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Airline Industry Recent Trend Update

Airline Industry Recent Trend Update

MITMIT Industry Recent Trend ICATICAT Update (November 2005)

Prof. R. John Hansman With the help of the Faculty and Students of the MIT Global Industry Study

Traffic Source: Sage Analysis courtesy Prof Ian Waitz [email protected] MITMIT ICATICAT RPK by Region

Scheduled Revenue Passenger-Kilometers by Region 1400

1200

1000

Europe 800 Asia and Pacific 600 Latin America & RPK (billion) Middle East 400

200

0 1970 1980 1990 2000 2010

Data source: ICAO, scheduled services of commercial air carriers MITMIT ICATICAT Freight Trends by Region

Freight Tonne-Kilometers by Region 60

50

North America 40

Asia and 30 Pacific Latin America & Caribbean FTK (billion) 20 Middle East

Africa 10

0 1970 1980 1990 2000 2010

Data source: ICAO, scheduled services of commercial air carriers Updated MITMIT Oct 05 U.S. Domestic RPMs ICATICAT

Domestic Traffic - RPMs (Billions)

50 s n lio l i B 45

40

35

30

25

2000 2001 2002 2003 2004 2005

20 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Source: ATA Monthly Passenger Traffic Report Data source: ATA, US member , scheduled service Updated MITMIT U.S. Airline Load Factors 2000- Oct 05 ICATICAT 2005

Domestic Traffic - Load Factor

90.0%

85.0%

80.0%

75.0%

70.0%

65.0%

60.0% 2000 2001 2003 2004 2005

55.0% Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Source: ATA Monthly Passenger Traffic Report Data source: ATA, US member airlines, scheduled mainline service Updated MITMIT U.S. Average Domestic Yield 2000-Oct 05 ICATICAT 2005

16.00

15.00

14.00 ) ile /m s t

n 13.00 e c d ( l e i

Y 12.00

11.00

10.00 2000 2001 2002 2003 2004 2005

Data source: ATA Monthly Airfare Report, 8 US major airlines excluding Southwest (WN). MITMIT US Systemwide Passenger Revenue ICATICAT as % of GDP 1.05%

1.00% ≅ $30B 0.95% of Nominal GDP* %

0.90% e as

0.85% Historical Band er Revenu 0.80%

0.75% Passeng e

0.70% stemwid

Sy 0.65% 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06

*Four-quarter rolling passenger revenue derived from government filings of major and national passenger airlines Sources: ATA Airline Cost Index; Bureau of Economic Analysis; U.S. Department of Transportation ATA Analysis Updated MITMIT Oct 05 U.S. Domestic Yield 2000-2005 ICATICAT

Yield - Domestic (c per mile)

16

14 )

e 12 l i m

r 10 e

p 8 c ( d l 6 e Yi 4 2000 2001 2002 2003 2004 2005 2 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Data source: ATA Monthly Airfare Report, 8 US major airlines excluding Southwest (WN). Updated MITMIT Oct 05 Atlantic Yield 2000-2005 ICATICAT

Yield - Atlantic (c per mile)

14 13 )

e 12 l i m

r 11

pe 10 c d ( l 9 e i Y 8 7 2000 2001 2002 2003 2004 2005 6 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Data source: ATA Monthly Airfare Report, 8 US major airlines excluding Southwest (WN). Updated MITMIT Oct 05 Latin Yield 2000-2005 ICATICAT

Yield - Latin (c per mile)

15 14

) 14 le i 13 m r

e 13 p c

( 12 d l e

i 12 Y 11 11 2000 2001 2002 2003 2004 2005 10 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Data source: ATA Monthly Airfare Report, 8 US major airlines excluding Southwest (WN). Updated MITMIT Oct 05 Pacific Yield 2000-2005 ICATICAT

Yield - Pacific (c per mile) 12

11 ) e l i 10 m r

pe 9 c d ( l e 8 Yi

7 2000 2001 2002 2003 2004 2005 6 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Data source: ATA Monthly Airfare Report, 8 US major airlines excluding Southwest (WN). MITMIT US Airlines Net Profit Model Best Fit of Undamped Oscillation ICATICAT Cycle Period = 11.3 yr eFolding Time = 7.9 yr MITMIT Airline Profits (Losses) ICATICAT

