AVIATION INDUSTRY

2009 OUTLOOK
Presented
Presented by:
by:

Deborah Meehan
SH&E,
SH&E, COO
COO

American Society of Civil Engineers

12th Annual Conference
April 14, 2009
2009 – Worst Year Ever?
“On Wall Street, the most
unnerving stock market reports
since the Depression 1930s
became daily more dismal.”
“[T]he unimaginable happened:
a collapse on a scale never seen
before—no, not even in 1929.
Prices went down, down, down,
swiftly wiping out an entire year's
spectacular gains. ‘I just can’t
believe that this is happening,’
moaned one trader, as he took
nonstop sell orders.”
“The U.S. is afflicted by a
massive economic migraine,
and more than 200 million
Americans know too well
just how much it hurts. Their
incomes, savings and life-
styles are being assailed by
a whole group of aches and
pains. . . . The stock market
has scarcely been so shaky
since 1929.”
“I want to say we’re in a
recession, but that’s not a
strong enough word. In some
regions it’s a depression.”
1
2009 – Worst Year Ever?
June 1, 1970
“On Wall Street, the
most unnerving
stock market
reports since the
Depression 1930s
became daily more
dismal.”
Nov. 2, 1987
“[T]he unimaginable
happened: a collapse on a
scale never seen before—no,
not even in 1929. Prices went
down, down, down, swiftly
wiping out an entire year's
spectacular gains. ‘I just can’t
believe that this is happening,’
moaned one trader, as he
took nonstop sell orders.”
Sept. 9, 1974
“The U.S. is afflicted by a
massive economic migraine, and
more than 200 million Americans
know too well just how much it
hurts. Their incomes, savings
and life-styles are being assailed
by a whole group of aches and
pains. . . . The stock market has
scarcely been so shaky since
1929.”
Oct. 15, 1990
“I want to say we’re
in a recession, but
that’s not a strong
enough word. In
some regions it’s a
depression.”
Source: TIME Magazine and Weston Wellington at
Dimensional Fund Advisors (DFA).
2
Global Recession and Tight Credit Markets Have Challenged
Airlines in 2009 With Distinct But Related Effects

Recession Global recession has already slashed demand for

Impacts passenger and cargo air travel
– Demand is falling more rapidly in business and premium
sectors, separating winners and losers and creating
opportunities for nimble airlines

Credit The credit crunch has increased the cost of

liquidity while making cash reserves more
Impacts important for airline survival
– Facing higher costs for all types of borrowing,
successful strategies will leverage good credit
as well as commercial and operational strategies
to conserve cash

3
These Are Challenging Times, But Not Uniquely So (Yet)

Percent Change During Recessions

US Economy / US Airline Industry
10% 8.8%
7.6%
8%
6.3%
6%

4%
2%
0.1%
0%
-2% -0.5% -0.2%
-4% Recessions Since 1973** Current Recession***
-6%
-5.8% -5.8%
-8%
Major US Airlines US Inflation US Real GDP US Unemployment
Net Profit Margin*

* Only includes data starting 1977 through Q3 08. Goodwill impairments of DL, NW & UA have been adjusted out
** Past recessions: Nov 73-March 75, Jan 80-Nov 82, July 90-March 91, March 2001-Nov 2001
*** Current Recession: Dec 2007-current
Source: Form 41, Bureau of Economic Analysis, Bureau of Labor Statistics, US Inflation Calculator
4
Long Term, Air Traffic Growth Has Been Remarkably Resilient,
Briefly Interrupted by Economic Shocks and Recessions

Historical
Historical World
World Traffic
Traffic and
and GDP
GDP Growth
Growth
Indexed Indexed:
Indexed: Base:
Base: 1970
1970 == 100
100
RTKs GDP
RPKs Growth
1,200 9%
SARS,
2nd Gulf War RTKs
1,000 U.S. 8%
Deregulation
Oil Crises Asian Crises RPKs
800 6%
Recession 1st Gulf War

600 5%
Sept. 11

400 3%

200 2%

0 0%
'70 '75 '80 '85 '90 '95 '00 '05 ‘07 ’09F

Source:
Source: IATA
IATA Economics
Economics Briefing,
Briefing, December,
December, 2008;
2008; Airline
Airline Monitor,
Monitor, July,
July, 2008;
2008; Boeing
Boeing
and
and International
International Monetary
Monetary Fund
Fund (“IMF”)
(“IMF”) World
World Economic
Economic Outlook,
Outlook, October
October 2008.
2008. 5
 U.S. Carriers Dramatically Cut Capacity Ahead of the Expected
Demand Drop, But Other Regions Have Not Responded in Kind

