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U.S. Airlines: “Mainline Carrier Prospects” John P. Heimlich (jheimlich@airlines)

U.S. Airlines: “Mainline Carrier Prospects” John P. Heimlich (jheimlich@airlines.org) Vice President and Chief Economist 30 th Annual FAA Aviation Forecast Conference March 18, 2005. The Air Transport Association of America, Inc. March 2005.

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U.S. Airlines: “Mainline Carrier Prospects” John P. Heimlich (jheimlich@airlines)

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  1. U.S. Airlines: “Mainline Carrier Prospects” John P. Heimlich (jheimlich@airlines.org) Vice President and Chief Economist 30th Annual FAA Aviation Forecast Conference March 18, 2005

  2. The Air Transport Association of America, Inc.March 2005 Combination ServicesAlaska AirlinesAloha AirlinesAmerica West AirlinesAmerican AirlinesATA AirlinesContinental AirlinesDelta Air LinesHawaiian AirlinesJetBlue AirwaysMidwest AirlinesNorthwest AirlinesSouthwest AirlinesUnited AirlinesUS Airways All-Cargo ServicesABX AirASTAR Air CargoAtlas AirEvergreen Int’l AirlinesFedEx CorporationPolar Air CargoUPS Airlines Associate MembersAeromexicoAir CanadaAir JamaicaMexicana

  3. Wall Street Perspective“Ultimately, all carriers feeling ill effects…” “[L]egacy carriers and LCCs continue to fight strenuously for market share with a complete lack of pricing power creating an anemic revenue environment… Fuel…remains a major factor in the industry’s inability to make a profit and we remind investors that this is not the first time the airlines have been faced with tough year over year comps. However, this is the first time that carriers have not been able to pass these costs on to the consumer as evident by several failed fare increases and the declining yields. In the current environment, we doubt that legacy carriers are even marginally inching forward since the meager revenue gains are more than offset by still very high and once again rising fuel price levels. The near-term prognosis is quite bleak considering the sector is not even at the halfway point of what seasonally is by far its toughest period… Ultimately, all carriers lack any pricing power and are feeling the ill effects…” Reno Bianchi and Steven K. Burton – Citigroup Corporate Bond ResearchAirline Industry Research Report (December 21, 2004)

  4. All Aviation Stakeholders Must Engage in “Self-Help” Along With Airlines and Suppliers… Congress, Regulators, and Airports Must Adapt “We find ourselves in the grip of a strange anomaly. The government that embraced deregulation more than 25 years ago, and whose members often excoriate airline executives for failing to change rapidly enough to accommodate market demands, has itself failed to adapt to the changing times. Many elements of our aviation policy are remnants of the past…” Robert L. Crandall, Retired Chairman, American AirlinesKeynote speech, Wright Memorial Dinner (December 17, 2004)

  5. Airline Balance Sheets in Disrepair With Heavy LossesStandard & Poor’s (S&P) Corporate Credit Ratings AAA: Extremely strong capacity to meet financial commitments. Highest rating.AA: Very strong capacity to meet financial commitments.A: Strong capacity to meet financial commitments, but somewhat susceptible to adverse economic conditions and changes in circumstances. BBB: Adequate capacity to meet financial commitments, but more subject to adverse economic conditions. (BBB- is the lowest investment grade rating.) BB: Less vulnerable in the near-term but faces major ongoing uncertainties to adverse business, financial and economic conditions. B: More vulnerable to adverse business, financial and economic conditions but currently has the capacity to meet financial commitments. CCC: Currently vulnerable and dependent on favorable business, financial and economic conditions to meet financial commitments. CC: Currently highly vulnerable. C: A bankruptcy petition has been filed or similar action taken but payments or financial commitments are continued.D: Payment default on financial commitments. Investment Grade(>= BBB-) * Formerly Atlantic Coast Airlines ** Airfreight company

  6. Crude Oil Prices Soaring to Record HighsWTI* to Reach Nominal Record in ’04; Little Relief Seen in ’05 “…it would be a mistake to underestimate the effect high oil prices have already had on the world economy. [T]he…losses suffered by the airlines mirror the increase in their fuel bills. ‘We are not that far behind the high prices of the early 1980s even in real terms…’” (Daniel Yergin, Chairman, Cambridge Energy Research Associates, Financial Times, September 16, 2004) “If fuel prices average $50 for 2005, the debt burden on the network airlines will grow by a number that rivals the entire combined market capitalization of these carriers.” (Gary Chase, Lehman Brothers, “Fuel Eating the Upcycle,” October 19, 2004) Average Price of Crude Oil ($/Barrel)* *West Texas Intermediate at Cushing, Texas Source: PIRA Energy Group and Air Transport Association

  7. 2005 Jet Fuel Prices Expected to Surpass 2004 RecordHedging and Point-of-Sale Alteration Keep Jet Price Paid Below Spot Crude Oil $/bbl* 2001 $26 2002 $26 2003 $31 2004F $41 2005F $50 Jet Fuel Price excl. Taxes (¢/Gallon) Average Price of Crude Oil ($/Barrel)* FORECAST *West Texas Intermediate (WTI) at Cushing, Texas Sources: U.S. Department of Transportation, Energy Information Administration, Air Transport Association, and PIRA Energy Group

  8. Aviation Fuel Efficiency Has Risen SteadilyConservation Efforts Accelerated Post-9/11, Paying Off in Better Throughput Revenue Passenger Miles per Gallon Source: ATA Cost Index for Major and National Passenger Airlines

  9. Mainline Passenger Revenue Running Just Above 1995With Express Flying Included, Passenger Revenue Finally > 2001 * Express data not available before January 2000. Source: ATA research

