State of the Industry

and Economic Outlook
Brian Pearce

Chief Economist

Global Media Day
Geneva, 8th December 2016

Connecting more cities at lower prices
Unique city-pairs and real transport costs
18000

2.50

Unique city pairs

2.30

16000

2.10

14000

1.90

12000

1.70

10000
8000

Cost of air transport,
after CPI inflation

1.50
1.30

6000

1.10

4000

0.90

2000

0.70

0

0.50

US$/RTK in 2014US$

Number of unique city-pairs

20000

1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017
Source:
IATA Economic
Performance
of the
Airline Industry – end year 2016 report
Airline Industry
Economics Advisory
Workshop
2016

2

Creating value for the wider economy Tax revenues paid and global supply chain jobs supported 75 130 70 120 Tax revenues paid 110 100 60 90 55 Supply chain jobs supported 50 80 $ billion Million 65 70 45 60 40 50 35 40 2000 2002 2004 2006 2008 2010 2012 2014 2016 Source: IATA Economic Performance of the Airline Industry – end year 2016 report Airline Industry Economics Advisory Workshop 2016 3 .

US$ billion 700 8000 7000 Value of traded goods carried by air 6000 600 5000 500 4000 Spending by tourists carried by air 400 3000 300 2000 200 1000 2000 2002 2004 2006 2008 2010 2012 2014 Source: IATA Economic Performance of the Airline Industry – end year 2016 report Airline Industry Economics Advisory Workshop 2016 Traded goods.Boosting trade and tourism Tourist spend. US$ billion Value of trade carried by air and the spending of tourists 800 2016 4 .

0 9.0 2.0 3.0 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 Source: IATA Economic Performance of the Airline Industry – end year 2016 report Airline Industry Economics Advisory Workshop 2016 5 .0 7.0 Return on capital invested in airlines Cost of capital (WACC) Return on capital (ROIC) 1.0 6.0 0.0 8.0 4.0 5.% of invested capital Now creating value for investors 10.

2017 less profitable but still value creating US$ billion Difference between investing in airlines and investing in similar assets elsewhere 20 15 10 5 0 -5 -10 -15 -20 -25 -30 -35 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 Source: IATA Economic Performance of the Airline Industry – end year 2016 report Airline Industry Economics Advisory Workshop 2016 2015 2017 6 .

Industry level profits momentum has weakened Airline industry average EBIT margin 16% 14% Unadjusted data % of revenue 12% 10% Adjusted for seasonality 8% 6% 4% 2% 0% -2% 2011 2012 2013 2014 2015 2016 Source: IATA seasonal of data2016 from The Airline Analyst and airline public reports Airline Industry Economicsadjustment Advisory Workshop 7 .

As unit costs and unit revenues crossed over Growth in unit revenues and unit costs % change over year earlier 25% 20% 15% 10% 5% 0% Unit costs -5% Unit revenues -10% -15% -20% 2011 2012 2013 Source: IATA using dataAdvisory from The Airline Analyst Airline Industry Economics Workshop 2016 2014 2015 2016 8 .

Industry profitability is more resilient to the cycle EBIT or operating margins and global GDP growth 10% Airline industry EBIT margin 8% 6% 4% 2% 0% Global GDP growth -2% -4% -6% 1970 1975 1980 1985 1990 1995 2000 Source: IATA using dataAdvisory from ICAO. the IMF and our own forecasts Airline Industry Economics Workshop 2016 2005 2010 2015 9 .

5 60 2 OPEC spare capacity (left scale) 58 56 Days of supply Million barrels production per day And it’s not just about low fuel prices 54 1.5 52 1 50 2011 2012 2013 Source: IATA using dataAdvisory from Haver Airline Industry Economics Workshop 2016 2014 2015 2016 10 .5 OECD crude oil inventories (right scale) 3 68 66 64 62 2.OPEC spare capacity and OECD crude oil inventories 3.

Structural changes in asset utilization Breakeven and achieved weight load factor 68 Achieved LF 67 66 % ATKs 65 64 63 62 61 60 Breakeven LF 59 58 2000 2002 2004 2006 2008 2010 2012 2014 Source: IATA Economic Performance of the Airline Industry – end year 2016 report Airline Industry Economics Advisory Workshop 2016 2016 11 .

9 -4 -6 0.4 Capital productivity 8 1.2 1. US$ Airlines' operating or EBIT margin and capital productivity 2016 12 .1 1. % revenue 10 1. revenue/invested capital.8 2000 2002 2004 2006 2008 2010 2012 2014 Source: IATA Economic Performance of the Airline Industry – end year 2016 report Airline Industry Economics Advisory Workshop 2016 Capital productivity.3 6 4 Operating margin 2 0 1.Structural changes in the product Operating margin.0 -2 0.

