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Reformulating U.S. Aviation John Heimlich VP & Chief Economist, Air Transport Association of America July 30, 2008
© ATA The Air Transport Association of America, Inc. Combination Services (12) AirTran Airways Alaska Airlines American Airlines Continental Airlines Delta Air Lines Hawaiian Airlines JetBlue Airways Midwest Airlines Northwest Airlines Southwest Airlines United Airlines US Airways All-Cargo Services (6) ABX Air ASTAR Air Cargo Atlas Air / Polar Air Cargo Evergreen Intl Airlines FedEx Corporation UPS Airlines Associate Members (3) Air Canada Air Jamaica Mexicana
© ATA Sources: Seabury APGDat airline schedules (July 25, 2008) The L.A. Metro Area is Not Immune from Service Cuts Los Angeles (LAX)Dec-07Dec-08Change Airlines55561 Weekly Flights5,9144,989(925) Destinations153144(9) Ontario (ONT)Dec-07Dec-08Change Airlines119(2) Weekly Flights867575(292) Destinations3417(17)
© ATA For Whom the Bell Tolls U.S. Airline Bankruptcies Since End of 2007 Include Numerous Shutdowns Out of BusinessLast Day of Ops MAXjet25-Dec-07 Big Sky7-Jan-08 Aloha31-Mar-08 ATA2-Apr-08 Skybus5-Apr-08 Eos27-Apr-08 Champion31-May-08 Air Midwest30-Jun-08 Vintage Props & Jets 1 18-Jul-08 ExpressJet 2 2-Sep-08 Continuing OperationsCh. 11 Filing Frontier11-Apr-08 Gemini Air Cargo18-Jun-08 Note: Oasis Hong Kong Airlines and Silverjet are among the non-U.S. airlines that have ceased operations 1.Intends to re-launch operations should market conditions permit 2.Ceasing branded commercial operations only; will continue to fly as Continental Express
© ATA EIA Sees Jet Fuel Prices Soaring in 2008 and 2009 Average Price of U.S. Jet Fuel per Barrel Source: Energy Information Administration (www.eia.doe.gov/steo) The Stone Age did not end for lack of stone, and the Oil Age will end long before the world runs out of oil. (Sheikh Zaki Yamani, former oil minister of Saudi Arabia, Oct. 23, 2003)
Crack Spread © ATA Sources: Energy Information Administration and ATA Dollars per Barrel Jet Fuel Prices Maintaining Premium to Soaring Crude Oil Average Refining Crack Spread Fluctuating Around $30 per Barrel
© ATA Sources: Energy Information Administration Weekly Petroleum Status ReportWeekly Petroleum Status Report Product Crack Spread (Dollars per Barrel) Jet Fuel Maintaining Premium to Gasoline and Diesel Key Factors Include U.S. Ethanol Mandates and Global Demand for Middle Distillates $25-$30 Premium
© ATA Jet Fuel Expense 1 Will Break 2007 Record Total Expense (Excluding Taxes and Into-Plane Fees) Could Exceed $61 Billion Sources: ATA, Energy Information Administration, Department of Transportation 1. U.S. passenger and cargo airlines 2. Based on $75K to employ one FTE 3. Based on approx. $70M per aircraft Equivalent of 267,000 Airline Jobs 2 or 286 New Narrow-body Jets 3 Note: Value in parentheses below year is average price paid per gallon excluding taxes, into-plane fees, pipeline tariffs and hedging costs
© ATA Surging Fuel Expense Offsetting Labor Restructuring For Passenger Airlines, Fuel CASM Has Overtaken Labor CASM Unit Operating Cost (¢ per Available Seat Mile) Source: ATA Passenger Airline Cost Index
Airlines Effectively Managing Controllable Costs Carrier Cost Hikes Overwhelmingly a Function of Higher Fuel Prices Operating Cost (¢) per Available Seat Mile Source: ATA Passenger Airline Cost Index * Expenses incurred for providing air transportation facilities associated with the performance of service which emanate from and are incidental to air transportation services performed by the carrier © ATA (4-Week Moving Average)
© ATA Relative to 2000, Jet Fuel Prices Overwhelming Fares Since 2000, Average U.S. Jet Fuel Price Up 265%, Domestic Fares Up 1% Average U.S. Jet Fuel Price (Cents per Gallon) Source: U.S. Energy Information Administration Avg. Fare to Fly 1,000 Miles Domestically (U.S. Dollars, Excluding Govt. Taxes) Source: ATA passenger revenue report (mainline + regionals) Up 1.0% Up 265.3%
© ATA Source: EIA and ATA passenger revenue report % Change Year-over-Year (January-June) Ticket Prices* Lagging Fuel Prices in 2008 * Fares per mile flown, also known as passenger yield Its very difficult for airlines to simply raise prices to levels that cover their higher fuel costs. Raising prices chokes demand: If tickets get too expensive, business travelers make alternate plans, pick cheaper airlines or buy discounted tickets further in advance. For vacationers, if prices get too high, they dont buy or they switch to cheaper destinations. Airlines can price themselves right out of a sale. Scott McCartney, What to Expect as Airlines Cope With Soaring Fuel Costs, Wall Street Journal (May 22, 2008)