$300

$(100) 200 0Q1 2000 Q3 200 1Q1 2001 Q3 2002Q 1 2002Q 3 200 3Q1 2003Q 3 200 4Q1 2004 Q3 2005Q 1

ns $(500) illio m in

) $(900) s s American (Lo

e United m $(1 300) o Delta No rthwest t Inc

e Continental N $(1 700) So uthwest JetBlue America W est Alaska $(2 100) ATA September 2001 US A irways

$(2 500)

Data source: Airline Financial Data, [airlines websites] MITMIT Profitable Air Carriers During 2005 Q2 ICATICAT

$500

$100 s n

io 2000Q1 2000Q3 2001Q1 2001Q3 2002Q1 2002Q3 2003Q1 2003Q3 2004Q1 2004Q3 2005Q1 ll i

m $(300) n i

) s s o

(L American e

m $(700) o Continental c In

t Southwest e N JetBlue

$(1 100) America West Alaska

US Airways

$(1 500) Data source: Airline reports MITMIT Cargo Operation Not Affected ICATICAT

$1,600 West Coast UPS FedEx Dock Strike SARS Iraq War $1,200 9/11 Attacks

in millions $800 me o Inc t e

N $400

$0 2000Q1 2000Q3 2001Q1 2001Q3 2002Q1 2002Q3 2003Q1 2003Q3 2004Q1 2004Q3

Data source: Companies’ annual reports MITMIT Market Cap: US Majors, 07-Sep- ICATICAT 2005

Alas ka A irlines 4.8 % Ai rTran Frontier 4.8% 2.0% American West Airlines 0.2% 1.3% FLY i US Airways 0.1% 10.7% 0.1% Un ited Air Lines 0.5% Co ntinental A irlines 4.4%

De lta Air L ines 1.0%

JetBlu e Airways 10.6% So uthw est Airlines 58.0% 1.5%

Total Market Cap: $18.6 billion

Data source: Yahoo Finance. MITMIT Current Market Cap vs. RPM Share ICATICAT US Majors

25%

20% e

Southwest Shar 2005) M f

P 15% o

t American r y R a hl p t

s United r ont i US Airways

e f 10% Northwest h

t Delta age M or f ( ver JetBlue A AmericCaonnt Winentestal 5% Alaska FLYi AirTran Frontier 0% Midwest 0% 10% 20% 30% 40% 50% 60% 70% Relative Market Cap 09/05

Source: Yahoo! Finance and airline traffic reports MITMIT ICATICAT Chap 11 Bankruptcy y TWA † 06/1995-08/1995 and 01/2001-12/2001 y US Air † 08/2002 – 03/2003 and 09/2004 – 09/2005 y United † 12/2002 - present y Delta † 09/2005 - present y Northwest † 09/2005 - present y ATA † 10/2004 – present MITMIT ASMs of the Top 11 US airlines ICATICAT

1000 Total ASMs Bankrupt ASMs 900 llions i B 800 700

600 Projected based on 2005 Q1 & Q2 results 500 for the top 11 US 400 airlines 300 200 100 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 UA UA US UA UA US DL TW TW US US TZ NW

Source: Bureau of Transportation Statistics Schedule T-1 ASM Analysis data MITMIT LCC Profitability ICATICAT 2000 2001 2002 2003 2004 1H05 20.0% Frontier Southwest 15.0% AirTran JetBlue JetBlue 10.0% Southwest JetBlue Southwest Southwest Frontier 5.0% America West Southwest Southwest Spirit Frontier JetBlue JetBlue AirTran ATA/Spirit AirTran 0.0% AirTran America West Frontier Frontier AirTran America West ATA Spirit America West (5.0%) Frontier Net Profit Margin Midway ATA Spirit (10.0%) America West National ATA (15.0%) National JetBlue America West Spirit (20.0%) Vanguard National Spirit Vanguard Independence Vanguard ATA Midway ATA Midway Independence

Source: DOT Form 41 reports ATA Analysis MITMIT Low-Cost Carrier Envy (or not) ICATICAT Emergence of LCCs

