Airlines

1Q 2023 update

An EY Knowledge presentation
July 2023

Avinash Sagar Gaurav Dabas

AM&M Analyst AM&M Analyst
Disclaimer

► The views expressed in this presentation are those of the speakers and do not necessarily represent the views of
Ernst & Young LLP.
► This presentation is provided solely for the purpose of enhancing knowledge on tax matters. It does not provide tax
advice to any taxpayer because it does not take into account any specific taxpayer’s facts and circumstances.
► These slides are for educational purposes only and are not intended, and should not be relied upon, as accounting
advice.

Page 2 Airlines: Q3 2022 update

Executive Summary

Global revenues (in US$ billion)

• Passenger traffic recovered to 85.9% in 1Q23 vs. 1Q19, due to the 803
732
substantial recovery of global air passenger travel as travel
restrictions were removed and passengers expressed a strong 509 546
willingness to fly. 384
430

• In 1Q23, CTKs were decreased across majority of the regions 189

239
except Europe and Middle East as there has been sequential 210 207
140 142
improvement in demand across these regions.
2020 2021 2022F 2023F
• Headwinds such as high inflation levels, the ongoing war in
Ukraine, labor shortages and the increasing fear of an economic Net Passenger Cargo
recession have a negative impact on the global air transportation.
• Financial performance of airline industry is expected to improve Global RPK and CTK (% y-o-y)
further across all the regions in 2023. North America is expected to
64.2%
be the most profitable region, followed by Europe and the Middle
East in 2023.
• Looking ahead, the investment appetite for new aircraft is likely to
21.8% 18.8% 28.3%
increase as the manufacturers forecast an increase in the global
demand for aircrafts by 2041.
-9.9% -8.1% -3.8%

-65.8%

2020 2021 2022F 2023F

RPK CTK

Page 3 November 7, 2023 Airlines: Q1 2023 update

Note: RPK is Revenue passenger kilometer; ASK is available seats kilometer; CTK is Cargo tonne kilometers
Passenger market: Pent up demand and rise in international travel activities post
pandemic have contributed to the increase in air passenger traffic

Global industry RPKs 2020-23 (% y-o-y)

• The global air passenger market is gradually
150% approaching the pre-pandemic levels, driven by growth
in demand for travel, increase in holiday travels from
115.9%
flyers in Europe and travel activities from the China
100% region because of the lifting of zero Covid policy.

67.0% • While travel in Europe and North America recovered

45.8% quickly post the lifting of travel restrictions, Asia had
50% been the slowest to recover due to remaining and
55.5%
imposition of new restrictions.

0%
• Global passenger air traffic is expected to reach 2019
20 20 21 21 21 2 1 21 21 22 22 22 2 2 22 22 23 23 levels in 2024. However there are certain headwinds in
ct- ec- eb- pr- Jun- ug- ct- ec- eb- pr- Jun- ug- ct- ec- eb- pr- form of high jet fuel prices, inflated commodity prices,
O D F A A O D F A A O D F A
prolonged Russia-Ukraine war which might affect the
-50% -45.1% growth of the passenger air traffic.

-100%

Source: AMM Transportation Dashboard

Page 4 November 7, 2023 Airlines: Q1 2023 update Source: IATA

Note: RPK is Revenue passenger kilometer; ASK is available seats kilometer; PLF is passenger load factor; CTK is Cargo tonne kilometers
In 2023, the global passenger traffic and capacity are expected to reach to 72% and 75%
of the pre-pandemic levels on the back of increased travel demand
Demand (RPK, y-o-y growth) Capacity (ASK, y-o-y growth)

-68% 17% -62%

Africa 84% Africa 19%
30% 51%
23%
-62% -59%
Latin America 40% 37%
63% Latin America 54%
14% 14%
-72% -63%
Middle East 9% 145% 21%
Middle East 67%
21% 16%
-62% -54%
Asia Pacific -13% -6%
32% Asia Pacific 15%
63% 49%
-70% -62%
Europe 28% 30%
102% Europe
20% 68%
19%29%
-65% -50%
North America 75% 41%
46% North America
17%
-66% 64% 16%
22% -57%
Global Global 19% 40%
28%
25%
-100% -50% 0% 50% 100% 150% 200% -80% -60% -40% -20% 0% 20% 40% 60% 80%

In 1Q23 the industry-wide RPKs rebounded to 85.9% of 1Q19 levels, showing a significant improvement from the 68.5% RPK recovery achieved for
2022.
Source: AMM Transportation Dashboard

y-o-y growth, unless stated otherwise

Page 5 November 7, 2023 Airlines: Q1 2023 update

Note: RPK is Revenue passenger kilometer; ASK is available seats kilometer; PLF is passenger load factor.
Cargo market: The cargo market is declining as it faces multiple headwinds due to
factors such as high inflation rates, Russia-Ukraine war etc.

