The Economic Climb-Out for U.S. : Global Competitiveness and Long-Term Viability

ATA Office of Economics January 29, 2011 The Air Transport Association of America, Inc.

Air transport has become an essential economic and social conduit throughout the world. Beyond the benefits of fast and inexpensive transcontinental travel, air transport also has become a vital form of shipping for high-valued items that need to come to market quickly… — World Bank (www.worldbank.org/airtransport)

Combination Services All-Cargo Services Associate Members AirTran Airways ABX Air Air Canada ASTAR Air Cargo Air Jamaica Worldwide Holdings * Evergreen Int’l Airlines FedEx Corporation UPS Airlines JetBlue Airways US Airways

* Includes Continental Airlines

www.airlines.org 2 OVERVIEW

• Safety of commercial travel exceeds other modes and continues to improve

• DOT statutory mission explicitly recognizes importance of industry viability and global competitiveness • A viable, competitive U.S. airline industry is good for the country, fueling jobs and growth • Numerous stakeholders benefit from a financially viable, competitive U.S. airline industry

• Competition among airlines remains intense

• Battlefield is increasingly global, with a relatively mature domestic market • U.S. airlines are financially weaker than many non-U.S. airlines

• To reinvest in product/people, airlines need substantially improved finances

• Competing in the global marketplace is essential for airlines and good for USA

www.airlines.org 3 The State of the Industry Fitch: ―2011 Outlook: U.S. Airline Balance Sheet Repair to Continue‖

. ―Fitch [Ratings] expects ratings for most U.S. airlines to improve in 2011, reflecting a modest strengthening of industry operating fundamentals and steady progress toward debt reduction and balance sheet deleveraging. As U.S. carriers look to unwind the lingering effects of historically weak returns, insufficient cash flow generation, and constrained liquidity, deployment of cash toward debt repayment will be essential if the ratings momentum witnessed in 2010 is to continue for another year.‖* . Much like the U.S. economy, U.S. airlines are climbing out of a deep hole and have a long way to go to be financially strong: (1) attain investment-grade credit and generate a return on invested capital in excess of cost of capital through a full business cycle . U.S. airlines are focused on shoring up balance sheets to reinvest in product, people and planes, and to weather the next fuel spike or economic downturn without significant reductions in personnel or service; the global aviation marketplace, where traffic growth is most promising, is increasingly relevant and intensely competitive . Restructuring has become a way of business – we’re in a period of continual reinvention

* Fitch Ratings, ―2011 Outlook: U.S. Airline Balance Sheet Repair to Continue‖ (Dec. 9, 2010)

www.airlines.org 4 U.S. Carriers: Competing in a Global Marketplace Selected M&A and/or Cross-Border Investment: 1995-Present

USA Non-USA Republic/Shuttle America Air France/KLM US Airways/America West Copa/AeroRepública SkyWest/Atlantic Southeast Lufthansa/Swiss Lufthansa/JetBlue* Air China/Cathay Pacific* Delta/Northwest Cathay Pacific/Dragonair Republic/Midwest Lufthansa/Brussels*/BMI/Austrian Republic/Frontier Avianca/TACA United/Continental British Airways/Iberia SkyWest-ASA/ExpressJet LAN/TAM Southwest/AirTran LAN/Aires*

Source: ATA and Deutsche Bank Global Research * Strategic investment but not full ownership or control

www.airlines.org 5 An Analyst/Investor View Source: Deutsche Bank Global Research (Jan. 13, 2011)

―Consolidation, in our review, represents a later stage for a mature industry that is seeking ways to address its financial volatility… Our view is that consolidation is part of a longer-term process that should ultimately allow the global airline industry to efficiently allocate capital and assets such that a positive return on invested capital can be achieved… On the surface, airlines pursue mergers as a means to improve profitability…and their competitive positioning via an expanded network. Longer-term, consolidation should improve industry viability while mitigating industry volatility and consequently lower its cost of capital.‖

