The outlook for commercial air transport - IATA

The outlook for commercial air transport Brian Pearce Chief Economist www.iata.org/economics

To represent, lead and serve the airline industry

Demand for air travel and cargo diverge Air travel and air freight volumes Seasonally adjusted 19 480

440

17

420

16

400

15

Freight FTKs

380

14 360

FTKs per month, billion

RPKs per month, billion

18

Passenger RPKs

460

13

340 320

12

300 2007

11 2008

2009

2010

2011

2012

2013

Source: IATA IATA Economics www.iata.org/economics

2

Air travel growth has risen with confidence Worldwide growth in air travel and business confidence 65

15%

10%

55

5%

50 45

0%

40

-5% Business Confidence

35

Growth in RPKs

-10%

30 25 2007

% change over year

Index of business confidence

60

-15% 2008

2009

2010

2011

2012

2013


3

But business/first seat demand shifted down Premium passengers as a % of total 10.0%

(seasonally adjusted)

9.5%

9.0%

8.5%

8.0%

7.5%

7.0%


4

Because of weak international trade growth Premium passengers and world trade growth 25 20

% change over year

15 10 5 0 -5 -10

-15 -20

Premium Travel Growth World Trade in Goods Growth

-25 -30

IATA Economics www.iata.org/economics

5

Air cargo is seeing a switch to other modes Ratio of air cargo tonnes and FTKs to world trade volumes 150 140 FTK share of world trade

Index to equal 100 in 1970

130 120 110 100

Cargo tonnes share of world trade

90 80 70 60 50 1970

1975

1980

1985

1990

1995

2000

2005

2010

Source: World trade – IHS Global Insight, Netherlands CPB Air cargo history – ICAO IATA Economics www.iata.org/economics

6

But a bigger problem is world trade weakness Ratio of world trade to domestic industrial production 1.20

1.10

1.00

0.90

0.80

0.70

0.60

0.50 1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

Source: Netherlands CPB, IATA IATA Economics www.iata.org/economics

7

Partly due to rise in protectionism Almost 500 protectionist measures taken in 2012

Number of measures

Source: Global Trade Alert IATA Economics www.iata.org/economics

8

Bali trade deal positive but more needed • • • • •

Trade facilitation welcome Doha-lite but endorses multilateral system Ratification of MC99 legal framework required Regional deals e.g. Trans-Pacific Partnership Bilateral deals e.g. US-EU


9

Revenue divergence greater than volumes Passenger and cargo revenues 600

90

550

Passenger revenue

80

500 70

400

60

350

50

US$ billion

US$ billion

450

Cargo revenue

300

40 250 30

200 150

20 1993

1995

1997

1999

2001

2003

2005

2007

2009

2011 2013F

Source: ICAO (history), IATA (forecast) IATA Economics www.iata.org/economics

10

Cargo asset utilization under pressure

(Seasonally adjusted)

Average daily hours flown

10.5 10.0

Freight aircraft utilization

53% 51% 49%

9.5

47%

9.0

45% 8.5

43%

8.0 7.5 7.0

Freight Load Factor

41% 39% 37%

% available freight tonne capacity

Freight load factor and freighter aircraft utilization

Source: IATA, Boeing IATA Economics www.iata.org/economics

11

Asset utilization high in passenger business Passenger aircraft utilization 81% Passenger load factor

Average daily hours flown

11.6

80%

11.4

79%

11.2

78% Twin-aisle aircraft utilization

11.0

77%

10.8

76%

10.6

75%

10.4

74%

10.2 2007

73% 2008


2009

2010

2011

2012

% of ASKs

11.8

2013 12

Ancillary services increasingly important Revenue per departing passenger 190 Fare

180 170

160 150 140

40 Cargo + other

30 20

Ancillaries

10 0 2000

2002

2004

2006

2008

2010

2012

2014

Source: Ancillaries derived from IdeaWorks 2013 report, IATA forecast IATA Economics www.iata.org/economics

13

Cash flows are better than expected Largest 8 airlines, EBITDA as % revenues, seasonally adjusted

20%

15%

US AsiaPacific

10%

Europe

5% Jet $82/b GDP 4%

Jet $127/b GDP 2.1%

0%

-5% 2006

2007

2008

2009

2010

2011

2012

2013

Source: Bloomberg IATA Economics www.iata.org/economics

14

25%

70 World trade growth

Year-on-year % change

20%

65

15% Industrial production growth

10% 5% 0%

60 55 50

Business confidence (right scale)

-5% -10%

45 40

-15% -20%

35

-25%

30

2007

2008

2009

2010

2011

2012

Confidence index, 50 equal no change

World economy is finally turning up

2013

Source: Netherlands CPB, Markit IATA Economics www.iata.org/economics

15

Jet fuel price to slide to low end of range Jet kerosene and crude oil price, $/barrel 200 180 160 $140/b 140 Jet kerosene price

120 $110/b

100 Brent crude oil price

80 60 40 20 0 2008

2009

2010

2011

2012

2013

2014

Source: RBS, Platts, IATA IATA Economics www.iata.org/economics

16

Better but divergent regional performance Airline net post-tax profit margins 8% 6% N America

4%

AsiaPacific Europe

2% 0% -2% -4% -6% 2007

2008

2009

2010

2011

2012

2013F 2014F

Source: ICAO, IATA IATA Economics www.iata.org/economics

17

Industry profitability almost as good as 2010 Global commercial airline profitability

25

6.0

3.0

EBIT margin (left scale)

15

0.0 -5 -3.0

Net post-tax profit (right scale)

-15

-6.0

-25

-9.0

-35

US$ billion

% revenues

5

Source: ICAO, IATA IATA Economics www.iata.org/economics

18

Returns up but still inadequate for investors Return on capital invested in airlines and their cost of capital

10.0 9.0

Cost of capital (WACC)

% of invested capital

8.0 7.0

Inadequate returns

6.0 5.0

Return on capital (ROIC)

4.0 3.0 2.0 1.0 0.0

1998 2000 2002 2004 2006 2008 2010 2012 2014F Source: McKinsey, IATA IATA Economics www.iata.org/economics

19

Margins will remain thin and fragile 2014 worldwide results per departing passenger 240 220 200 180 160 140 120 100 80 60 40 20 0

$224.40

$218.46

$5.94

Ancillary $13.66

Air fare $180.10

Costs $218.46

Cargo & other $30.64

Revenues

Costs

Net profit


20