AIRLINE ECONOMIC ANALYSIS 2018-2019 EDITION

TOM STALNAKER GRANT ALPORT ANDY BUCHANAN AARON TAYLOR CONTENTS CONTENTS

EXECUTIVE SUMMARY 3

REPORT METHODOLOGY 6 ANALYSIS

REVENUE 8 Revenue Versus Gross Domestic Product 9 Operating Revenue 9

AIRLINE ECONOMIC AIRLINE Revenue Drivers 9 Profitable Pacific? 16 COST 17 Increase in Costs 18 Domestic Unit Cost Trend and Gap 18 Domestic Cost Performance 18 An Uncertain Future for Jet Fuel Prices 21 PROFIT 22 Hanging Onto Profitability Amid Declining Margins 23 BUSINESS CYCLE REVIEW 25 Aligning Capacity and Demand to Drive Margins 26 WORLD CAPACITY TRENDS 28 The Global View 29 OPERATIONAL RESILIENCE 31 Why Resiliency Matters 32 On-Time Performance 32 Is Regulation a Solution? 33 Improvements Underway 33 APPENDIXES 37 Revenue Appendix 38 Cost Appendix 47 Profit Appendix 52 Business Cycle Appendix 55 World Capacity Appendix 57

2 EXECUTIVE SUMMARY In 2018, airlines in the United States stretched resiliency as well, especially as customers their unbroken string of operating profits to demand more service and reliability from airlines. eight years, but they’re now facing tough Also, the impact of capacity growth on an already SUMMARY choices as costs increase and margins narrow. severely constrained infrastructure — both in While persistently strong demand for air travel the air with overworked air traffic controllers is pushing many carriers to add capacity, the and on the ground with overly congested additional routes and service are making pricing airports — must be addressed. In addition, the EXECUTIVE more competitive and putting pressure on yields. airline industry will likely contend with mounting Airline operations also face mounting obstacles pressure from governments and the public to sticking to their published schedules. For to reduce greenhouse gas emissions, even as carriers, it’s coming down to a battle of growing available seat miles (ASMs) rise. Finally, as the capacity and revenue versus maintaining longest rebound on record runs out of steam ANALYSIS

operational resilience. With predictions of a after 10 years, the industry faces the prospect global economic slowdown in 2019 and 2020, of sluggish economic growth of less than two remaining profitable may become more of a test. percent annually in North America and Europe as For the year ending in September 2018, the well as slower expansion globally. average carrier margin declined to 8.5 percent Based on current trends and pressures, the

AIRLINE ECONOMIC AIRLINE as higher operating costs began to offset rising operating margin for US airlines is expected to revenue. That’s down 2.1 percentage points narrow to between five and six percent in 2019 from the previous 12 months, and it marks — a margin that is less than 40 percent of the the third straight year that US airline margins industry’s peak of 15 percent in 2015. Ironically, have contracted. this margin squeeze began during a period of Moving forward, profit growth may be falling oil prices: In January 2016, prices per constrained by political instability and barrel slid to around $35 from a high of more than government-required compensatory costs from $110 in 2014. Although prices quickly recovered delays and cancellations — particularly in Europe, to above $50, they have not returned to the where the EU 261 regulation penalizes carriers $80-plus levels they had maintained between on behalf of passengers. Although not reflected mid-2009 and October 2014. in this analysis, the 35-day shutdown of the US Fuel makes up about a quarter of total government that began December 22 cut into operating costs for carriers and represents the airline revenue in 2018’s fourth quarter; it will industry’s second-largest expense. Even so, have an even bigger impact on first quarter 2019, the pattern makes it clear that many factors when most of the stoppage took place. other than fuel — most notably labor, the No. 1 The fallout from contentious Brexit expense, and capacity — affect profitability as negotiations over the United Kingdom’s much or more than fuel over the medium to withdrawal from the European Union also is long term. likely to affect the industry. Recently, uncertainty around Brexit has caused some airlines to issue guidance on lower revenue. In October, the THE IMPACT OF MORE International Air Transport Association also CAPACITY warned that Brexit “could potentially have considerable implications for all players in this This year’s Oliver Wyman Airline Economic important aviation market.” Analysis (AEA) reinforces earlier findings On the plus side, the industry is benefiting that adding capacity at a pace faster than US from a sizable drop in jet fuel prices from October economic growth has contributed to carriers’ to December. Although prices began to creep up eroding margins over the past several years, in first quarter 2019, the US Energy Information a situation likely to continue until a balance Agency (EIA) forecasts average oil prices at a between supply and demand is restored. In 2014, manageable $60 a barrel, with jet fuel about $2 capacity began to expand faster than the US a gallon through May. Prices could trend upward gross domestic product (GDP) — much faster, after that. in fact. That year, GDP grew 2.5 percent versus capacity growth well above three percent. By 2015, capacity growth was peaking above four BIG CHALLENGES AHEAD percent, while GDP was 2.9 percent. Industry margins also peaked that year at 15 percent, The challenges facing airlines go beyond figuring helped by oil prices that averaged around $50 out how to manage growth and stay profitable. a barrel. Growth strategies need to prioritize operational

