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To represent, lead and serve the airline industry

Airlines worldwide:
The value they create and the
challenges they face

Brian Pearce
Chief Economist
www.iata.org/economics December 2013


Key points (value created/challenges faced)
Great value for consumers slide 3-4
$6.4 trillion of goods go by air cargo slide 5
Global supply chains (Dell, Apple) depend on air slide 6
Wider economy get large benefits slides 7-8
Massive expansion in demand ahead slide 9
Requires $4.8 trillion investment finance slide 10
But airline investors earn nothing slides 11-12
Ancillaries allow marginal profit, no more slide 12
Periods of profit short-lived slide 13
Market pressures for better profits worldwide slide 14
Not just problem of mature, legacy airlines slide 15
Porter 5-forces intense competition slide 16
Value chain profitability very unbalanced slide 17
Rising cost of infrastructure slide 18
Governments part of the problem slide 19
Cost threats from regulation slide 20
Dealing with climate change slide 21-24

IATA Economics www.iata.org/economics 2
The value proposition for air travel remains strong
Its safer, its greener and its still a bargain
IATA Economics www.iata.org/economics 3
Source: Constructed from worldwide data from ICAO and IATA
The quality of air service has improved
Even in the past 5 years the main facets of airline service have got better

IATA Economics www.iata.org/economics 4
2007 2008 2009 2010 2011 2012 2013
On-time arrival rate*
European flights** 77.9% 78.3% 82.1% 75.8% 82.1% 83.4% 83.9%
US domestic flights*** 73.4% 76.0% 79.5% 79.8% 79.6% 81.9% 78.8%
Mishandled bags per 1000 passengers
Worldwide^ 19 15 11 12 9 9
Cancelled flights
European network airlines^^ 1.40% 1.38% 1.08% 3.43%^* 0.94% 1.00% 1.23%
US domestic flights^^^ 2.16% 1.96% 1.39% 1.76% 1.91% 1.29% 1.42%
* % flights arriving within 15 minutes scheduled time
** http://www.eurocontrol.int/articles/coda-publications
*** http://airconsumer.ost.dot.gov/reports/; table 1A YTD December figures
^ SITA Baggage Report 2012
^^ AEA
^^^ http://www.transtats.bts.gov/HomeDrillChart.asp; On time performance - Flight delays at a glance
^* Impacted by airspace closures due to Icelandic volcanic ash cloud
Over $6 trillion of goods annually are now carried by air
35% of world trade is carried by air; a key enabler of globalization
IATA Economics www.iata.org/economics 5
Source: ICAO, IATA, WTO. Value carried by air=world merchandize exports*35% (35% estimated by The Colography Group, 2005)
Air connectivity has enabled global supply chains
Dell, Apple, Amazon would look very different without rapid air freight
IATA Economics www.iata.org/economics 6
Businesses can
set up much more
efficient global
supply chains
Dell manufacturing plant
Austin, Texas
Mexico
Keyboards
France
Soundcards
China
Power supplies
Hong Kong
Video Cards
Microprocessors
Singapore
SCSI Cards
Disk Devices
Japan
RAM Chips
CD-ROM Drives
Taiwan
Network Cards
Monitors
Cooling Fans
Malaysia
Floppy Drives
Source: Dell, IATA
0.0% 5.0% 10.0% 15.0% 20.0%
Nigeria
Poland
Japan
Czech Republic
Romania
China
Russian Federation
Hungary
Brazil
Denmark
India
Colombia
Italy
Ecuador
Austria
Peru
Mexico
Latvia
Korea
Philippines
Switzerland
Norway
Taiwan
Germany
Israel
Belgium
Netherlands
South Africa
Saudi Arabia
Portugal
WORLD AVERAGE
Luxembourg
Malaysia
Kenya
France
Sweden
Finland
Chile
Turkey
United States
United Kingdom
Spain
Jordan
Canada
Ireland
Greece
Australia
Egypt
Hong Kong
Singapore
Thailand
New Zealand
Iceland
United Arab Emirates
Cyprus
Lebanon
Malta
Aviation and tourism GVA as a % GDP
Aviation plays a major role in most economies
Footprint of aviation and tourism measured by the sectors GVA as % GDP
IATA Economics www.iata.org/economics 7
Source: Oxford Economics. http://www.benefitsofaviation.aero/Pages/default.aspx Note: GVA = Gross Value Added which is
mainly wages and profits. GDP = Gross Domestic Product
Size of aviations GDP footprint linked to development
The size of aviations GDP footprint depends, among other factors, on the
countrys stage of economic development (GDP per capita)
IATA Economics www.iata.org/economics 8
Source: Oxford Economics http://www.benefitsofaviation.aero/Pages/default.aspx
Massive expansion ahead for emerging markets
Expanding middle classes drive both travel and air cargo flows
Serving this demand will require a big expansion of investment
IATA Economics www.iata.org/economics 9
Global middle income class in 2009 and prediction for 2030
North America
Central &
South America
Europe
Middle East &
North Africa
Sub Saharan
Africa
Asia Pacific
100mn
500mn
1bn
2009
2030
Source: OECD, Standard Chartered Bank
Market expansion will require $4.8 trillion investment
Airlines will need to raise funds to invest in 35,000 new aircraft over 20 years
IATA Economics www.iata.org/economics 10
Source: Boeing Current Market Outlook
Capital
cost
$4.8
trillion
Even in the good years airline returns are inadequate
Below WACC returns indicate intense competition and fragile financing
IATA Economics www.iata.org/economics 11
Source: IATA
Revenue per passenger exceeds cost by just $2.56 (1%)
Excluding $12 ancillaries revenues would have lagged costs by $10 (-5%)
IATA Economics www.iata.org/economics 12
Source: Ancillary revenues from Idea Works 2012 estimate, other data IATA. Costs include operating items and debt interest.
2012 worldwide airline financial results per departing passenger
0
20
40
60
80
100
120
140
160
180
200
220
Net profit
$2.56
Costs
$212.04
Costs $212.04
Revenues
$214.64
Cargo & other $31.30
Air fare $171.20
Ancillary $12.14
Periods of profit in the industry are typically short-lived
Average 1990-2012 net profit margin for airlines worldwide was 0.0%!
IATA Economics www.iata.org/economics 13
Source: ICAO, IATA
Airlines subject to market pressure to raise profitability
Majority of airlines are now privately owned in most regions
IATA Economics www.iata.org/economics 14
0%
20%
40%
60%
80%
100%
120%
N America Europe L America Africa Asia-Pacific Middle East
Ownership of airlines, weighted by ASKs
Source: various
Private Government
Source: IATAs Vision2050 report http://www.iata.org/pressroom/facts_figures/Documents/vision-2050.pdf
Lack of profitability not due to business model or region
Airlines generating average EBIT margins of more than 8% during the 2000s
IATA Economics www.iata.org/economics 15
0% 5% 10% 15% 20% 25%
Ryanair
Republic Airways
COPA
Allegiant
GOL
Air Arabia
Turkish
Aeroflot
Pinnacle Airlines
Emirates
Singapore Airlines
Southwest Airlines
Aegean
LAN
INDUSTRY
EBIT margin %, 2000-2009
Average EBIT margins, 2000-09
LCC
Full service
long-haul
Regional
L America
N America
Mid East
Asia-Pacific
Europe
Source: IATA Vision2050 report http://www.iata.org/pressroom/facts_figures/Documents/vision-2050.pdf
Porters 5-forces show the high intensity of competition
Four out of five rate high with the fifth medium and rising
IATA Economics www.iata.org/economics 16