Source: ―Global Airline Sector – Laying the Foundation for Global M&A,‖ Deutsche Bank Global Research (Jan. 13, 2011)

www.airlines.org 6 Air Travel Safer Than Other Forms of Intercity Transport U.S. Passenger Fatalities per 100 Million Passenger Miles, 1998-2007

0.75

0.04 0.04 0.01

Auto (1) Bus (2) Rail (3) Airline (4)

1. Passenger cars/taxis; drivers considered passengers; data from the NSC Fatality Analysis Reporting System 2. Does not include school buses; data from the NSC Fatality Analysis Reporting System 3. Data from the Federal Railroad Administration (FRA) 4. Large and commuter airlines, excluding cargo; data from the National Transportation Safety Board (NTSB)

Source: National Safety Council Injury Facts® 2010 Edition, 1998-2007 averages (most recent available)

www.airlines.org 7 Each Decade, U.S. Airline Safety Has Improved Markedly Fatal Accidents per Million Aircraft Departures in Scheduled Service

0.8810

0.5050

0.2919

0.1230

1970-79 1980-89 1990-99 2000-09

Source: ATA analysis of data from the National Transportation Safety Board

www.airlines.org 8 DOT Statutory Mission Explicitly Recognizes Importance of (and Role in) Industry Viability and Competitiveness

U.S. Code, Title 49, Sec. 40101. Policy, Subsection A: ―Economic Regulation‖

(6) placing maximum reliance on competitive market forces and on actual and potential competition — (A) to provide the needed air transportation system; and (B) to encourage efficient and well-managed air carriers to earn adequate profits and attract capital, considering any material differences between interstate air transportation and foreign air transportation. (14) promoting, encouraging, and developing civil aeronautics and a viable, privately- owned United States air transport industry. (15) strengthening the competitive position of air carriers to at least ensure equality with foreign air carriers, including the attainment of the opportunity for air carriers to maintain and increase their profitability in foreign air transportation. (16) ensuring that consumers in all regions of the United States, including those in small communities and rural and remote areas, have access to affordable, regularly scheduled air service.

www.airlines.org 9 A Viable, Competitive U.S. Airline Industry Is Good for The Country, Fueling Jobs and Economic Growth

“Aviation is the glue that keeps the global economy together. Without widely accessible and well-priced air travel, the global economy will quickly become less global.” — Dr. Mark Zandi, Chief Economist & Co-Founder, Moody‟s Economy.com (August 2008)

―The Economic Impact of Civil Aviation on the “Economic growth and prosperity are determined U.S. Economy‖ (FAA, Dec. 2009) in large part by access to the global economy. Commercial aviation helps drive: And, just as islands require bridges to the mainland….communities require bridges to the  $1.225 trillion/year in economic activity global economy. Air transportation is that bridge,  $371 billion/year in personal earnings  10.9 million jobs providing the necessary access for U.S. cities…to enjoy a „Virtuous Circle of Economic Growth.‟” Commercial aviation contributes:

 $731.5 billion/year to U.S. GDP “The Plane Truth About Air Service and Economic Development,”  5.2% of U.S. GDP Global Aviation Improvement Network, Booz Allen (March 2001) “Every day, the airline industry propels the economic takeoff of our nation. It is the great enabler, knitting together all corners of the country, facilitating the movement of people and goods that is the backbone of economic growth. It also firmly embeds us in that awesome process of globalization that is defining the 21st century.” — Daniel Yergin, Author, Commanding Heights: The Battle for the World Economy, in the ATA 2005 Economic Report

www.airlines.org 10 Commercial Aviation Drives Nearly 11 Million U.S. Jobs U.S. Job Impact by Aviation Activity, In Millions

Travel Arrangements 0.2

Air Transport 3.0

Visitor Expenditures Airport 5.9 Operations 0.6

Aircraft Manufacturing 1.1

Source: Federal Aviation Administration, “The Economic Impact of Civil Aviation on the U.S. Economy,” (December 2009)

www.airlines.org 11 Numerous and Varied Stakeholders Benefit From a Financially Viable, Competitive U.S. Airline Industry