4 In 2016, GDP took a sudden slide to below accommodate the emergence of the newer Ultra two percent as the trade deficit ballooned and Low-Cost Carriers (ULCCs). oil prices plunged. While airline capacity growth Of the three categories, Value airlines achieved SUMMARY also began to slow, it failed to match the drop in the best operating margin in the third quarter GDP. That’s when margins began to fall despite 2018 — 11.9 percent. Network carriers realized lower oil prices. The capacity numbers suggest a 7.5 percent margin, while the ULCC group’s that the industry has not always exercised the operating margin was 6.5 percent. During EXECUTIVE discipline it sometimes boasts of achieving and the third quarter, Network carriers increased that it will experience shrinking margins until real capacity 3.8 percent, Value carrier capacity capacity discipline returns. rose 5.1 percent, and ULCC capacity grew One caveat: While margins have declined in 16.2 percent. recent years, they are still higher than they were Capacity growth for all three carrier groups ANALYSIS

from 2010 to 2013, when they were six percent has ensured steady revenue growth, particularly or lower. The fact that margins were in the teens when it comes to international routes. AEA from 2015 to 2017, even though on the decline, data show international revenue growth reflects the impact of lower oil prices. outpacing domestic. Revenue from domestic flights for all three categories grew over the

AIRLINE ECONOMIC AIRLINE 12-month period ending in September 2018. EXPANDING TO THREE There’s no doubt that the rising demand for air CATEGORIES travel is encouraging airlines to focus on the need for new capacity and the potential to expand This year, for the first time, the Airline Economic revenue and market share — even if such moves Analysis is dividing US airlines into three mean sacrificing margins and reducing yield. categories instead of two — Network, Value, While airlines remain profitable, the prospect and Ultra Low-Cost — to create groupings that of slowing GDP may force carriers to reassess better represent common characteristics. The capacity expansions, especially given rising expansion in categories reflects changes in pressures on operations from that rapid growth. the industry, such as cost structures, reliance Indeed, the industry’s biggest risk over the next on ancillary revenue, and dependence on decade may be failing to strike the right balance international revenue. That created the need between capacity and profitability at a time when to split the Value category, creating a third to managing operations grows increasingly difficult.

Exhibit 1: US AIRLINE INDUSTRY MARGIN AND OIL PRICE PER BARREL, 2010 THROUGH Q2 2018

MARGIN OIL PPB US DOLLARS 16% 120 Margin increasing on flat to higher oil price 12% 90

8% 60

4% 30 Steadily declining margin on fluctuating oil price 0% 0 2010 2012 2014 2016 2018

Oil price Margin

Source: Form 41 and Energy Information Administration accessed at eia.gov

55 ANALYSIS REPORT METHODOLOGY AIRLINE ECONOMIC AIRLINE This year, for the first time, the AEA will divide international presence in all three major world the passenger airlines it tracks into three regions — Atlantic, Latin, and Pacific. categories — Network, Value, and Ultra Low-Cost. Although for years we have used only two categories, Network and Value, structural changes AIRLINES TRACKED in the industry in the United States have made that division less relevant and meaningful. The Below is a list of all the US passenger airlines result of expanding to three categories means in their respective categories for which data are that the members of each grouping share tracked and analyzed by the report. more commonalities. A substantial part of our financial analysis The categories reflect business model is based on US Department of Transportation similarities, based on financial and operational Form 41 data. This data include transport-related characteristics. For example, all carriers in the revenue and expenses, mainly related to regional Network group produce the highest unit revenue partners and codeshares. as well as have the highest cost structure, while To facilitate a fair comparison of airlines, Ultra Low-Cost Carriers (ULCC) have the lowest. we exclude transport-related categories from Also, among the metrics used to determine the Revenue and Cost sections of the report. categories are domestic revenue per available However, recognizing that a substantial portion seat mile (RASM) and cost per available seat of Network carriers’ business design is based mile (CASM). on regional partner feeds and codeshare On an operational basis, the Network group participation, the Profit section includes the Form now includes only those carriers with a large 41 Transports category where that information is reported. Throughout the report, we refer to