Source: IATAs Vision2050 report http://www.iata.org/pressroom/facts_figures/Documents/vision-2050.pdf
Profitability is very unbalanced across the value chain
Airlines sit in the middle of the value chain making the least returns
IATA Economics www.iata.org/economics 17
ROIC excluding goodwill of sample, period 2004-2011, %
20
7
0
5
10
15
20
25
30
35
40
45
44
4
15
9
6
9
11
9-11
Cost of
capital

9-11 7-9 6-8 6-8 7-10 10-11 8-11 7-8
Source: McKinsey
The rising cost of airports and air navigation services
Payments by airlines and passengers for infrastructure services
IATA Economics www.iata.org/economics 18
Source: Aeronautical revenues ACI aeronautical revenue data 1997-2011. ANS charges ATM-Cost Effectiveness (ACE) Benchmarking
reports, Eurocontrol and ATM Report and Directory 2012, CANSO. AATF levies FAA. DHS levies TSA.
2007-2011
Rise in infrastructure costs: 28%
Rise in passenger numbers: 17%
Rise in infrastructure costs per passenger: 9%
Rise in OECD CPI: 9.3%
Rise in airline revenues per passenger: 0.1%
Governments are part of the problem
Porters 5-forces model identifies how government intervenes in the market
IATA Economics www.iata.org/economics 19