U.S. Consumer Sentiment at Lowest Level Since May 1980 [This] level of confidence is not only consistent with a recession; it is suggestive of a severe recession. Scott Hoyt, Director of Consumer Economics, Moodys Economy.com (June 27, 2008) © ATA Source: University of Michigan via https://customers.reuters.com/community/university Key Factors: Household debt Declining stock prices Declining U.S. dollar Rising food prices Rising energy prices Rising unemployment U. Mich. Consumer Sentiment Index (Dec-64=100)
© ATA Portion of Ticket Needed to Buy Fuel Exceeds 40% Airline Fuel Expense per Passenger-Mile Will Exceed 7 Cents in 3Q08 Fuel Cost (¢) per Passenger MileFuel Cost as % of Passenger Revenue Source: ATA quarterly airline cost index, reflecting systemwide (domestic and international) operations
* Some taxes and fees shown include collections from non-U.S. carriers Sources: Department of Homeland Security Federal Aviation Administration Office of Management and Budget Transportation Security Administration DHS Collections = $3.8B AATF + LUST = $11.4B Special Aviation Taxes/Fees* Add $18B Burden Estimated Collections Shown in $Millions © ATA
Its Only a Few Bucks per Passenger In Deregulated Era, ATA Member Airlines Average $1.76 Net Loss per Passenger Sources: ATA Annual Reports of the U.S. Airline Industry and carrier reports and Airline Net Profit per Passenger Enplaned* * Based on ATA-member passenger airlines only for each respective year © ATA Average = ($1.76) per pax
Soaring Fuel Prices Forcing Industry Contraction Reduction in Domestic Route Frequency and Seating Capacity Reverses 2007 Trend Source: ATA analysis of Seabury APGDat airline schedules as of July 25, 2008 © ATA % Change in Dom. Service vs * An available seat mile (ASM) is one seat flown one mile and is the standard unit of capacity in the passenger airline sector
© ATA Dozens of U.S. Station Closings Announced or Implemented by Individual U.S. Airlines in 2008 BFL CLD MCE MRY ANC MGM TXK DRO BDL BMI MDW RFD SDF BWI COU IRK JLN STL TUP AZO LAN MKG RDU FAR ELY RNO CMH TOL OKC EUG MFR AOO BFD DUJ PVD BNA/CHA ABI CRP MFE GRB STE BLI STT ACY TTN OAK ONT PSP SAN SBP VIS ALB ART ISP JFK JHW MSS OGS PBG SLK SAT SJT APF DAB FLL GNV PBI PFN RSW SRQ UST CEF PSM IGM PRC TUS YUM FKL JST MDT SCE AHN BKW CKB LWB MGW PKB CDC CNY VEL FMN GRI MCK MHK SLN SHD
© ATA Sources: Seabury APGDat airline schedules (July 25, 2008) and Federal Aviation Administration Few FAA Large Hub Airports Have Escaped Flight Cuts % Change in Scheduled Domestic Departures: 4Q08 vs. 4Q07
© ATA Sources: Seabury APGDat airline schedules (July 25, 2008) and Federal Aviation Administration Few FAA Medium Hub Airports Have Escaped Flight Cuts % Change in Scheduled Domestic Departures: 4Q08 vs. 4Q07
Soaring Fuel Prices Taking Heavy Toll on Airline Workers U.S. Passenger Airline Jobs Will Fall Below 400,000 Before 2009 Source: U.S. Bureau of Transportation StatisticsBureau of Transportation Statistics Thousands of Full-Time Equivalents (FTEs) © ATA FORECAST
© ATA Sources: Energy Information Administration (NYH/USGC/LA) and U.S. Dollar (USD) Equivalents per Barrel U.S. Airlines Paying Transatlantic Premium for Jet Fuel USD-Euro Exchange Rate Has Boosted Fuel Price Differential to Nearly 60% $55-65 Differential
The Transatlantic Blues Equity Market Capitalization (Millions USD) on July 16, 2008 Sources: Bloomberg (for Deutsche Lufthansa AG – LHA:GR) and MSN © ATA American Continental Delta Northwest United US Airways Lufthansa
U.S. Carriers Suffer From Comparatively Weak Credit Standard & Poors (S&P) Corporate Credit Ratings as of July 25, 2008 Investment Grade Speculative © ATA
© ATA Revenue Ton Miles (RTMs) per Gallon U.S. Airlines* Greener Than Ever Fuel Efficiency Up 24% from 2000 to 2007 and 110% from 1978 to 2007 Source: ATA analysis of DOT Form 41 traffic data (T2-Z240) and gallons (T2-Z921) * U.S. passenger and cargo airlines operating worldwide – passenger and cargo revenue ton miles (RTMs) in all services [On]ce government creates an artificial scarcity of carbon, how the credits are allocated creates a huge new venue for political rent-seeking and more subsidies for favored industries. Some businesses will benefit more than others… Congress itself will probably take the largest revenue grab, offering itself a few more bites out of the economy and soaking politically unpopular businesses. McCains Climate Market, WSJ (May 13, 2008)
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