Service Continuity, Job Security, Reinvestment in Product and People

Airline/Airport/Aerospace Workers Air Travelers and Shippers Hub Cities People Who’ve Never Flown Spoke Communities Agriculture Interests U.S. Treasury Manufacturing Sector Small Businesses Importers/Exporters Corporate America Travel and Tourism Aviation Suppliers Humanitarian/Relief Workers National Defense Medical/Emergency Personnel

www.airlines.org 12 Inter-Airline Competition Remains Intense

―The purpose of this study is to examine the competitiveness of the U.S. domestic airline industry following a period of unprecedented financial turmoil and considerable change in industry structure…. [T]he industry is more competitive now than at any other time in the 12-year period examined.‖

―One area of promise for the network airlines is the prospect for continued international expansion to provide support for their domestic networks. Although the airlines (and consumers) have benefited from the international network development enabled by the liberalization created by open skies agreements, the potential for much greater progress is large.‖

— Former DOT officials Randy Bennett, Patrick Murphy and Jack Schmidt, ―A Competitive Analysis of An Industry in Transition‖ (July 2007)

www.airlines.org 13 Economic Forces Continue Toll on Airline Jobs*

U.S. Passenger Airline Full-Time Equivalent (FTE) Employees in Thousands*

All-Time Peak (May 2001) = 544.4

530.9 530.9

509.0 509.0

499.3 499.3

478.1 478.1

476.4 476.4

461.9

454.8

446.8

442.4

442.0

440.6

433.1

431.7

430.3 430.3

426.8 426.8

417.9 417.9

413.6

403.4 403.4

394.2 394.2

379.7 379.7

378.1 378.1

Oct-10 Oct-90 Oct-91 Oct-92 Oct-93 Oct-94 Oct-95 Oct-96 Oct-97 Oct-98 Oct-99 Oct-00 Oct-01 Oct-02 Oct-03 Oct-04 Oct-05 Oct-06 Oct-07 Oct-08 Oct-09

* Full-time equivalent employees in thousands (see http://www.bts.gov/programs/airline_information/number_of_employees/)

www.airlines.org 14 The Lost Decade: Industry Climbing Out of a Deep Hole Net Income ($Billions) and Profit Margin (%) for U.S. Airlines*

$16.3

$0.6 $1.6 $3.6 (0.3%) (~4%)

3.2% 2.7% 1.9% ($1.5) 1.6%

($53.7)

1951-1960 1961-1970 1971-1980 1981-1990 1991-2000 2001-2010E

* All U.S. passenger airlines and cargo airlines reporting to DOT Form 41 P-12, Accounts 9899 and 4999

www.airlines.org 15 A Quarter or Two of Profit Will Not Suffice Meaningful Profitability Needed to Reinvest, Compete Abroad

EBITDAR* Profit Margins: U.S. Passenger Airlines 10% 5% 0% -5% -10% -15% -20% -25% -30%

-35%

1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10

Source: ATA analysis of DOT Form 41 reports * Earnings before interest, taxes, depreciation, amortization and rents; an approximate measure of a company’s operating cash flow based on data from the company’s income statement. Rent is included in the measure to evaluate the financial performance of airlines and other companies (e.g., casinos, restaurants) that have significant rental and lease expenses derived from business operations.

www.airlines.org 16 Doing Better and Doing Well Are Not the Same Thing

U.S. Unemployment Rate (9.4%) Real U.S. GDP Percent Trillions of Chained 2005 Dollars, SAAR 11 $13.5 10 $13.4 $13.3 9 $13.2 8 $13.1 7 $13.0 6 $12.9 $12.8 5 $12.7 4 $12.6

