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Submitted to the Future of Aviation Advisory Committee May 19, 2010

The Economic Conditions for U.S. Airlines. Submitted to the Future of Aviation Advisory Committee May 19, 2010. The Air Transport Association of America, Inc.

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Submitted to the Future of Aviation Advisory Committee May 19, 2010

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  1. The Economic Conditions for U.S. Airlines Submitted to the Future of Aviation Advisory Committee May 19, 2010

  2. 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 ServicesAirTran Airways Alaska Airlines American AirlinesContinental AirlinesDelta Air LinesHawaiian AirlinesJetBlue AirwaysSouthwest AirlinesUnited AirlinesUS Airways All-Cargo ServicesABX AirASTAR Air CargoAtlas Air Worldwide HoldingsEvergreen Int’l AirlinesFedEx CorporationUPS Airlines Associate MembersAir CanadaAir JamaicaMexicana www.airlines.org 2

  3. The Future of Aviation Advisory Committee The Committee will focus principally on five issue areas: balancing the industry’s competitiveness and viability, ensuring a world-class aviation workforce, ensuring aviation safety, securing stable funding for aviation systems and addressing environmental challenges and solutions. The following slides provide pertinent information concerning each of these issue areas. In general, the slides illustrate the economic challenges the industry faces in attempting to achieve financial stability, including: reduced consumer demand, high taxes and fees, fuel prices that are volatile and well above historic levels, and looming new impositions related to carbon emissions and increased PFCs. The slides also illustrate the industry’s exceptional safety record. www.airlines.org 3

  4. Balancing the Industry’s Competitiveness and Viability www.airlines.org 4

  5. Commercial Aviation: An Economic Enabler “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, Moody’s Economy.com (August 2008) “The Economic Impact of Civil Aviation on the U.S. Economy” (FAA, Dec. 2009) • “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. cities…to enjoy a ‘Virtuous Circle of Economic Growth.’” • “The Plane Truth About Air Service and Economic Development,” • Global Aviation Improvement Network, Booz Allen (March 2001) 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 “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 5

  6. Global Context: Airlines Challenged to Cover Cost of CapitalAirlines Not in a Position to Make Large Investments in New Markets or Equipment Percent Source: 1993-2004 from McKinsey study ; 2005-2010F from IATA data/forecasts of global net income and estimates of invested capital www.airlines.org 6

  7. Airline Industry Profitability ElusivePretax Profit Margin Highly Cyclical and Well Below U.S. Corporate Average Average of U.S. Corporations Pretax Profit Margin (%) U.S. Passenger Airlines Sources: (1) IRS Statistics of Income (Historical Table 13) – “Net income (less deficit)” divided by “Total receipts”; (2) ATA Cost Index www.airlines.org 7

  8. Demand for Domestic Air Travel Has Not RecoveredSmaller Portion of U.S. Economy Being Spent on Air Travel Means Revenue Shortfall “The events of 9/11 marked…a permanent decline in domestic airline demand. We estimate that the gap between pre-9/11 demand and the post-9/11 period demand resulted in…the equivalent of the industry having no domestic revenue in 2007 and 2008.” (“9/11 Revenue Impact in Context,” Barclays Capital, Feb. 10, 2009) Domestic Passenger Revenue as Share of U.S. Gross Domestic Product Annual Passenger Revenue Shortfall(in $Billions) vs. 1991-2000 Average Source: ATA analysis of BEA and BTS data www.airlines.org 8

  9. What a Difference Two Years Have Made in Airport Ops 62 of the 65 FAA “Large” and “Medium” U.S. Airports Have Lost Scheduled Flights % Change in Scheduled-Service Departures: 2Q 2010 vs. 2Q 2008 Sources: Innovata (May 7, 2010) and Federal Aviation Administration www.airlines.org 9