Change in Scheduled Seat Capacity

YOY November 2008 – March 2009

U.S. Carriers European Carriers Asian Carriers

10% 10% 10%
8% 8% 8%
6% 6% 6%
4% 4% 4%
2% 2% 2%
0% 0% 0%
-2% -2% -2%
-4% -4% -4%
-6% -6% -6%
-8% -8% -8%
-10% Network Carriers -10% LCCs -10% India/China
-12% LCCs -12% Network Carriers -12% Pacific Rim
-14% -14% -14%
Nov
2008Dec Jan Feb Mar
2009 Nov
2008Dec Jan Feb Mar
2009 Nov
2008Dec Jan Feb Mar
2009
NOV DEC JAN FEB MAR NOV DEC JAN FEB MAR NOV DEC JAN FEB MAR
Region
-7.4% -11.2% -7.1% -5.5% -6.7% -0.6% -1.1% -2.0% -0.3% -1.7% 3.1% 1.8% 3.2% 0.8% 1.0%
Change

Note: U.S. network carriers include AA, CO, DL, NW, UA, and US; U.S. LCCs include B6, F9, FL, and WN.
European network carriers include BA, LH, and AF/KL; European LCCs include AB, FR and U2.
Asian Pacific Rim carriers include CX, KE, NH, JL, SQ; India/China carriers includes 9W, AI, CA, CZ, HU and MU.
Source: OAG.
6
As a Result, Many Forecasts Now Expect the U.S. Industry to Post
Profits in 2009, While Other Regions Take Longer to Catch Up

Global Airline 2009 IATA

Operating Profits Regional Profit Forecasts
USD billions
North America
$24 84% Asia
$19.7 $3.6 Bn 0%
$20
–$0.6 Bn
$16
$15.0

$12

$8
$4.3 $3.9
$4 $1.1
$0
Europe
16%
($4) $0.7 Bn
($8)

($12)

($16)

2005 2006 2007 2008F 2009F

Source: IATA, December 2008 Financial Forecast; ICAO data to 2007.

7
Amidst the General Decline, Premium and Business Traffic
is Falling Much More Rapidly Than Leisure Traffic

YoY Growth in Passenger Traffic

January 2007 – December 2008

10%
8%
Economy
Massive Premium Traffic and
6%
4%
Yield Declines in High-Value
2%
International Markets
0% Premium Yields Are Down
-2%
-5.3%
an Estimated 9%
-4%
-6% North Atlantic -8.8%
-8%
Within Far East -25.1%
-10% Premium -13.3%
-12% North/Mid Pacific -19.7%
-14%
Jan Apr Jul Oct Jan Apr Jul OctNov
Within Europe -16.3%

2007 2008

Source: IATA Premium Traffic Monitor: http://www.iata.org/whatwedo/economics/ptmarchives.htm, Rothwell, Steve, “British Airways to Report Loss on Traffic,
Currencies.” Bloomberg.com, Brothers, Caroline, “European airlines’ decline in premium ticket sales hurts earning.” International Herald Tribune. Q4 2008 UAL
Corporation Earnings Conference Call 8
Recent U.S. Data Shows Traffic On Short-Haul Business Routes
Falling More Rapidly Than On Long-Haul and Leisure Routes

Change in Change in
Routes Response Passengers1 Seats1 Net Effect
East Coast
BIZ (17.6%) (7.0%) (10.6%)
Shuttle Traffic down
much more
Dallas- than capacity
BIZ (17.0%) (7.1%) (9.9%)
Houston

MIX Las Vegas (15.9%) (15.1%) (0.8%)

(Hub) Traffic down
same as
LEISURE Mainland –
capacity (19.6%) (15.1%) (4.5%)
(Upmarket) Hawaii

MIX Transcon (14.8%) (15.7%) 0.9%

Traffic down
less than
Northeast – capacity
LEISURE (11.1%) (5.4%) (5.7%)
Florida

1/ November 2008 over November 2007.

Source: US DOT Form T-100.

9
Hotel Data Also Shows Steeper Declines in the
Luxury Segments

Year-Over-Year Change in Occupancy

United States Hotel Revenue per Available Room

Global Hotel Occupancy YoY, 8-14 February 2009
December 2008
Upper
Luxury Upscale Upscale Midscale Economy
0%
Americas (-6.6%)
-5%

Asia Pacific (-16.0%) -10%

-15% -12.7%
-13.6%
-15.1%
Europe (-7.7%) -20% -18.2%
-25%
Middle East (-10.0%) -30%
/ Africa -28.6%
-35%

Note: U.S. results exclude independents.