3 $12.5

1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010

1Q05 1Q06 1Q07 1Q08 1Q09 1Q10

Sources: Bureau of Labor Statistics (http://www.bls.gov/cps) and Bureau of Economic Analysis (http://www.bea.gov/national/index.htm#gdp)

www.airlines.org 17 DOT Airline Customer Service Metrics

2000 2007 2008 2009 1Q-3Q10 Flight Cancellations 3.30 2.16 1.96 1.39 1.75 (as % of sched. domestic departures) Taxi-Out* Times > Three Hours 2.92 2.22 1.76 1.40** 0.25** (per 10,000 domestic departures) On-Time Arrival Rate 72.6 73.4 76.0 79.5 79.8 (% of domestic flights within 00:15) Involuntary Denied Boardings 1.04 1.12 1.11 1.19 1.19 (per 10,000 passengers) Mishandled Bags 5.29 7.05 5.26 3.91 3.59 (per 1,000 domestic passengers) Customer Complaints 2.98 1.38 1.13 0.97 1.30 (per 100,000 systemwide passengers)

* Time elapsed between departure from the origin airport gate and wheels off ** Effective October 2008, BTS monthly reports on tarmac times included, for the first time, data from flights which were subsequently cancelled, diverted, and/or had multiple gate departures (see http://www.bts.gov/help/about_tarmac.html) Sources: Bureau of Transportation Statistics and DOT Air Travel Consumer Report (http://airconsumer.dot.gov/reports/index.htm)

www.airlines.org 18 Breakeven Load Factor Finally Below 80% Again Yields (Fares per Mile) Closing Gap to Unit Costs of Operation

90% Four-Quarter Moving Average 85%

80%

75%

70%

65%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Source: ATA Passenger Airline Cost Index

www.airlines.org 19 Airline Energy Costs Are High and Poised to Rise Average U.S. Price per Gallon of Jet Fuel

$2.72 $2.61

$2.20

$1.05

$0.59

1991-2000 2001-2005 2006-2010 2011 (EIA-F) 2012 (EIA-F)

Source: Energy Information Administration, including Short-Term Energy Outlook (Jan. 11, 2011) forecast of ―Jet Fuel Refiner Price to End Users

www.airlines.org 20 Jet Fuel Prices: Not Just a Crude Story Crack Spread (Refining Margin) Back to $20-$25/bbl Territory

$120

$110 Jet Fuel (Gulf Coast) $100

$90 CrackSpread

$80 Crude Oil (WTI) $70

$60

3-Jul-10

4-Apr-10

1-Oct-10

4-Jan-10

18-Feb-10 13-Feb-11

17-Aug-10

15-Nov-10

30-Dec-10

30-Mar-11 19-May-10

Source: ATA and Energy Information Administration

www.airlines.org 21 For U.S. Passenger and Cargo-Only Airlines, Fuel Expenditures Trending Up Despite Lower Consumption

$60 57.8 21 Billion Gallons $50 20

41.9 38.8 $40 37.4 19 33.2 32.3 $30 18 22.7 Billion Dollars $20 16.8 17 15.0 15.5 12.8 $10 16 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 YE 9/10 ($0.82) ($0.78) ($0.72) ($0.85) ($1.16) ($1.66) ($1.97) ($2.11) ($3.07) ($1.90) ($2.19)

Note: Value in parentheses below year is average price paid per gallon excluding taxes, into-plane fees, pipeline tariffs and hedging costs; YE = year ended Sources: ATA, Energy Information Administration, Department of Transportation

www.airlines.org 22 Tax Bite on a $300 One-Stop Round Trip* Growing Governmental Take Leaves Less Revenue for Carriers

1972 Taxes 1992 Taxes 2011 Taxes 7% ($22)* 13% ($38)* 20% ($61)*

TAX

AIRFARE

* Sample itinerary assumes one-stop domestic round trip with maximum passenger facility charge (PFC) per airport; $300 total price includes taxes and fees. Source: ATA analysis of federal tax code

www.airlines.org 23 “Special” Aviation Tax Burden* Exceeded $16B in 2010 In Addition to Typical Federal/State/Local Corporate Taxes (e.g., Income, Property)