  10. DOT:Avg. Domestic Ticket Prices Just Above 1999 LevelsU.S. CPI Rose 41 Percent from 4Q 1995 to 4Q 2009, Leaving Prices $85.86 “Short” May 19, 2010 – “While air fares in the fourth quarter of 2009 declined 6.1 percent since the fourth quarter of 2000, overall prices measured by the inflation rate rose 24.1 percent during that period. In the 14 years from 1995, the first year of BTS records, air fares rose 10.9 percent compared to a 40.7 percent inflation rate. In 1995 dollars, the average air fare in the fourth quarter of 2009 was $227, compared to $288 in 1995 and $300 in 2000.” $85.86 CPI-Linked Prices Actual Avg. Prices Note: 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 10

  11. Jet Fuel Prices* in 2009 Exceeded Historical AverageDecisions About Staffing, Scheduling, Aircraft Purchasing Made in Broader Cycles * Simple average of spot price per gallon in New York Harbor, U.S. Gulf Coast and Los Angeles (from EIA Weekly Petroleum Status Report) “It is very hard to justify oil going from $30 to above $80 based only on the fundamentals of supply and demand.” Economist NourielRoubini, Inside Commodities Conference (11/4/09) “I have no problem with the notion that $75 or $80 a barrel oil is a fair market value in a healthy economy, but we’ve got ahead of ourselves.” Stephen Schork, Inside Commodities Conference (11/4/09) “[O]il, energy and food prices are now rising faster than economic fundamentals warrant, and could be driven higher by excessive liquidity chasing assets and by speculative demand… The global economy could not withstand another contractionary shock if similar speculation drives oil rapidly towards $100 a barrel.” NourielRoubini, NYU, “The risk of a double-dip recession is rising” (8/23/09) www.airlines.org 11

  12. U.S. Aviation* Taxes/Fees Up Substantially From 2000Airlines and Flying/Shipping Public Have Not Received Commensurate ROI Collections, in Billions * U.S. passenger and cargo carriers; FAA taxes are commercial aviation only Source: ATA, BTS, DHS, FAA www.airlines.org 12

  13. Trading of Oil Futures Surging in Spring 2010Daily Paper Trade (Million Barrels) of Oil via Exchanges* * NYMEX West Texas Intermediate (WTI) + ICE WTI + Brent Sources: Citi Futures, EIA, IEA, New York Mercantile Exchange (NYMEX) and London IntercontinentalExchange® (ICE) www.airlines.org 13

  14. One U.S. Passenger Airline Has Investment-Grade CreditNo Passenger Airline in the World Enjoys an A-Minus or Better Rating from S&P >= BBB- (investment-grade) < BBB- (speculative or “junk”) Sources: Standard and Poor’s as of Dec. 18, 2009 and http://online.wsj.com/article/BT-CO-20090420-711716.html www.airlines.org 14

  15. U.S. Passenger Airlines* Market Value in ContextMarket Capitalization (Billion USD) as of Mar. 31, 2010 @ 1:00 PM EDT * U.S. Passenger Airlines AAI AirTran ALK Alaska AMR American CAL Continental DAL Delta HA Hawaiian JBLU JetBlue LCC US Airways LUV Southwest MESA Mesa PNCL Pinnacle RJET Republic SKYW SkyWest UAUA United XJT ExpressJet Source: MSN Money - http://moneycentral.msn.com/investor/research/welcome.asp www.airlines.org 15

  16. Ensuring a World-Class Aviation Workforce www.airlines.org 16

  17. Economy, Fuel, Taxes, Regulation Continue Toll on Jobs*U.S. Passenger Airline FTEs* Down More Than 30% from May 2001 All-Time Peak “Why are companies still laying people off if the economy’s looking better? A closer look at the airline industry might help answer that question. While carriers say they see glimmers of evidence that the plunge in passenger demand that began a year ago is bottoming out, they aren’t seeing many signs that travelers are coming back or are willing to pay more for tickets… And now fuel prices are rising again, giving more cause for alarm.” Susan Carey, “Airlines Illustrate Why Layoffs Continue,” Wall Street Journal (Nov. 6, 2009) * Full-time equivalent employees in thousands (see http://www.bts.gov/programs/airline_information/number_of_employees/) www.airlines.org 17