Source: Smith Travel Research, Inc., Weekly Hotel Report (February 19, 2009); STR Global,
Press Release (February 6, 2009). 10
Even Before This Downturn, Airlines Were Building Up
Their Cash Positions
Days
Days Cash
Cash at
at Quarter-End
Quarter-End
Q3
Q3 2000 vs. Q3
2000 vs. Q3 2007
2007
Š Average cash holdings for U.S.
Average Average
2000 2007 carriers up to 112 days from 82
82 112 at the peak of the last business
78 cycle
AirTran 84

132
– At the end of Q3 2007 Lufthansa
JetBlue 127 held about 100 days
119
American 110
– High fuel prices in summer 2008
79 Q3 2007 depleted some reserves: at end
Delta 60 Q3 2008, U.S. carriers’ holdings
110
Q3 2000 were approx. 90 days
Continental
84

Hawaiian 71
101
Š Even in good times, this cash
United
120 is expensive to carry – roughly
74
$1.5b per year for this group
110
Southwest
61
161
US Airways 69

0 50 100 150 200

Source: Form 41. Cash position calculated as the sum of cash and near-cash assets (cash, short-term investments, notes
receivable, accounts receivable and pre-paid expenses). Cash expenses calculated as the sum of operating expenses and net
interest expense less depreciation and amortization. Cost of cash estimate based on a WACC of 8%. 11
However, the Cash Position of U.S. Airlines Has Severely
Diminished in the Last Two Quarters

Days of Cash to Cover Operating Expenses

Allegiant Air 164.1

150.3
Delta/Northwest 83.9
76.5

JetBlue 78.7
69.2

Southwest 66.0
66.0

Continental 68.7
64.1

American 55.8
48.6 Restricted and Unrestricted
60.1 Days of Cash
AirTran
47.8 Unrestricted Days of Cash
United 36.3
35.3

US Airways 49.7
29.4
0 50 100 150 200

Source: SEC Filings as of December 2008, except Air Canada from their latest Annual Report
12
High Cash Balances Are Critical to Survival

Š Helps airlines weather demand

shocks

Š Allows airlines to outlast fare wars,

and therefore discourages predators
in the first place

Š Signals to suppliers and capital

markets that the airline will survive,
reducing the cost of all kinds of
borrowing
– Credit ratings
– Borrowing covenants
– Supplier credit terms
– Avoiding credit card holdbacks

13
On Average, Traffic at U.S. Airports Declined by 3.3%
from 2007 to 2008

Percent Change In Enplaned Passengers

CY 2007 vs. CY 2008
0%

-1%

-2%

-3%
-2.8%
-4% -3.4% -3.3%

-5%

-6%
-5.4%
Large Hubs Medium Hubs Small Hubs Total
Total

Note: Includes: May Not Include All Airports in Each Hub Grouping, But Includes All Major Airports (30 large, 30 medium and 32 small hubs)
Source: Airport Records
14
Among the Largest Airports, Traffic Has Declined Further

Percent Change In Enplaned Passengers at Top Large Hub Airports

January 2009 vs. January 2008

ORD LAX JFK SEA DEN ATL

0%

-0.8%
-3%
-2.7%

-6% 2.8%
-6.1% -5.8% Standard for
Large Hubs
-9%

-12% -10.6%
-12.4%
-15%

Source: Airport Records

15
Cargo Volume’s Decline is Even More Dramatic

Percent Change In Freight at Top Large Hub Airports

January 2009 vs. January 2008

JFK ORD LAX ATL DEN SEA

0%

-10%
-8.7%
-13.2%
-20%

-24.3% -24.2%
-30% -28.1%

-34.1%
-40%

Source: Airport Records

16
The Drop in Traffic Exceeds the Reduction in Capacity

Percent Change in RPMs -15.4%

-19.9% Frontier
and ASMs for Selected
-14.8%
Major and LCC Airlines -17.5% Northwest
February 2009 -15.9%
-17.2% United
-9.1%
-13.6% AirTran
-10.1%
-13.5% American
-9.4%
-13.1% Continental
ASMs -9.3%
-9.3% US Airways
RPMs -5.5%
-8.3% JetBlue
-4.5%
-7.6% Delta
-6.5%
-6.0% Southwest
1.9%
Allegiant Air 6.3%

-25% -20% -15% -10% -5% 0% 5% 10%

Source: Airline Reports

17
The Drop in Traffic Exceeds the Reduction in Capacity

Percent Change in RPMs and ASMs for All U.S. Carriers

February 2009

Network Carriers Low Cost Carriers Total

0%

-3%

-6%
-6.0%
-6.9%
-9% -8.4%
-9.0%
-10.3%
-12% -11.1% RPMs ASMs

-15%

Source: Airline Reports

18
So, Where Are
We Going?

19
So, Where Are
We Going?

20
No End In Sight – Latest Reports Show Unemployment
Worsened

Underemployment – Devastating!
9.0M

3.2M

8.5%

694K

March Total Unemployment Working P/T,

2009 Unemployed Rate Unable to Find F/T
21
Versus…

Š “Fears ebb”
Š Dow ends above 8000 in best
four-week run since 1933

Š Pace of decline in auto sales

has slowed

Š Houses are beginning to sell

Š Accounting rule of mark-to-market
reversed

Š Consumer spending leveled off

Š Government spending surge

22
What’s to Come?
“Airlines Hopeful of
Summer Upturn”
Air Canada
Likely to Need
Court Protection

23
24
25
No End In Sight – Latest Reports Show Unemployment
Worsened

Underemployment
– Devastating!
13.2M

9.0M

8.5%

694K

March Total Unemployment Working P/T,

2009 Unemployed Rate Unable to Find F/T
26