2010 collections ($millions) from airlines $395 $351 $16,558 Federal Aviation Administration (FAA) $2,324 Department of Homeland Security (DHS) $7,261 U.S. Airports

DHS = $3.4B

$460 $599 $291 $1,808 $282 $2,787 FAA = $10.3B

* Federally levied/approved commercial aviation taxes/fees only; some taxes/fees shown include collections from non-U.S. carriers; PFCs reflect FAA estimate as of Nov. 2010 Sources: Department of Homeland Security, FAA, Office of Management Budget, Transportation Security Administration, ATA

www.airlines.org 24 Demand for Domestic Air Travel Has Not Recovered Domestic Passenger Revenue (¢) per $100 of U.S. Gross Domestic Product

75

70

65

60

55 Shortfall$34B =

50

45

2008 2001 2002 2003 2004 2005 2006 2007 2009 2010E

Source: ATA analysis of BEA and BTS data 1991-2000

www.airlines.org 25 The Price of Air Travel Has Not Kept Pace With U.S. Inflation The Price of Many Common Goods and Services Has Outpaced the CPI

Product (Unit) 2000 2009 % Change Grade-A Large Eggs (Dozen) $0.91 $1.66 82.9 Unleaded Gasoline (Gallon) $1.51 $2.35 55.6 Movie Ticket $5.39 $7.50 39.1 Prescription Drugs (Index) 285.4 391.1 37.0 First-Class Domestic Stamp $0.33 $0.44 33.3 New Single-Family Home $169,000 $216,700 28.2 U.S. CPI (All Items)1 172.2 214.5 24.6 Whole Milk (Index) 156.9 183.2 16.7 New Vehicle $24,923 $28,966 16.2 Systemwide Airfare + Ancillary Fees2 $144.57 $145.17 0.4 Domestic Round-Trip Airfare + Taxes3 $339.03 $310.06 (8.5) Television (Index) 49.9 10.6 (78.7)

1. BLS ―measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.‖ 2. BTS average airfare and ancillary fees generated per passenger enplaned, excluding government-imposed charges. 3. BTS National-Level Average Fare Series, the average domestic airfare paid per round-trip itinerary, including government-imposed charges.

www.airlines.org 26 The Price* of Air Travel Has Not Kept Pace With U.S. Inflation

U.S. CPI Rose 43.3% from 2Q95 to 2Q10, Leaving Ticket Prices $84.49 ―Short‖

CPI-Linked Prices (hypothetical)

Average Nominal Prices* (actual, including taxes)

$425.21 $425.21

$84.49

$346.10

$341.58

$340.72

$339.16

$329.34

$328.67

$325.39

$317.93 $317.93

$314.52 $314.52

$309.45

$306.68

$301.26

$300.97 $300.97

$296.80

$289.44

$275.78 $275.78

2Q05 2Q95 2Q96 2Q97 2Q98 2Q99 2Q00 2Q01 2Q02 2Q03 2Q04 2Q06 2Q07 2Q08 2Q09 2Q10

* BTS reports average fares based on domestic itinerary fares (round-trip or one-way for which no return is purchased). [Averages do not include frequent-flyer or ―zero fares.‖] Fares are based on the total ticket value, which consists of the price charged by the airlines plus any additional taxes and fees levied by an outside entity at the time of purchase. Sources: BTS National-Level Average Fare Series (http://www.bts.gov/xml/atpi/src/avgfareseries.xml) and BLS (http://www.bls.gov/cpi/tables.htm)

www.airlines.org 27 2009 Domestic Seating Capacity Fell Most Since 1942 Market Forces, Policy Resulted in Largest Post -WWII Contraction in Aviation History

100

80

60

40

20

0

(20)

(6.9) (16.2)

Annual Percent Change in Domestic ASMs* Domestic in Change Percent Annual (40)

1932 1934 1936 1938 1940 1942 1944 1946 1948 1950 1952 1954 1956 1958 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