12 Copyright 2011 Professor Michael E. Porter
Threat of Substitute
Products or Services
Threat of New
Entrants
Rivalry Among
Existing Competitors Bargaining Power
of Suppliers
Subsidies and export-financing
for aircraft manufacturers
pushes capacity growth and
entry
Labor market regulations give
power to unions and create
advantages for new entrants
Privatization of airports and
ground handling services has
raised costs
Government-mandated fees
(Over flight rights, air control,
security fees) raise costs
Fly national rules
for government
employees and
government
contractors distort
market choices
Some legal entry barriers remain (domestic,
international) which limit consolidation
Policies influence allocation of slots/gates
Safety standards create limited barriers
Government financing for substitutes (e.g., high-
speed trains)
Inconvenience and delays created by safety
procedures and air traffic control for airline travel
Competition rules limit consolidation
Restrictions to FDI/M&A limit consolidation
Government ownership leads to uneconomic
decisions, though privatization is increasing
Public service requirements require serving
unprofitable markets
Bankruptcy laws and bail-outs allow
uneconomic carriers to persist
Environmental standards and taxes raise
costs
Safety and air traffic control procedures
reduce service quality and create costs
Safety guidelines and technical standards limit
potential for differentiation
Bargaining Power
of Channels
Consumer protection
laws on pricing
transparency and
delays raise airline
costs
Bargaining Power
of Buyers
Source: IATAs Vision2050 report http://www.iata.org/pressroom/facts_figures/Documents/vision-2050.pdf
Existing and proposed regulation risk significant cost
A selection of regulations/policies illustrating industry and market-level costs
IATA Economics www.iata.org/economics 20
Source: IATA
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
Airport
regulation
Budget
deficits
Passenger
rights
Climate
change
Congestion
policy
%

a
v
e
r
a
g
e

t
i
c
k
e
t

p
r
i
c
e
Policy risk impact
Austrian
tax
German
tax
Climate
fund
levy
EU ETS
LHR
2012-14
Delhi
ACSA
LHR
congest
-ion
pricing
CDG
congest
-ion
pricing
Europe
Total cost for
industry
$1.5bn
Industry is addressing the climate change challenge
Lower compliance cost for Carbon Neutral Growth from 2020 requires
government to deliver on infrastructure and biofuel support
IATA Economics www.iata.org/economics 21
Source: IATA Aviation Carbon Model. Note revisions to IEA aviation fuel data have slightly increased the emissions profile from previous estimates.
400
500
600
700
800
900
1000
1100
1200
1300
1990 1995 2000 2005 2010 2015 2020 2025 2030
Worldwide CO
2
emissions from commercial air transport, mT per year
689mT in 2012
790mT in 2020
235mT
offsets
CNG2020
cap 790mT
1240mT CO
2
in 2030
after fleet renewal and
higher load factors
Operations
Infrastructure
Biofuels
Airlines bought 25,000 new aircraft during 1990-2012
Spending equivalent of $3 trillion when valued at todays aircraft prices
IATA Economics www.iata.org/economics 22
0
5,000
10,000
15,000
20,000
25,000
30,000
0
200
400
600
800
1,000
1,200
1,400
1,600
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
New aircraft deliveries, 1990-2012
Aircraft deliveries (left scale) Cumulated deliveries (right scale)
Source: Ascend
35
40
45
50
55
60
65
70
75
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
F
u
e
l

e
f
f
i
c
i
e
n
c
y
,

l
i
t
r
e
s
/
1
0
0

T
K
P
Fuel efficiency of commercial airlines worldwide, in litres/100 RTK
46%
improvement
1990-2012
Airlines improved fuel efficiency by 46% over 1990-2012
Fuel efficiency measured in litres of fuel burned per 100 RTK
IATA Economics www.iata.org/economics 23
Source: IATA calculations. Note revisions to IEA aviation fuel data have increased fuel efficiency gains from previous estimates.
300
400
500
600
700
800
900
1000
1100
1200
1300
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
m
i
l
l
i
o
n

t
o
n
n
e
s

C
O
2
CO
2
from commercial airline fuel burn, actual versus frozen technology
1293mT
689mT
CO
2
if industry fuel efficiency had
remained fozen at 1990 levels
Actual airline industry CO
2
emissions
Cumulative CO
2
emission savings
of over 5 billion tonnes during
1990-2012
During 1990-2012 airlines saved 5 billion+ tonnes CO
2
Comparison of actual emissions with the level had fuel efficiency remained frozen
IATA Economics www.iata.org/economics 24
Source: IATA Aviation Carbon Model

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