Some regions doing much better than others ROIC in 2016 (part year) by region and airline 40% 35% 30% 25% 20% Average cost of capital 15% 10% 5% 0% -5% -10% North America Europe -15% Source: IATA using dataAdvisory from The Airline Analyst Airline Industry Economics Workshop 2016 Asia Pacific Latin Middle America East Africa 13 .

05 Thai -0.50 1.10 0.20 JAL Delta AMR Air China Easyjet United 0.40 Spring on capital (ROIC) Ryanair 0.00 1.35 Allegiant Spirit Mesa 0.00 2.45 Increasing return Jazeera 0.15 Aeromexico Air Canada PIA IAG Qantas 0. adjusted EBIT/revenue There is a wide range of business models 2015 ROIC = adjusted EBIT/revenue * revenue/invested Capital 0.EBIT margin .25 Hawaiian PFIZER JetBlue Southwest 0.50 Capital productivity ($ revenue per $ invested capital) Source: IATA using dataAdvisory from The Airline Analyst Airline Industry Economics Workshop 2016 14 .10 Lufthansa Cathay SIA ANA LATAM 0.50 2.30 Volaris Alaska 0.00 -0.00 0.05 Comair GOL AF -KLM WALMART Korean 0.

5 3.5 6.0 Latin America 6.0 North America 2.0 2011 2012 Source: IATA using dataAdvisory from The Airline Analyst Airline Industry Economics Workshop 2016 2013 2014 2015 15 .5 Asia Pacific 5.5 4.0 4.5 2.0 Europe 3.Balance sheet metrics remain divergent Adjusted net debt/EBITDAR by region Adjusted net debt/EBITDAR 7.0 5.

Netherlands CPB Airline Industry Economics Workshop 2016 2015 2016 16 . Haver.Where now for the fragile economic cycle? 20% 15% 70 Indicators of the economic cycle World trade growth (left scale) 65 10% Business confidence (right scale) Industrial production growth (left scale) 5% 60 55 0% 50 -5% 45 -10% 2010 40 2011 2012 2013 2014 Source: IATA using dataAdvisory from Markit.

This time is different for global GDP growth? 5 4 IMF forecasts of global economic growth (using market exchange rates) April 2013 3 April 2014 April Jan 2015 2016 July 2016 2 Trade restrictions scenario 1 0 -1 -2 -3 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Source: IATA using dataAdvisory from theWorkshop IMF’s World Airline Industry Economics 2016 Economic Outlook 17 .

measure of global supply chains 110 100 World trade/IP ratio 90 80 Ratio of foreign value added to domestic value added in world gross exports 70 60 50 1995 1997 1999 2001 2003 2005 Source: IATA using dataAdvisory from theWorkshop Netherlands Airline Industry Economics 2016 CPB 2007 2009 2011 2013 52 50 48 46 44 42 40 38 36 34 32 30 2015 18 .The problem with world trade remains Share (%) Index (Oct 2008=100) 120 World trade/IP ratio vs.

Travel demand has been strong % year-on-year Growth in RPKs and the level of business confidence Diffusion index 16% 65 12% 60 Growth in industry RPKs 8% 55 4% 50 Global PMI index (adv. 2 months) 0% 45 -4% 40 -8% 35 -12% 30 2007 2008 2009 2010 2011 2012 Source: IATA using dataAdvisory from IATA statistics Airline Industry Economics Workshop 2016and Markit 2013 2014 2015 2016 2017 19 .

2% Turkey 5.6% Philippines 6.6% India 6.Over the next two decades considerable growth Corresponding CAGR China 5.2% Brazil 2.0% Australia 3.0% Mexico 4. 2015-2035) Source: IATA using data from TE/IATA Air Passenger Forecasts.2% United States 2. October 2016 Airline Industry Economics Advisory Workshop 2016 700 800 20 .7% Indonesia 3.2% 0 100 200 300 400 500 600 Change in domestic O-D -markets (millions.5% Vietnam 8.

500 8 3.000 2000 2002 2004 2006 2008 2010 2012 2014 2016 Source: IATA Economic Performance of the Airline Industry – end year 2016 report Airline Industry Economics Advisory Workshop 2016 21 .500 -2 -4 Numbers of passengers.000 0 1. million Global RPK growth and passenger numbers 1.000 6 2.500 Growth in global RPKs 14 12 Passenger numbers 4.500 4 20-year trend growth rate 2 2.000 10 3.Next year will be slower but still close to trend % change over previous year 16 4.

Airline Industry Economics Advisory Workshop 2016 22 .