  18. Commercial Aviation Drives 10.9M U.S. JobsEvery 100 Civil Aviation Jobs Generate Approximately 330 Jobs in Other Industries 0%-4.9% 5%-9.9% 10% or above Source: Federal Aviation Administration, “The Economic Impact of Civil Aviation on the U.S. Economy,” (December 2009) www.airlines.org 18

  19. Ensuring Aviation Safety www.airlines.org 19

  20. With Each Decade, U.S. Airline Safety Improves MarkedlyFatal Accidents per Million Aircraft Departures in Scheduled Service Source: ATA analysis of data from the National Transportation Safety Board www.airlines.org 20

  21. U.S. Passenger Fatalities per 100 Million Passenger Miles 1. Passenger cars/taxis; drivers considered passengers; data from the NSC Fatality Analysis Reporting System2. Does not include school buses; data from the NSC Fatality Analysis Reporting System3. 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®, 1997-2006 averages www.airlines.org 21

  22. Securing Stable Funding for Aviation Systems www.airlines.org 25

  23. 2009 Domestic Seating Capacity Fell Most Since 1942 Market Forces, Policy Resulted in Largest Post-WWII Contraction in Aviation History Annual Percent Change in Domestic ASMs* * An available seat mile (ASM) is one seat flown one mile Sources: ATA, BTS and Innovata (via APGDat ) www.airlines.org 26

  24. Tax Bite on a $300 One-Stop Round Trip* Has Nearly Tripled Growing Take by U.S. Government and Airports Leaves Less Revenue for Carriers 1972 Taxes7% ($22)* 2010 Taxes20% ($61)* 1992 Taxes13% ($38)* Airfare Taxes * 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 27

  25. “Special” Tax Burden* Was $16.6 Billion in 2009 In Addition to Typical Federal, State and Local Corporate Taxes (e.g., Income, Property, Sales) 2009 collections ($millions) from airlines Federal Aviation Administration (FAA) Department of Homeland Security (DHS) U.S. Airports DHS = $3.5B FAA = $10.3B * Federally levied/approved commercial aviation taxes/fees only; some taxes/fees shown include collections from non-U.S. carriers Sources: Department of Homeland Security, FAA, Office of Management Budget, Transportation Security Administration, ATA www.airlines.org 28

  26. FAA COSTS BY USER GROUPSource: Federal Aviation Administration FY05 Cost Allocation Study as applied to total FY08 Trust Fund revenues Airlines Account for 95% of Funding But Only 66% of Costs Dollars in Millions, Based on FY08 FAA Budget Cross-Subsidy: $3,445 Airport & Airway Trust Fund TAXES PAID Source: Federal Aviation Administration Trust Fund Revenue Collections www.airlines.org 29

  27. Billions of Aviation Taxes Have Hardly Made a Dent New York-Area Delay Share Continues to Rise, Begging for Accelerated NextGen Implementation EWR/JFK/LGA/PHL Share (%) of Major-Airport Delay Minutes Source: FAA OPSNET for OEP 35 airports www.airlines.org 30

  28. Addressing Environmental Challenges and Solutions www.airlines.org 31

  29. In 2008, U.S. Passenger and All-Cargo Airlines Spent $16B More on Fuel Than in 2007 and $42B More Than in 2003 “The U.S. airlines…have a relatively low proportion of their 2008 fuel needs hedged, because hedging high and volatile fuel prices is expensive and may require posting cash collateral.” Standard & Poor’s (March 11, 2008) Gallons Note: Value in parentheses below year is average price paid per gallon excluding taxes, into-plane fees, pipeline tariffs and hedging costs Sources: ATA, Energy Information Administration, Department of Transportation www.airlines.org 32

  30. Airline Fuel Efficiency Has Surged Over Three DecadesRevenue Ton Miles (RTMs) per Gallon – U.S. Passenger and All-Cargo Airlines “We’re not aware of any other major user of fossil fuels or those who tap into the electrical grid targeting as aggressive a reduction in their carbon footprint as the global airline industry….” “Should you consider buying carbon offsets next time you log on to your computer?” Airmail 349, Merrill Lynch (Jan. 16, 2009) * U.S. passenger and cargo airlines operating worldwide – passenger and cargo revenue ton miles (RTMs) in all services Source: ATA analysis of DOT Form 41 traffic data (T2-Z240) and gallons (T2-Z921) www.airlines.org 33