Global industry CTKs 2020-23 (% y-o-y)

100% • In 1Q23, global air cargo demand decreased by 7.7% y-o-

83.1% y in Mar’23 due to numerous headwinds such as reduced
80% demand, disruption of trade flows, and decrease in
economic activities due to high inflation rates post the
60% pandemic and Russia – Ukraine war.

• North America and Africa were the only two regions

40%
having CTKs above 2019 levels, while Asia Pacific
exceeded the pre-Covid level in Feb’23.
20%
• Unlike demand, capacity increased during 1Q23. ACTKs
0% increased by 9.9% y-o-y in Mar’23 driven by the strong
recovery of belly hold capacity in passenger aircraft that
-11.2% -6.6%
-20% -13.6% -14.9% are returning to service.

-40%

Page 6 November 7, 2023 Airlines: Q1 2023 update Source: IATA

Note: RPK is Revenue passenger kilometer; ASK is available seats kilometer; PLF is passenger load factor; CTK is Cargo tonne kilometers
Performance of cargo market is divergent across regions, as CTKs are significantly
higher for Americas than the other regions
Demand (CTKs, y-o-y growth) Number of system ACTKs (y-o-y growth)

10%
34.4%
4.6%
5%
27.6%
0% 23.6%
19.9%
-5% -2.7% -5.5% 12.9%
-3.4% -5.3% 9.3% 9.7%
-6.2% -7.3%
-6.0% -3.2% 9.6% 8.8%
-9.4% 8.8%
-10% -7.8% 2.3%
-9.5% -8.7% 2.8%
4.7%
-11.8%
-8.1% 0.4%
-15% -1.8% -1.5%
-4.1%
-15.3% -9.3%
-20% -19.0%
-20.4%
-25%
Africa Asia Pacific Europe Latin America Middle East North America Jan'23 Feb'22 Mar'23

Africa Asia Pacific Europe Latin America

Middle East North America
Jan'23 Feb'22 Mar'23

• In 1Q23, CTKs were decreased across majority of the regions except Europe and Middle East as there has been sequential improvement in demand
across these regions.
• Economic factors such as inflation and the eruption of a banking crisis in North America tightened the credit conditions, thus impacting the
demand for cargo in short term.

Source: IATA, CAPA

Page 7 November 7, 2023 Airlines: Q1 2023 update

Note: RPK is Revenue passenger kilometer; ASK is available seats kilometer; PLF is passenger load factor.
International air passenger market grows significantly on the back of increased demand,
whereas the headwinds have negatively impacted cargo market
International RPK and CTK Mar’23 (by region) Global air passenger market
100.0%
350% • Global air passenger traffic gained momentum and recovered substantially as
travel restrictions were taken down and passengers expressed a very strong
300%
willingness to travel.
250% • In Mar’23, international air passenger traffic recovered substantially to ~83%
200% of the pre-pandemic 2019 levels.
• International traffic within Asia increased by ~283% y-o-y in Mar’23, thus
150% 100.0% reaching ~62% of Mar’19 levels due to opening of China.
100.0% 100.0% 100.0%
100% 100.0% • International RPKs for Europe and North America increased by 51% and 38%
y-o-y respectively in Mar’23, as few major routes such as Europe– North
50%
America outperformed the pre-pandemic levels.
0% • Both domestic and international markets have maintained their passenger
-50%
traffic growth in the Latin American region.

-100% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

ca fic st ca Global air cargo market
-150% eri r op
e a ci Ea e ri ica
m
Eu ia P le m Afr
r th A As Mi
dd tin
A
-200% No La • International CTKs decreased for all regions in Mar’23 vs. Mar’22 due to
Source: IATA lower demand and decline in air cargo traffic
RPK growth CTK growth • Cargo demand for airlines in Asia-Pacific declined the most by 9.4% y-o-y
due to volatility in cargo traffic and the impact of production activities
moving out of China.
International air passenger (RPK) increased by 48%, whereas International air cargo • International CTKs for North America and Europe declined due to adverse
economic conditions such as rising inflation.
(CTK) declined by 7% in Mar’23 compared to Mar’22.
• However, international CTKs for Africa and North America improved in
Mar’23 vs. 2019 levels to 11% and 5%.