Canada (7, 1 in 2004) Europe (60, 3 in 2004) CanJet Westjet Aer Arann Baboo Fare4U Sun Express HMY Airways Zip Air 2000 Basiq Air German Wings Swedline Airlines Baltic Bexx Air Germania Express Tango Airlines Air Berlin BMI Baby Globespan V Bird Air Finland British European Hapag Lloyd Express Virgin Express USA (19, 4 in 2003/2004) Air Luxor Lite BudgetAir Hellas Jet VLM Airlines AirTran Air Polonia Corendon Helvetic Airways VolareWeb Deutsche BA Iceland Express Windjet Vola American West EasyJet Smart Wings ATA USA 3000 Airlines Air Wales Snalskjutsen Vacation Express Excel Airways SnowFlake Airlines Hop Interstate Jet Azzurra Air Fairline Austria Sterling JetBlue Airways Asia/Pacific (20, 8 in 2004) Virgin USA Midwest Express Virgin Blue Pan American Africa (2) Air Asia Air Blue Southeast Airlines South America (3) 1Time Air Deccan Bra Kulula Athena Air Services BackpackersXpress Gol Citilink Jetstar U A ir Freedom Air Nok Air Lion Airways Pacific Blue One-Two-Go SkyAsia Skymark Airlines Tiger Airways Skynet Asia Airways Spring ValuAir Source: http://www.etn.nl/lcostair.htm, airline news Total 111 LCCs, 17 started/to start in 2003/2005 MITMIT America West - USAirways ICATICAT Proposed Merger MITMIT America West - USAirways ICATICAT Proposed Merger MITMIT America West - USAirways ICATICAT Proposed Merger MITMIT Trends in Fuel Price ICATICAT

Average Crude Oil and Jet Fuel Prices

$70 180¢

Jet Fuel (R) $60 160¢ l Jet

e Crude Oil (L) r r F a $50 140¢ u B el r : P pe r e i

$40 120¢ ce P ic r P a i d pot

$30 100¢ p S e r G Oil: a

$20 80¢ l l o ude n r C $10 60¢

$0 40¢ 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 0 0 0 0 0 8 8 8 8 9 9 9 9 9 9 9 9 9 an- an- an- an- an- an- an- an- an- an- an- an- an- an- an- an- an- an- an- an- J J J J J J J J J J J J J J J J J J J J

Data source: ATA; U.S. major, national, large regional passenger and cargo airlines; all services Sept 1st data: http://www.bloomberg.com/energy/ MITMIT Increasing Jet Fuel Crack Spread ICATICAT $75 $70 $65

$60 14.72 $55 $50

$45 9.28 $40 $35 5.90 $30 7.49 3.63 5.56 7.42 $25 55.31 4.91 4.80 4.18 4.34 3.13 $20 5.10 3.67 41.44 4.69 3.55 Average Price of Fuel ($/Barrel) Average Price of Fuel $15 31.14 30.30 25.92 26.10 $10 24.50 22.15 21.48 20.56 20.60 19.25 18.46 18.43 17.19

$5 14.40 $0 1990 91 92 93 94 95 96 97 98 99 2000 01 02 03 04 YTD Sep- Crude Oil Jet Crack 05

Source: Air Transport Association analysis of Energy Information Administration data MITMIT Fuel Efficiency ICATICAT

Fue l Efficie ncy 50

45 n

llo 40 a G r

e 35 p s

ile 30 M 25

20 1996 1998 2000 2002 2004 1980 1982 1984 1986 1988 1990 1992 1994

Revenue Passenge r M ile s Available Seat M ile s

Source: ATA data MITMIT US Airlines Net Profit Model Best Fit of Undamped Oscillation ICATICAT Cycle Period = 11.3 yr eFolding Time = 7.9 yr MITMIT Airline Profits Adjusted for Constant Fuel ICATICAT Price MITMIT Employees Full Time: ICATICAT US Network Carriers 2001-2005