  10. U.S. Economy Remains Relatively Strong But GDP Decelerating Post-2004, Partly on Higher Energy Costs Real GDP Growth vs. Preceding Year (%) Source: U.S. Bureau of Economic Analysis

  11. Air Travel Demand Disconnecting from Cyclical FactorsHistorically > 0.90% of GDP, Passenger Revenue Now Just 0.70% Historical Band *Four-quarter rolling passenger revenue derived from government filings of major and national passenger airlines Sources: U.S. Bureau of Economic Analysis; U.S. Department of Transportation Form 41 reports

  12. Planes, Trains, and Automobiles . . .Domestic Air Travel Volumes Ahead of 2000 but Still Lag Amtrak/Autos Annualized Psgr. Volume Index (12ME Dec-00=100) Sources: Seabury APG (Domestic Onboards-T100); Amtrak (Ridership); Federal Highway Administration (Rural Arterial Vehicle Miles); Travel Industry Association

  13. Short-Haul Domestic Travel Down; Long-Haul Up*Hassle/Taxes Take Toll Where Substitutes Abound; LCCs Offer Long-Haul Alternative * Because much mainline service has been replaced with commuter service since 2000 and DB1A fails to capture a significant portion of commuter traffic, volume declines for short-haul trips may be overstated. Source: U.S. Department of Transportation Data Bank 1A (DB1A) – Origin and Destination (O&D) Survey; Data Base Products

  14. Pricing Power Remains ElusiveDomestic Fares (Excl. Taxes) Down Sharply From 2000; International Recovering “Internet pricing, low-cost carrier growth and higher taxation of airline revenue remain as obstacles to an airline recovery. [I]t may be years before we experience a return to the late 1990's absolute level of revenue….” (William Greene, Morgan Stanley — September 24, 2004) “Many industries, still saddled with excess capacity, can’t raise prices. The biggest: carmakers and airlines.”(Rich Miller, ”Pricing Power Is Back—But Inflation Isn’t Likely to Follow,” BusinessWeek — December 27, 2004) % Change in Mainline Psgr. Yield (¢/RPM) vs. 2000 Source: ATA research

  15. Aviation Taxes Have Outpaced Inflation and FaresTaxes the Leader of the Pack, at Expense of Fares Segment Fee + CPI Security Fee PFC <= $18 per R/T Segment Fee phase-in PFC <= $12 per R/T Index (1991=100) *Itinerary assumes one-stop domestic round-trip with maximum passenger facility charge (PFC) per airport; $200 total includes taxes and fees. Source: ATA research

  16. Notwithstanding Tax Hikes, Fare Compression UnderwaySince 2000, All Buckets Have Declined Except $100-300 Round-Trips Source: ATA analysis of DOT Databank 1A

  17. Even With Tax Hikes, Total Ticket Prices Down $40 per R/TTwo-Thirds of Domestic Passengers Now Pay Total Price Under $300 Avg. Ticket Price: $316 Avg. Ticket Price: $276 Tickets < $200 -- 25% (up from 23%) Tickets < $300 -- 67% (up from 55%) Tickets < $400 -- 87% (up from 75%) Tickets < $500 -- 95% (up from 88%) *Including taxes Source: ATA analysis of DOT Databank 1A

  18. Passenger Unit Revenue Weak at Home; Strong AbroadDomestically, Record Load Factors Insufficient to Offset Sharply Lower Fares “[T]he industry continues to face a demand curve characterized by very accentuated price elasticity and thus the needed objective to achieve simultaneously capacity and traffic growth as well as improved price realization continues to be a very elusive task.” (Citigroup — October 24, 2004) 12-Month Rolling Psgr. Revenue per ASM (¢) * ATA research of Alaska, American, America West, Continental, Delta, Northwest, United, US Airways

  19. Since 2000, Breakeven Load Factor Well Above Actual Prices, Less Cargo, Higher Costs = More Seats Must be Filled Passenger Load Factor (%)—Majors and Nationals Source: ATA research

  20. * American, Continental, Delta, Northwest, United, US Airways Source: U.S. Securities and Exchange Commission (SEC) filings of selected companies; Air Transport Association Capital Expenditures Just One-Third of 2000 LevelsATA Member Passenger Airlines Capital Expenditures ($Billions)

  21. Productivity Improvements Driving Cost ReliefNetwork Restructuring, Work Rules, Human Capital, Outsourcing, Technology Source: ATA Airline Cost Index for U.S. major and national passenger airlines

  22. TOTAL Aug-01Dec-04 747.6 621.5 Airline Headcount Down ~126,000 (17%) from 9/11Low Fares, High Fuel Prices, Productivity Gains Driving Cuts or Curbing Growth U.S. Airline Employment (000s) * American, Continental, Delta, Northwest, United, US Airways ** AirTran, Alaska, America West, ATA (formerly American Trans Air), Frontier, JetBlue, Southwest, Spirit *** Air Transport Int’l, ASTAR/DHL, Express.Net, Evergreen, FedEx, Gemini, Kalitta, Kitty Hawk, Polar, Ryan Int’l, Southern, Tradewinds, UPS, World Sources: U.S. Department of Transportation P1a employment report; carrier reports for full-time and part-time workers

  23. Consumer/CEO OutlookCEO Confidence Deteriorating; Energy Costs Swinging Consumers CEO Business Confidence Index (Quarterly) Consumer Sentiment Index (Monthly) Sources: Conference Board and University of Michigan

  24. Volumes Up But Four Years Behind Pre-9/11 ExpectationsFAA Expects Demand to Exceed a Billion Passengers in Fiscal Year 2014 Revenue Passengers Enplaned (Millions) *Scheduled Revenue Passenger Enplanements (Millions), Certificated U.S. Carriers; Source: FAA Aerospace Forecasts, based on DOT Forms 41 and 298-C

  25. www.airlines.org

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