Page 8 November 7, 2023 Airlines: Q1 2023 update Source: IATA

Note: RPK is Revenue passenger kilometer; ASK is available seats kilometer; PLF is passenger load factor; CTK is Cargo tonne kilometers
Regional growth analysis- Americas and Europe

Americas Europe
Passenger market growth Passenger market growth
• Airlines both in North America and Latin • Airlines have maintained stable growth in the
America recovered significantly among all region, achieving 89% of the growth in
regions globally, as in Mar’23 total RPKs international RPKs in Mar’23 vs. Mar’22.
for North America and Latin America
recovered to 98% and 94% respectively of • International traffic grew in Europe despite
their 2019 levels. headwinds such as inflation and rising energy
prices, as European airlines carried 38.5%
• Total domestic RPKs increased by 6.3% y- more international passenger traffic in Mar’23
o-y in Latin America, whereas it declined by vs. Mar’22.
1.2% y-o-y for the North American region.
• This recovery was mostly led by domestic air
• Carriers in US recovered their domestic passenger traffic, which has already surpassed
traffic, while RPKs for Brazil’s airlines were its 1Q19 level by more than 10%.
almost at par with pre-pandemic levels.
Cargo market growth
Cargo market growth
• In Mar’23, European airlines’ CTKs declined
• Owing to the consolidation of the cargo to 17.4% below their pre-pandemic level,
processes in US, CTKs in Northern America mainly driven by disruption in capacity.
increased by 7% in Mar’23 vs. Mar’19.
• Headwinds such as the conflict in Ukraine,
• The cargo business evolved during the labor shortages, and high inflation levels
pandemic in the LATAM region, which led impacted the cargo capacity in the region.
to increase in the cargo capacity.
• “Within Europe” was the weakest performing
• As a result CTKs in the LATAM region route across the major routes.
were only 4% below their pre-pandemic
levels.

Page 9 November 7, 2023 Airlines: Q1 2023 update Source: IATA

Note: RPK is Revenue passenger kilometer; ASK is available seats kilometer; PLF is passenger load factor; CTK is Cargo tonne kilometers.
Regional growth analysis- MEA and Asia-Pacific

Middle East and Africa Asia Pacific and North Asia

Passenger market growth Passenger market growth
• In Mar’23, the RPKs in Africa were at • The passenger traffic improved significantly in
91% of pre-crisis levels, whereas Middle domestic markets of the region during Jan-
Eastern airlines recovered to 86% of 2019 Mar’23.
levels. • In Mar’23, RPKs of airlines in the Asia-Pacific
• The strong traffic recovery in the regions region increased to 159% y-o-y primarily due to
can be attributed mostly to increasing China’s reopening and increased travel demand in
international passenger travel and opening the region.
of the international markets, for which the • International RPKs grew by more than 283% y-o-
countries in region serve as hubs. y driven by sustained recovery of domestic traffic
Cargo market growth in China.
• Air cargo traffic from African and Middle • However, the region’s international RPKs
Eastern airlines led the recovery to pre- remained far behind other regions in 2022 when
pandemic levels at the beginning of 2021. compared to 2019 levels, reaching at only 79% of
2019 levels.
• However, the momentum slowed for
Middle East in 2023, as the cargo traffic Cargo market growth
for Middle eastern region reached at 94% • Airlines in Asia Pacific were mostly impacted by
of the 2019 levels in Mar’23. disruptions to trade, manufacturing, and supply
• The cargo traffic in the region is impacted chains due to pandemic-related challenges in
by headwinds such as the ongoing Russia- China.
Ukraine war, labor shortages, and high • As a result, Cargo traffic in the Asia Pacific region
inflation levels. declined by 7.3% y-o-y in Mar’23 and is now
13.7% below its pre-pandemic level.

