Economic performance

of the airline industry Mid-year 2017 update

Brian Pearce,

Chief Economist,

IATA

www.iata.org/economics

Performance drivers are now diverging

Source: IATA Economics using data from The Airline Analyst and Markit

40

42

44

46

48

50

52

54

-20%

-15%

-10%

-5%

0%

5%

10%

2012 2013 2014 2015 2016 2017

Ind

ex, 5

0 =

no

ch

ange

in o

utp

ut

% c

han

ge o

ver

pre

vio

us

year

Airlines unit cost growth and global business confidence

Global business confidence

Airlines' unit cost growth

Return on capital performance good in 2016

Source: IATA Economics using data from The Airline Analyst

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

2010 2011 2012 2013 2014 2015 2016

EBIT

ad

just

ed f

or

op

erat

ing

leas

es a

s %

in

vest

ed c

apit

alReturn on invested capital

Industry average

North America

Europe

Asia PacificLatin America

Middle East

Weighted Average Cost

2016 free cash flow good but more divergent

Source: IATA Economics using data from The Airline Analyst

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

2010 2011 2012 2013 2014 2015 2016

FCF

as %

inve

sted

cap

ital

Free cash flow yield (% invested capital)

North America

Industry average

Asia PacificLatin America

Europe

Middle East

Debt still ranges from investment grade to weak

Source: IATA Economics using data from The Airline Analyst

0

1

2

3

4

5

6

7

8

2010 2011 2012 2013 2014 2015 2016

Deb

t ad

just

ed f

or

op

erat

ing

leas

es/E

BIT

DA

R

Adjusted net debt/EBITDAR

Latin America

Asia Pacific

Industry average

Europe

North America

Middle East

Investment grade

Operating margins still high but declining

Source: IATA Economics using data from The Airline Analyst and airline releases

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

2011 2012 2013 2014 2015 2016 2017

% r

evenues

Airline industry operating margin, % revenues

Margins

adjusted for

seasonality

Unadjusted

margins

As margins squeezed by accelerating costs

Source: IATA Economics using data from The Airline Analyst

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

2011 2012 2013 2014 2015 2016 2017

% c

han

ge o

ver

pre

vio

us

year

Unit revenues and unit costs, % change over previous year

Unit cost growth

Unit revenue growth

Cost acceleration driven by fuel, MRO, labour

Source: IATA Economics using data from The Airline Analyst

7

7.2

7.4

7.6

7.8

8

8.2

8.4

CASM2016Q1

Fuel MRO Labour Infra-structure

Other CASM2017Q1

US

cen

ts/A

SM

CASM 2016Q1 to 2017Q1

Signs of a stabilization of yields

Source: IATA Economics using data from The Airline Analyst and Markit

80

82

84

86

88

90

92

94

96

98

100

48

49

50

51

52

53

54

2014 2015 2016 2017

Ind

ex o

f fa

res,

co

nst

ant

FX

Bu

sin

ess

con

fid

ence

50

= n

eutr

al

Worldwide average fares (constant FX) and business confidence

Business confidence

Average return fare index, constant FX

Financial markets and airline CFOs are confident

Source: IATA Economics using data from IATA Business Confidence survey and Thompson Reuters Datastream

0

10

20

30

40

50

60

70

80

90

100

350

450

550

650

750

850

950

1,050

1,150

1,250

1,350

2012 2013 2014 2015 2016 2017

CFO

exp

ecta

tio

ns

of

airl

ine

pro

fits

in 1

2

mo

nth

s, 5

0 =

no

ch

ange

Glo

bal

air

line

shar

e p

rice

ind

ex

Airline share prices and CFO expectations of airline profitability

Airline share prices

CFO expectations for change in profits in next 12 months

We’ve upgraded our forecasts for 2017

Source: IATA Economic Performance of the Airline Industry, Mid-year 2017 and End-year 2016 reports

2.5

0

5.1

3.3

5.66.6

2.9

-2

7.4 7.3 77.7

-4

-2

0

2

4

6

8

10

GDP Pax yields RPKs Freight tonnes ASKs Operatingmargins

Perc

enta

ge c

han

ge o

r %

rev

enu

es

Forecast revisions for 2017Previous forecast

Current forecast

Air travel has started the year strongly

Source: IATA Economics using data from IATA Statistics and Markit

30

35

40

45

50

55

60

65

-12%

-8%

-4%

0%

4%

8%

12%

16%

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

% year-on-year Diffusion indices

Growth in industry RPKs (LHS)

Global manufacturing PMI index (adv. 2 months, RHS)

Global services PMI index (adv. 2 months, RHS)

Strong growth in domestic markets

Source: IATA Economics using data from IATA Statistics

-0.7%

6.0%

3.4%

8.1%

15.3%

14.9%

14.8%

7.4%

-2.1%

3.0%

4.7%

6.6%

12.7%

15.3%

16.7%

7.7%

-5% 0% 5% 10% 15% 20%

Apr 2017 Mar 2017

Domestic revenue passenger kilometres (% year-on-year)

Industry

Domestic Russia

Domestic India

Domestic China

Domestic Japan

Domestic USA

Domestic Brazil

Dom. Australia

Load factors (mostly) at all-time highs

Source: IATA Economics using data from IATA Statistics

All-time low All-time high

Industry

Europe

N. America

L. America

Asia Pacific

Middle East

Africa

50% 60% 70% 80% 90%

Apr 2017 Apr 2016

Passenger load factors (% of available seat kms, seasonally adjusted)

81.7%

84.3%

84.2%

81.7%

80.9%

74.7%

72.3%

80.4%

82.1%

83.4%

79.6%

79.6%

75.4%

67.8%

Air freight rebound driven by re-stocking

Source: IATA Economics using data from IATA Statistics and Thompson Reuters Datastream

-15%

-10%

-5%

0%

5%

10%

15%-30%

-20%

-10%

0%

10%

20%

30%

40%

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

Global FTKs (LHS)

Inventory to sales ratio (RHS, inverted scale)

% year-on-year Year-on-year change

*Rolling 3 month periods

Fall in inventory to sales ratio, increase in FTK growth

Breakeven point rising but so are load factors

Source: IATA Economic Performance of the Airline Industry, Mid-year 2017 report

55

57

59

61

63

65

67

69

1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

% A

TKs

Breakeven and achieved weight load factors

Achieved

Breakeven

Return on capital lower but still good in 2017

Source: IATA Economic Performance of the Airline Industry, Mid-year 2017 report

0.0

2.0

4.0

6.0

8.0

10.0

12.0

1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

% o

f in

vest

ed c

apit

al

Return on capital invested in airlines

Cost of capital (WACC)

Return on capital (ROIC)

2017 profits down but upgraded

Source: IATA Economic Performance of the Airline Industry, Mid-year 2017 report

0

2

4

6

8

10

-10-505

10152025303540

2009 2010 2011 2012 2013 2014 2015 2016 2017

% r

even

ues

US$

bill

ion

Net profits and operating margins

Net profits - current Net profits - previous

Operating margin - current Operating margin - previous

Regional divergence in profitability remains

Source: IATA Economic Performance of the Airline Industry, Mid-year 2017 report

-2

0

2

4

6

8

10

12

14

16

18

-1%

1%

3%

5%

7%

9%

N America Europe Asia Pacific L America Middle East Africa

US$

bill

ion

% r

even

ues

Net profits by region in 2017

Net profits % revenues