AIRLINES FINANCIAL MONITOR

KEY POINTS

October-November 2011

Airline share prices down 40% this year, on market pessimism about future prospects; But backward-looking third quarter airline EBIT of $12 billion shows a reasonable performance so far; Jet fuel prices were back up above $130/b, despite economic gloom, as the supply squeeze persists; Air freight markets are in clear decline, as business confidence falls, but air travel is still trending higher; Asset utilization has been kept high in passenger markets, so far, but has fallen sharply in freight markets; Also helping profitability was a stabilization of breakeven passenger load factors, by rising yields and nonfuel cost efficiencies. But the environment over the next few quarters looks much more challenging.

Financial indicators
Airline share prices down 40% so far this year, on market pessimism about the future
Bloomberg Airlines Index Source: Bloomberg 300

US $ based index equal to 100 in 2000

250

Asian Airlines
200 European Airlines

Airline share prices, according to the Bloomberg global index, are down 40% so far this year and fell 14% last month alone. Thats not too far away from the lows of early 2009, in the depths of the great recession. All regions have been similarly affected. Moreover, airline shares have fallen considerably further than other sectors. The FTSE Global All-Cap index was down 7% last month and is down 15% so far this year. In the worsening economic environment investors expect airline profits to be hit more than most sectors.

150

100 Worldwide Airlines

50 US Airlines

0 Jan/07

Jan/08

Jan/09

Jan/10

Jan/11

But looking backwards, Q3 airline profits show a reasonable performance so far

In US $ Million # Airlines Q3 2010 Q3 2011 Operating Net post-tax Operating Net post-tax profit profit profit profit North America 3971 2409 3182 898 Asia-Pacific 4352 3495 3487 1596 Europe 4703 2867 4449 2744 Latin America 513 343 518 -553 Middle East 1022 1007 286 271 Africa 30 18 11 21 Sample total 14591 10139 11933 4977

12 22 17 4 4 1 60

In fact during Q3 airlines did quite well, with a sample of 60 airlines reporting net profits of $5 billion. Profits are down on last year, but only by 20% at the EBIT level. In Europe, where the economic outlook is dire, airlines limited the decline in Q3 profits to 5%. However, these are backward-looking indicators. Financial markets try to make forward-looking assessments. The future does look considerably worse than the situation that generated these third quarter profits.
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IATA Economics www.iata.org/economics

Fuel costs

Airlines Financial Monitor October-November 2011

Jet fuel prices stay high, despite the economic gloom, as supply is squeezed
200 180 160 140 120 100 80 60 Crude oil price (Brent) 40 20 Jan07 Jet fuel price

Jet Fuel and Crude Oil Price ($/barrel) Source: Platts, RBS

Despite the deterioration in economic conditions and in the outlook, jet fuel prices rose during the past month back above $130 a barrel. Brent crude stayed around the $110 a barrel level. Oil markets are tight because they have been subject to a supply squeeze for some time, due to a combination of lower than expected non-OPEC supply, the loss of Libyan supply and OPECs lack of response. Forward cover of oil inventories at the global level has fallen by 9 days since the start of 2009, which shows the extent of the tightness.

Jan08

Jan09

Jan10

Jan11

Improve profitability through fuel efficiency consulting www.iata.org/fuelconsulting

Demand
Air freight has declined significantly but air travel continues to expand close to trend
Total air travel and air freight volumes 450 430 16 410
RPKs per month, billion
Seasonally adjusted Source: IATA

17

RPKs 15
FTKs per month, billion

390 370

14 350 330 310 FTKs 13

Air freight and air travel markets are moving in different directions at the moment. The air freight market has shrunk 5% since mid-year, as world trade has started to deteriorate and shippers switch away from more costly air transport, in anticipation of recession. Air travel so far shows little sign of reflecting the slump in business and consumer confidence in many economies. The strongest travel markets are currently within-Europe or linked to Europe, which looks a fragile foundation for future growth.

12
290 270 2007 2008 2009 2010 2011 11

Capacity
Air freight capacity stable but passenger capacity being added at an unabated pace
Total passenger and freight capacity
Seasonally adjusted Source: IATA

35 ASKs

560 34

540
33 520 AFTKs 32

500

AFTKs per month, billion

ASKs per month, billion

Air freight capacity has stabilized as reductions in freighter capacity have offset new belly capacity coming onstream from the passenger fleet. However, utilization rates for freighters are down sharply, adversely affecting cargo profitability, Passenger capacity has trended higher unabated. Twin aisle aircraft utilization has dipped recently, but generally airlines have been able to keep asset utilization in the passenger business high. This was reflected in Q3 profits.