Page 10 November 7, 2023 Airlines: Q1 2023 update Source: IATA

Note: RPK is Revenue passenger kilometer; ASK is available seats kilometer; PLF is passenger load factor; CTK is Cargo tonne kilometers.
North America is expected to be the most profitable region in 2023, followed by Europe
and the Middle East
Global commercial airline industry EBIT margin (by region, in %)

6.3% ► Despite oil price volatility, inflation, and geopolitical challenges in

6.0% 6.7% 4.0% 4.4% 5.1%
2022, the financial performance of the airline industry at a global
level continues to recover from the massive loss of almost US$140
billion in 2020.
-4.1%
-5.9% -2.2% -3.3%
-6.8%-1.9% ► North America benefitted from the boosted pent-up domestic travel
-4.7% -9.0% in a large home market, and international travel across the Atlantic.
-8.9% -10.2%
-13.0% ► In Europe, the financial performance of some airlines increased by
-12.0%
4% y-o-y due to increased demand, despite impacted by the Russia-
-16.9% Ukraine war.
► The Middle Eastern region’s efforts to swiftly rebuilding its
international networks and increasing the PLF by ~25% in 2022 led
-24.8% to increase in EBIT by 6.3% y-o-y.
-27.1% -27.0%
-28.3%
► The Asia-Pacific region recovered significantly by 1.8 percentage
points in 2022 as travel restriction were lifted in China and demand
-34.0% increased in other regions.
► The performance of airlines across Latin America has been very
North America Europe Asia-Pacific Middle East Latin America Africa
mixed. High costs and burdensome taxes led to an overall increase
in the average ticket fares.
2020 2021 2022F 2023F
► Macro-economic headwinds in Africa impacted the financial
performance in the region.
Source: IATA

Note: Industry performance calculated using a sample set of 66 airlines globally (15 in North America, 27 In Asia-Pacific, 14 in Europe, 7
Latin America, 3 in Others

Page 11 7 November 2022 Airlines: Q1 2023 update

Note: RPK is Revenue passenger kilometer; ASK is available seats kilometer; PLF is passenger load factor.
Airline industry made a net loss of about US$3.6 billion during 2022, which is forecasted
to improve to a profit US$9.8 billion in 2023
Global commercial airline industry net profit (by region, in US$ billion) ROIC and Net Profit Margin (in %)

11.5
9.1
4.15.1
1.4 2
-1.1
2.9%
-2.3 -0.8 -0.5 -0.5%
-4.9 -3.9 -1.4 -1.8
-6.9 -7 -8.0% 1.3% 1.2%
-12.1 -14.6 -9.6 -8.2%
-13.5 -11.9
-19.3%

-35.8%
-35.1 -34.5
2020 2021 2022F 2023F
-44.8
North America Europe Asia-Pacific Middle East Latin America Africa Return on Invested Capital, % Net Profit, %margin

2020 2021 2022F 2023F

US$9.8 Forecasted total net profit for 2023,

up from a net loss of US$3.6 billion in 2.9%
Forecasted return on invested capital
(ROIC) in 2023, up from 1.3% in 2022.
billion 2022.

Page 12 November 7, 2023 Airlines: Q1 2023 update Source: IATA

Aircraft deliveries to airlines fell sharply in 2020 and are expected to recover to the pre-
pandemic levels in 2023
Aircraft deliveries per region

2000
1813 ► Total aircraft deliveries increased by 19.1% y-o-y
1800 91
in 2022. The vast majority of deliveries in 2022,
32
1600 112
and new orders for 2023 are new generation narrow
102 1405 1484
104
body jets.
1400 1239
435 32
48
111
83 ► These aircrafts will be delivered to airlines
1200 85 1040
registered in the three main passenger markets such
22
55 378
1000 349
313 806 84 as Asia Pacific, Europe and North America.
22 49 314
800
31 ► Aircraft manufacturers such as Boeing, have
27 276
306 47
459 reported supply chain issues that will delay aircraft
600 200
386 production and deliveries.
274
400 794 231 ► As a result of which, major airlines are scaling back
551
200 351
428 their operations (such as pilot hiring etc.). For
270 335
instance, Southwest lowered its pilot hiring because
0 of Boeing’s delivery delays. It also lowered its
2018 2019 2020 2021 2022 2023
delivery expectations as it anticipates receiving
only 70 MAX 8s instead of 90 in 2023.
Asia Pacific North America Europe
Middle East& Africa Africa Latin America
Total