Sources: ATA, BTS (T1 Scheduled Service) * An available seat mile (ASM) is one seat flown one mile

www.airlines.org 28 Capacity Being Re-Balanced With Size of U.S. Economy Domestic ASMs* per $1K of Real U.S. GDP** at Lowest Level Since 1979

75

70

65

60

55

50

45

40

35

1986 1974 1976 1978 1980 1982 1984 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2012 2014 2010E

Sources: BTS (T1 Domestic, All Services) and Bureau of Economic Analysis * An available seat mile (ASM) is one seat flown one mile ** Chained 2005 dollars

www.airlines.org 29 Capacity Over the Past Decade: A Tale of Two Markets Down 11% Domestically, Up 20% to/from USA

Billion Domestic ASMs per Week Billion International* ASMs per Week

2.89

2.85

2.74

14.39

2.66

2.64

14.05

14.02

14.02

13.99

2.49

13.69

13.62

2.42

2.41

2.23

12.92

2.10

12.76

12.65

2.05

12.56

12.51

1.94

1Q00 1Q01 1Q02 1Q03 1Q04 1Q05 1Q06 1Q07 1Q08 1Q09 1Q10 1Q11

1Q00 1Q01 1Q02 1Q03 1Q04 1Q05 1Q06 1Q07 1Q08 1Q09 1Q10 1Q11

* U.S. airlines only; an available seat mile (ASM) is one seat flown one mile and is the standard unit of capacity in the passenger airline sector Source: Innovata (via APG) published schedules as of Jan. 21, 2011

www.airlines.org 30 Departures Over the Past Decade: A Tale of Two Markets Down 22% Domestically, Down 3% to/from USA

Scheduled Domestic Flights per Day Scheduled International* Flights per Day

1,921

29,953

1,898

29,673

1,864

1,836

1,816

1,816

1,811

1,806

28,000

1,759

26,895

26,826

26,359

26,282

26,077

25,947

1,669

1,654

23,991

1,541

23,452

23,299

1Q00 1Q01 1Q02 1Q03 1Q04 1Q05 1Q06 1Q07 1Q08 1Q09 1Q10 1Q11

1Q00 1Q01 1Q02 1Q03 1Q04 1Q05 1Q06 1Q07 1Q08 1Q09 1Q10 1Q11

* Scheduled U.S.- and non-U.S.-airline flights departing U.S. airports for non-U.S. destinations Source: Innovata (via APG) published schedules as of Jan. 21, 2011

www.airlines.org 31 Thinking Outside the [Domestic] Box The Future Lies Across the Ponds

Airbus Global Market Forecast Boeing Current Market Outlook Annual Traffic Growth: 2009-2028 Annual Traffic Growth: 2009-2028

6.8 4.6 4.7 4.9 4.0 4.2 2.5

2.0

China-US

Japan-US

US-Europe

Transpacific

Domestic US Domestic

North Atlantic North

Within NorthAm Within NorthAmto LatAm www.airlines.org 32 Healthy Investment Requires Healthy Equity Equity Market Capitalization (Billions) as of Jan. 5 at 1800 EST

eBay $37.5

U.S. airline industry* $40.9 * AAI, ALGT, ALK, AMR, DAL, HA, JBLU, LCC, LUV, PNCL, RJET, SKYW, UAL Deutsche Bank $50.9 Goldman Sachs $89.0 BP $125.8 Toyota $145.6 Wal-Mart $193.8 GE $198.4 Microsoft $239.6 Apple $306.4 ExxonMobil $376.7

www.airlines.org 33 Healthy Investment Requires Healthy Credit No Passenger Airline in the World Enjoys an A-Minus or Better Rating from S&P

>= BBB- (investment-grade)

< BBB- (speculative or “junk”)