480

31

460

30

440 2007 2008 2009 2010 2011

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IATA Economics: www.iata.org/economics

Airlines Financial Monitor October-November 2011

In-service fleet expanding seat numbers at a much slower 2% pace in October

Airline fleet development
Source: Ascend

% change in seats m-o-m

Deliveries

Other factors

Storage activity

Change in operating fleet (a/c per month)

0.8% 0.5% 0.2% -0.1% -0.4% -0.7% -1.0%

% change in airline seats

Although new deliveries of jets and turboprops remain close to a monthly rate of 100, airlines started to put more aircraft into storage in September and October. The number of seats added to the fleet had been growing at a rate of 6-8% in the middle of the year, threatening an excess of capacity. This rate of growth has slowed to 0.2% a month or an annual rate of 2-3%, which will have helped passenger airlines match capacity with demand. If air travel slows sharply, as we expect, this matching will become more difficult.

Predict future demand and minimize investment risk. Airline Industry Forecast 2011-2015 now available www.iata.org/forecast

Load factors are still high in passenger markets but are sliding in freight

Total load factors on passenger and freight markets Seasonally adjusted Source: IATA

84%
82% 80% 78% 76% 74%

52%
50% 48% 46%
Freight load factor, % AFTKs

Passenger load factor, % ASKs

Freight load

As well as lower freighter aircraft utilization, freight load factors have fallen substantially. Freight capacity has been stabilized recently but shrinking demand had meant load factors are now 5% lower than the early 2010 peak. They are also now below pre-recession levels. In sharp contrast, at the end of Q3 passenger load factors were still close to all-time highs. Unabated growth in air travel, so far, has been matched with careful capacity additions keeping the utilization of seats high. High passenger load factors helped unit revenues and profitability in Q3.

Passenger load factor

44% 42%

72%
70% 2007 2008 2009 2010 2011

40%
38%

Yields
Passenger yields still trending higher, but at a slower pace

Average international return fare and US passenger yields (seasonally adjusted)

Source: ATA, IATA

15.0 14.5

800

Yield (cents/RPM)

750

13.5 13.0 700 12.5 12.0 11.5 11.0 10.5 2007 2008 2009 2010 2011 600 Average international return fare (right scale) 650

Fare (US$/passenger)

14.0

US airline yield

Relatively tight passenger markets have allowed airlines to reflect high fuel costs in passenger yields. This has been evident for US airlines, which have been cutting capacity and keeping load factors highest. However, the opposite is the case on freight markets, where yields have been falling. Through to Q3, rising yields and nonfuel cost efficiencies meant breakeven load factors were stable. However, a deteriorating economic environment and a supply squeeze on oil may well raise future breakeven load factors.
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IATA Economics: www.iata.org/economics

Airlines Financial Monitor October-November 2011

Data tables
Year on Year Comparison
RPK

October 2011 vs. October 2010

ASK PLF FTK AFTK FLF RPK

YTD 2011 vs. YTD 2010

ASK PLF FTK AFTK FLF

Africa Asia/Pacific Europe Latin America Middle East North America

1.3% 4.4% 6.4% 5.8% 7.3% -1.1% 3.6%

3.5% 6.5% 7.8% 10.2% 8.9% -0.3% 5.3%

68.6% 77.3% 79.4% 73.4% 74.7% 82.3% 78.5%

8.7% -7.7% -4.0% 7.7% 3.0% -5.2% -4.7%

7.5% -2.6% 3.0% 2.5% 13.0% 0.2% 1.3%

27.3% 58.8% 48.8% 42.3% 43.8% 34.7% 46.5%

0.8% 5.3% 9.3% 11.9% 8.0% 2.6% 6.0%

2.9% 5.7% 9.9% 9.6% 8.8% 3.0% 6.5%

67.5% 77.1% 78.5% 75.0% 75.5% 82.3% 78.4%

-2.0% -4.3% 1.9% 6.7% 7.9% 0.3% -0.5%

2.7% 0.5% 6.8% 3.8% 13.2% 4.4% 4.4%

25.3% 57.9% 48.5% 40.6% 43.7% 34.2% 45.8%

Total Market

RPK: Revenue-Passenger-Kilometers; ASK: Available-Seat-Kilometers; PLF: Passenger-Load-Factor; FTK: Freight-Tonne-Kilometers; AFTK: Available Freight Tonne Kilometers; FLF: Freight Load Factor; All Figures are expressed in % change Year on Year except PLF and FLF which are the load factors for the specific month.

IATA Economics 30 November 2011

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IATA Economics: www.iata.org/economics