Page 13 November 7, 2023 Airlines: Q1 2023 update Source: IATA *as of 3Q22
Oil and fuel prices are expected to rise sharply in 2023 vs. the pre-pandemic levels, thus
increasing the total fuel spend to US$215 billion for the global airlines industry
Total fuel spend for global airline industry (2019-23, US$ billion)
► Fuel is one of the main operational cost items for an
In 2022, the average price of crude oil was US$101 per barrel airline, typically accounting for 20-25% of the total
109.4% cost.
$215
► The outbreak of war in Europe in Feb’22 caused a sharp
$214
increase in oil prices.
$190 ► The price of jet fuel rose to US$175 per barrel in the
summer of 2022, and causing the spread between jet
fuel and crude oil prices to climb above US$60 per
barrel.
28.0% ► In 2023, the jet fuel price is expected to remain
relatively high, averaging around US$98 per barrel.
6.8% $102
0.6%
► Airlines have accumulated substantial financial debt
$80 since the start of the pandemic, hence absorbing the
increased operational costs (due to elevated fuel prices)
will remain a key headwind for the industry.
► However, airlines are aiming to reduce high operational
-58.0% costs by investing in the fleet renewals, that has been
instrumental in reducing fuel consumption.
2019 2020 2021 2022e 2023f

Fuel spend, $bn % change over year % opex

*Note: Excluding handling cost

Page 14 November 7, 2023 Airlines: Q1 2023 update Source: IATA

In the long term outlook, the investment appetite for new aircraft is likely to increase as the A&D
manufacturers forecast growth in the global demand for aircrafts
Global fleet size by region/ status Projected fleet deliveries
(in units, as in Jul’23) (in units, as in Jul’23)
70 55 45
153 91
185 358 5
315 378
77
7649 252
3263 0
1532 56
179
813 3275
1314
1972 2061 2128
1805
10881 11318 1347
8046 764
1315 144 310
253 248 3004
1790 2031
Asia Pacific Middle East Africa Europe North America Latin America 2024 2025 2026 2027 2028
In service Inactive On order
Source: CAPA Source: CAPA Widebody Jet Narrowbody Jet Regional Jet Turboprop

Global in-service fleet by business model

► Despite the Covid pandemic wiping out two years of growth for the
commercial airplane market, OEMs such as Boeing, Airbus expect demand for
(in units, as in Jul’23) the aircrafts to increase robustly over the next 20 years.
► Boeing and Airbus predicted global demand of 41,170 and 39,490 aircraft by
2041 respectively.
17.4%
6.2% ► The two major OEMs plan to deliver more than 1000 aircrafts in 2023, putting
39.0% global deliveries back towards where they were in 2012.
7.5% ► In 1Q23, Airbus and Boeing cumulatively delivered a combined total of 257
commercial aircrafts (~8% more from 1Q22).
11.7% 18.2% ► Asian markets account for about 40% of long-term global demand for new
Source: CAPA airplanes. For instance, Airbus would deliver more than one commercial
aircraft per week to the Indian market until 2032.
*Other category includes general aviation, military/government, virtual carrier and no operator assigned.

Page 15 November 7, 2023 Airlines: Q1 2023 update Source: CAPA Fleet Database, EY analysis
Financial benchmarking airlines
 Financial benchmarking: Majority of the airlines experienced growth in revenues by more than
30%, whereas profitability remains a challenge

Revenue growth y-o-y and operating profit margin Key highlights

(1Q23)
20% • Capacity growth for airlines such as American, Delta and
United is driven by the restoration of long-haul
international network and the increase in utilization of
widebody aircraft assets.
Operating profit margin

15%
Allegiant
• Diversifying distribution channels such as New
10% Distribution Capability (NDC), increasing use of digital
channels, and efforts to elevate customer experience by
American, Delta etc. drove the sales growth in 1Q23.
5% American
Delta • Revenues through loyalty programs such as travel rewards
program and co-brand credit cards helped majority of the
0%
25% 30% 35% 40% 45%
United
50% 55%
airlines in increasing their revenues. For instance,
• American’s enrolments in AAdvantage loyalty
-5% Alaska increased to ~60% in 1Q23 vs. 1Q19.
• Allegiant’s Always Rewards credit card with an
-10% EBITDA margin of more than 90%, contributed
~US$100 million to sales in 1Q23.
Revenue growth

Source: Capital IQ, EY Knowledge analysis

Airlines: Q1 2023 update
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