-

-

------

AAA AAA AA+ AA AA A A A BBB BBB BBB BB B+ B+ B B B B B B B B

BP

GE

SAS

TAM

eBay

Delta

United

Alaska

Toyota

AirTran

JetBlue

Wal-Mart QANTAS

Microsoft

American

Lufthansa

BritishAir

Southwest

Air Canada Air

USAirways

ExxonMobil GoldmanSachs

www.airlines.org 34 S&P Corporate Credit Ratings (July 12, 2010) for North American Transportation Companies, “Strongest to Weakest”

AA- to A- BBB+ to BBB- BB to B B- to CCC-

1. Union Tank Car 7. Burlington Northern 23. AWAS Aviation Capital 44. Dollar Thrifty Automotive 2. UPS 8. Enterprise Holdings 24. Teekay Corp. 45. UAL Corp. 3. TTX 9. Norfolk Southern 25. AMERCO 46. Coach America Holdings 4. AMTRAK 10. Ryder System 26. Kansas City Southern 47. JetBlue Airways 5. Canadian 11. Alexander & Baldwin 27. Mobile Mini Inc. 48. AirTran Holdings National 12. GATX 28. Overseas Shipholding Group 49. JHCI Acquisition Inc. Railway 13. Union Pacific 29. Kenan Advantage Group 50. Quality Distribution Inc. 6. Kirby Corp. 14. FedEx 30. RailAmerica 51. Trailer Bridge Inc. 15. Hunt (J.B.) Transport 31. Avis Budget Group 52. Western Express Inc. 16. Brink's Co. 32. US Xpress Enterprises 53. AMR Corp. 17. Aviation Capital Group 33. Hertz Global Holdings 54. US Airways Group 18. Canadian Pacific Railway 34. 55. Air Canada 19. Southwest Airlines 35. 56. Swift Corp. 20. CSX 36. Marquette Transportation 57. Evergreen International 21. Con-way 37. United Maritime Group 58. YRC Worldwide 22. ILFC 38. Delta Air Lines 39. Ozburn-Hessey Holding Co. 40. American Commercial Lines 41. Horizon Lines 42. General Maritime Corp. 43. Continental Airlines

www.airlines.org 35 What’s Wrong With This Picture? The Investor’s View

―As you weigh policy objectives for the airlines, you may want to consider the benefits from having airlines in a better position to generate a return on invested capital in excess of their cost of capital through a full business cycle. The balance between positions which seek to socialize aspects of the airline industry versus those that promote growth in the free market will contribute to how the market prices airline capital risk and measures the required rate of return to justify growth. The ability to generate more consistent returns on equity and increase free cash flow is the path to repairing balance sheets and longer term financial stability. Only then will there be a solid foundation for increased capital expenditures, rising wages, and increased service.‖

Statement of David R. Strine before the House Subcommittee on Aviation, ―Consolidation In The Aviation Industry, With A Focus On The Proposed Merger Between United Airlines And Continental Airlines – A Perspective From Within The Financial Markets‖ (June 16, 2010)

www.airlines.org 36 Global Context: Airlines Challenged to Cover Cost of Capital ROIC Below WACC Translates to Loss of Investor Wealth

12 Cost (WACC) 10

8

6 Percent 4 Return (ROIC) 2

0

2005 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2006 2007 2008 2009 2013 2014 2015

2011F 2012F 2010E Source: IATA (1993-2004 from McKinsey study) and Deutsche Bank Global Research (for 2010-2012 estimates)

www.airlines.org 37 Where Do We Go From Here?

. To invest in people and product, airlines require sustained profitability – they must earn their cost of capital over the entire business cycle . U.S. airlines are climbing out of a deep hole – doing better financially should not be equated with doing well (or well enough) financially . By just about any measure, U.S. airlines are less equipped than other airlines and other industries to compete effectively on the global stage . Barriers to exit, higher taxes, environmental charges, inefficient infrastructure (air traffic control vs. air traffic management) will exacerbate inadequate financial condition and the competitiveness gap

. Consistent with DOT mission, promoting and encouraging the development of a viable, competitive U.S. airline industry is in our national interest

www.airlines.org 38 When America Flies, It Works

www.airlines.org