US Network Carrier Employees 120,000

100,000 )

e American

m 80,000 i

T United l l u

F Delta 60,000 Northw est yees (

o Continental l p 40,000 US A irw ays m E Alaska 20,000

0 2001 2002 2003 2004 2005

Source: US DOT MITMIT Employees Full Time: ICATICAT Low Cost Carriers 2001-2005

Low-Cost Carrier Employees 35,000

30,000

) 25,000 Southw est e m i America West T l l 20,000 u

F JetBlue

15,000 AirTran yees ( o l

p ATA

m 10,000 E Frontier

5,000 Independence Air Spirit 0 2001 2002 2003 2004 2005

Source: US DOT MITMIT Productivity Improvements Driving Cost Relief Network Restructuring, Work Rules, Human Capital, Outsourcing, Technology ICATICAT

2,400

2,299 2,300

2,200

2,100

2,000

1,900 Ms per FTE (000)—4-QTR Moving Average Ms per FTE (000)—4-QTR S A

1,800 2000 2001 2002 2003 2004 1Q05

Source: ATA Airline Cost Index for U.S. major and national passenger airlines MITMIT POSITIVE VIEWS OF EMPLOYEE MORALE ICATICAT

70% 60% 50% 40% 30% 20% 10% 0% 12/00 12/01 12/02 12/03 12/04 09/05

y Source: The Wilson Center for Public Research, Inc. – based on 150,674 interviews conducted with pilots or flight attendants from 1/1/2001 to 9/20/2005 MITMIT Pension Obligations ICATICAT at the end of year 2004

16

14 ) s n 12 illio B

$ 10 ( n o i t 8 a lig b 6 O n io

s 4 n Pe 2

0

d l e lta n st es e a est ta ays est lu e n it e ic w w li n D r h en w tB r U e t in ir th e i r t A u J ca W o n o i a A Am N S S er k Co U m las A A

Source: Airlines Annual Financial Reports (US airways (successor company) figure corresponds to year 2003) MITMIT Retirement Benefits Paid in 2004 ICATICAT

1400 ) s n 1200 illio M $

( 1000 4 0 0 2 800 in id Pa

t 600 i f e n e 400 B t n e

m 200 e r i t e

R 0

a d s l s e lt y st te an est est a ta ne lu ic w w n li B De ni h w r t We U er t h ir ine i m ut Je ca or A nt a A ri A N So US Co sk la me A A

Source: Airlines Annual Financial Reports (US airways (successor company) figure corresponds to year 2003) MITMIT Retirement Plan Terminations ICATICAT

Summary of US and United Plan Terminations ($ in billions) US United Airwa Airlines ys Total Termination Liability $7.9 $16.8 Assets $2.9 $7.0 Unfunded Termination Liability $5.0 $9.8 PBGC Guaranteed Portion of Underfunding $2.9 $6.6 Value of Lost Benefits $2.1 $3.2 Lost Benefits as % of Total Term. Liability 26.58% 19.05%

Delta and NWA Chap 11 filings estimated at $16B Liability

Source: Subcommittee on Aviation Hearing on Airline Pensions: Avoiding Further Collapse, also NYT http://www.house.gov/transportation/aviation/06-22-05/06-22-05memo.html MITMIT ICATICAT Safety Trend

Source: Boeing Statistical Abstract MITMIT ICATICAT Safety Trend

Source: Boeing Statistical Abstract MITMIT ICATICAT 2005 Fatal Accidents

Date Aircraft Operator Fatalities Location Desription

CFIT Boeing Approach 4-Feb 737-200 104 Afghanistan Snow 3-Aug 0 Canada Weather A.340 Overrun

15-Aug Boeing Helios 121 Decompre 737-300 Airways ssion

17-Aug MD-80 West 160 Dual Caribbean Flame Out Airways Fuel? 24-Aug Boeing TANS 40 Peru Approach 737-200 Weather? 6-Sep Boeing Mandala 102 Indonesia Initial Cimb 737-200 Airlines 23-Oct Boeing Bellview 117 Nigeria Enroute 737-200 Airlines

