.

23.
24.
25.
26.
27.
28.
29.
30.
31.
32.
33.
34.
35.
36.
37.
38.
39.
40.
41.
42.
43.

44.
45.
46.
47.
48.
49.
50.
51.
52.
53.
54.
55.
56.
57.
58.

Union Tank Car

UPS
TTX
AMTRAK
Canadian
National
Railway
6. Kirby Corp.

www.airlines.org

Burlington Northern
Enterprise Holdings
Norfolk Southern
Ryder System
Alexander & Baldwin
GATX
Union Pacific
FedEx
Hunt (J.B.) Transport
Brink's Co.
Aviation Capital Group
Canadian Pacific Railway
Southwest Airlines
CSX
Con-way
ILFC

AWAS Aviation Capital

Teekay Corp.
AMERCO
Kansas City Southern
Mobile Mini Inc.
Overseas Shipholding Group
Kenan Advantage Group
RailAmerica
Avis Budget Group
US Xpress Enterprises
Hertz Global Holdings
Alaska Air Group
Global Aviation Holdings
Marquette Transportation
United Maritime Group
Delta Air Lines
Ozburn-Hessey Holding Co.
American Commercial Lines
Horizon Lines
General Maritime Corp.
Continental Airlines

Dollar Thrifty Automotive

UAL Corp.
Coach America Holdings
JetBlue Airways
AirTran Holdings
JHCI Acquisition Inc.
Quality Distribution Inc.
Trailer Bridge Inc.
Western Express Inc.
AMR Corp.
US Airways Group
Air Canada
Swift Corp.
Evergreen International
YRC Worldwide

35

Whats Wrong With This Picture?

The Investors View
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. The balance between positions which seek to socialize
aspects of the airline industry versus those that promote growth in the
free market will contribute to how the market prices airline capital risk
and measures the required rate of return to justify growth. The ability to
generate more consistent returns on equity and increase free cash flow is
the path to repairing balance sheets and longer term financial stability.
Only then will there be a solid foundation for increased capital
expenditures, rising wages, and increased service.
Statement of David R. Strine before the House Subcommittee on Aviation, Consolidation In The Aviation Industry,
With A Focus On The Proposed Merger Between United Airlines And Continental Airlines A Perspective From Within
The Financial Markets (June 16, 2010)

www.airlines.org

36

Global Context: Airlines Challenged to Cover Cost of Capital

ROIC Below WACC Translates to Loss of Investor Wealth
12

Cost (WACC)
10

Percent

8
6
4

Return (ROIC)
2

2015

2014

2013

2012F

2011F

2010E

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

Source: IATA (1993-2004 from McKinsey study) and Deutsche Bank Global Research (for 2010-2012 estimates)

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37

Where Do We Go From Here?

To invest in people and product, airlines require sustained profitability they

must earn their cost of capital over the entire business cycle
U.S. airlines are climbing out of a deep hole doing better financially should
not be equated with doing well (or well enough) financially
By just about any measure, U.S. airlines are less equipped than other airlines
and other industries to compete effectively on the global stage
Barriers to exit, higher taxes, environmental charges, inefficient infrastructure
(air traffic control vs. air traffic management) will exacerbate inadequate
financial condition and the competitiveness gap
Consistent with DOT mission, promoting and encouraging the development of
a viable, competitive U.S. airline industry is in our national interest

www.airlines.org

38

When America Flies, It Works

www.airlines.org