  31. The Environmental Way Forward – Globally • Global Sectoral Approach Framework for Aviation • International and domestic aviation emissions under framework • Collective aviation-specific emissions targets • Fuel efficiency: annual average improvement of 1.5% through 2020 • Growth of the industry’s emissions “carbon neutral” beginning in 2021 • Aspirational goal of 50% reduction in emissions in 2050 (vs. 2005 levels) • Targets all subject to government investment and “do no harm” – so technology, operations and infrastructure improvements flourish • Why These Targets? • They address the key concern . . . growth . . . • While global aviation currently contributes only 2% of the world’s man-made CO2, many are concerned that growth in demand = growth in emissions • While seeking to keep sufficient resources within the industry to allow it to continue its strong record of continuous environmental improvement www.airlines.org 34

  32. Global Approach Requires International & U.S. Adoption • Framework should be established under ICAO • International Civil Aviation Organization (ICAO) is the authority for international aviation emissions • Framework should be incorporated in domestic legislation • Not a “carve out,” but a “carve in” • Complementary policy framework – countries must: • Accelerate ATC modernization, including federal funding for aircraft equipage, training, etc. • Support development and deployment of aviation alternative fuels • Reinstate (and increase) research and development and investment for aircraft technology • All of these efforts should be taken in context of solid energy policy, including stable fuel supplies and appropriate oversight and control of energy futures trading/speculation www.airlines.org 35

  33. ATA Alternative Fuels Commitment is Predicated on Performance — We Are Feedstock- and Technology-Neutral April 22, 2008—The members of the Air Transport Association of America (ATA) are dedicated to the development and deployment of safe, environmentally friendly, reliable and economically feasible alternativesto conventional petroleum-based jet fuel. We recognize that this effort presents significant technical and financing challenges…We commit to work with future suppliers who potentially can integrate alternative fuels into our operations… To foster the development and deployment of alternative jet fuels that meet our objectives, ATA is a founding and principal member of the Commercial Aviation Alternative Fuels Initiative (CAAFI), a consortium of government agencies, airlines, manufacturers, airports and current and prospective fuel suppliers that are coordinating work on the research and development of alternative jet fuels, including technical specifications, environmental aspects, production and distribution. To foster the development and deployment of alternative jet fuels that meet our objectives, ATA is a founding and principal member of the Commercial Aviation Alternative Fuels Initiative (CAAFI), a consortium of government agencies, airlines, manufacturers, airports and current and prospective fuel suppliers that are coordinating work on the research and development of alternative jet fuels, including technical specifications, environmental aspects, production and distribution. In addition…we seek to engage potential suppliers who are capable of providing alternative aviation fuel that can reach our airports within the next few years, in particular, while also encouraging potential suppliers who may be developing alternatives that will be realized in the longer term. www.airlines.org 36

  34. The Bottom LineExcerpted from Fitch Ratings Airline Credit Navigator (April 13, 2010) “Given the urgent need for balance sheet deleveraging through the next industry demand cycle as the key to ratings improvement, Fitch will be focused first and foremost on the free cash flow (FCF) generation performance of U.S. carriers as the recovery takes hold in 2010… Without exception, the U.S. legacy carriers face heavy debt maturities (and in some cases rising cash pension funding obligations) that simply will not be funded entirely out of internal cash flow over the next several quarters ⎯ even if a solid global recovery takes shape. This will force many carriers to continue borrowing in 2010 and 2011, delaying any significant progress toward deleveraging their extremely weak balance sheets. Renewed speculation surrounding potential mergers and industry consolidation reflects the notable improvements in the industry operating outlook and the long-term logic of increased concentration in a largely commoditized industry that remains vulnerable to external demand and fuel price shocks. Fitch continues to see further industry consolidation as a necessary and inevitable part of the U.S. airline industry’s effort to ensure more durable financial profiles through economic cycles…” Source: Fitch Ratings “Airline Credit Navigator: Spring 2010 (April 13, 2010) www.airlines.org 37

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