Source: aviation-safety.net MITMIT Blacklist Controversy ICATICAT August 2005 y France † (North Korea) † Air Saint Thomas (US) † International Air Services (Liberia) † Lineas Aer de Mozambique (Mozambique) † Phuket Airlines (Thailand) y Belgium † Africa Lines (Republic of Central Africa) † Air Memphis (Egypt) † Air Van Airlines (Armenia) † Central Air Express (Democratic Republic of Congo) † I.C.T.T.P.W. (Libya) † International Air Tours Limited (Nigeria) † Johnsons Air Limited (Ghana) † Silverback Cargo Freighters (Rwanda) † South Airlines (Ukraine) y FAA Position (IASA) Assessment by Country † Category 1 (meet ICAO Standards) † Category 2 (does not meet ICAO Standards) MITMIT USUS FlightFlight DelaysDelays ICATICAT from 1995 to 2005

Source: FAA OPSNET data US Flight Delays MITMIT US Flight Delays ICATICAT from 2000 to 2005

Source: FAA OPSNET data MITMIT ICATICAT Flight Cancellations

250 ds n a

Thous 200

150 ons i t a l l e nc a

C 100

50

0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Source: BTS, Airline On Time Performance data MITMIT Consumer Complaints ICATICAT

25 Southwest USAirways United 20 TWA Northwest 15 America West Delta Continental 10 Alaska American 5

Complaints to the DOT (000) Complaints to 0 0 2 4 6 8 0 2 4 6 8 8 004 19 19 198 198 198 199 199 199 199 1998 2000 2002 2

Note: Year 2005 consumer complaints is an extrapolation using data from Jan-Mar 2005

Data source: DOT Aviation Consumer Protection Division, available at: http://airconsumer.ost.dot.gov/ Air Traffic Controller Staffing

ATO Hiring Forecast vs. Losses

Time to CPC (Certified Professional Controller) Terminal; 8 - 24 months Enroute: 36 - 60 Source: Air Traffic Controller Workforce Plan - 2004 MITMIT Projected % Developmental ICATICAT Controllers

From: ATCS Workforce Plan Briefing MITMIT Trends in Aircraft Size ICATICAT

220 Domestic

200 International e

r Total u t r 180 a p e d r 160 e s p 140 e seat

ag 120 ver A 100

80 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Data source: Form 41 Traffic data from Bureau of Transportation Statistics (includes Regional Jets and Turboprops) MITMIT U.S. Growth ICATICAT Slowing

1400

1200

1000 CRJ900 CRJ700 800 CRJ200 CRJ100 600 EMB135 EMB145 BAE145 400

200

0 1995Q1 1995Q3 1996Q1 1996Q4 1997Q2 1997Q4 1998Q2 1998Q4 1999Q2 1999Q4 2000Q2 2000Q4 2001Q2 2001Q4 2002Q2 2002Q4 2003Q2 2003Q4

Source: FAA registration data from 1995 until the present MITMIT Most Common Regional Jets ICATICAT

ERJ 145 (50 seats) CRJ 200 (50 seats)

CRJ 200 Production on hold About 400 aircraft in national fleet About 2000 daily flights in January 2003 About 400 aircraft in national fleet About 1500 daily flights in January 2003 MITMIT RJ-NB Boundary Blurred ICATICAT

Regional Jets Narrow-body 2400 New Aircraft

2200 B735/6 B737 ERJ170 ERJ190 2000 MD-90 CRJ900 1800 CRJ700 CRJ200 A319 1600 ERJ145 Range (nm) A318

1400 B717 MD-80

1200 DC-9

1000 20 40 60 80 100 120 140 160 A/C Seats

Source: based on manufactures’ a/c specifications. Full pax range of standard version MITMIT World Population Distribution & ICATICAT 2004 Air Transportation Activity

North America Europe 36% Pax 27% Pax 26% Cargo 27% Cargo ~160 Airlines ~200 Airlines Asia/ ~4100 Airports ~2400 Airports Pacific 27% Pax 36% Cargo Latin America/ ~80 Airlines Middle East Caribbean Africa ~1800 Airports 4% Pax 4% Pax 2% Pax 6% Cargo 3% Cargo 2% Cargo ~20 Airlines ~50 Airlines ~20 Airlines ~230 Airports ~580 Airports ~300 Airports

Data source: Population: [URL:http://www.ciesin.org/datasets/gpw/globldem.doc.html] Air Transport: ICAO, R. Schild/Airbus Passenger and freight traffic represent RPK and FTK share in 2004

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