NETWORK VALUE ULTRA LOW-COST CARRIERS CARRIERS CARRIERS

American Alaska Allegiant Delta Hawaiian Frontier United JetBlue Spirit Southwest the non-standard terms RASMxT and CASMxT. American/US Airways; Southwest/AirTran; Delta/ The “xT” portion of the terms indicates that Northwest; United/Continental; and Alaska/Virgin we have eliminated transport-related revenue America. This report focuses almost exclusively ANALYSIS

and expense. on US carriers, based on the availability of We have also updated the format of our report. reported regulatory data. However, in the World Our written analysis has been trimmed to focus Capacity section, we provide an expanded review on the most relevant and significant trends and by geographic region. charts. More detailed analyses for each section Lastly, totals between charts and text

AIRLINE ECONOMIC AIRLINE are now gathered in appendixes at the end of throughout the report may vary slightly because the report. of rounding used in the text. As it has in past years, the report combines historical data for merged airlines including

Exhibit 2: DOMESTIC RASMXT VERSUS CASMXT FOR THE 10 CARRIERS, Q3 2018

American

Delta

United Hawaiian

JetBlue Southwest EPENSE

Alaska

Allegiant

Frontier Spirit

REENUE

Network Value ULCC

Source: Planestats.com > Form 41 Financials > P 1.2 Income Statement DRAFT REVENUE AIRLINE ECONOMIC ANALYSIS REVENUE it mostofthetimesince than USGDPgrowth, buthasstill outperformed revenue growth hasbeensignificantlyless stable revenue toUSGDP. Overthepast15 years,airline growth atcargo growth atpassenger carriersand32.1 expansion hasbeendrivenby10.1 airline revenue isup14 performance. Sincethethird quarter of2016, 2016, followingtwoyearsofflattodeclining US airlinerevenue hasrecovered since 1 2017 months endingSeptember2018 overthesame It wasup0.4 represents 41.6 For Networkcarriers,internationalrevenue domestic growth forallthree carriergroups. forthecombinedthreemiles (ASMs) despite producing 9.1 accounts for4.1 revenue growth of18.9 portion isup0.4 revenue intheValue group. Theinternational international makes upjust9.2 international revenue growth of10.9 the Value carriersrose 6.2 10.3 percentage international market, whichinflatestheir significantly smallerbase,particularlyinthe be notedthattheULCCs are addingontoa and 5.8 for ULCCs, 9.5 airline groups aswell,growing 17.6 10.9 for ULCCs, 11.4 International revenue growth was42.7 revenue growth across allthree airlinegroups. international segment,whichoutpaceddomestic The highestrevenue growth wasinthe OPERATING REVENUE GDP REVENUE VERSUS Exhibit International revenue growth outpaced The ULCC group produced year-o Overall, Networkcarrierrevenue grew Domestic revenue increased forthethree Miscellaneous During thethird quarter2018, AmericanAirlinesreclassified about$321 percent year-o percent fortheValue carrier period. percent fortheValue group. Itshould 3 depictstherelationship ofUSairline growth. percentage pointforthe12 percent forNetworkairlines, Revenue. percent forNetworkcarriers,and percent oftotalrevenue.

carriers. percent ofUSairlinerevenue, percentage point ver-y

percent ofavailableseat percent. Thisrevenue percent andnow 2005. ear. Revenuefor percent. Despite percent oftotal group.

year-o percent percent ver-y percent, groups.

percent percent ear ver-y ear. increase in contributed toa$321 the reporting adjustmentbyAmerican Airlines 2018, despitedepressed Pacific results. Again, operations duringtheyearendinginSeptember provided $510 $384 a 4.9 ending September2018 forallthree groups. GDP growth of3.4 year-o haveincreasedASMs atleast4.9 — Network,Value, andULCC —domestic by carriergroup. For allthree carriergroups between domesticandinternationalmarkets slight third quarter. Load factorandyieldbothspurred additional $73 ($126 ULCC were domesticASMs up14.8 more revenue gainthantheothercategories. groups, withcapacitygrowth producing pattern tobothNetwork andValue carrier $27 Yield increased 0.4cent,boostingrevenue by added $50 reducing revenue by$61 were partiallyoffset byadecrease inloadfactor, additional $114 A slightriseinyield,up0.2cent,provided an ULCC international of LatinAmericaandCaribbeanserviceisdriving factor fell2.2points,or$2 grew 38.3 analyze becauseofthesmallsamplesize.ASMs international operations are more difficult to it reports miscellaneousrevenue. only becauseAmericanAirlinesadjustedtheway or $273 driver, produced 19.3 accounting for28.2 revenue. Yield wasthesecond-largest driver, of totalrevenue growth, or$1.4 domestic revenue, producing 49.3 capacity wasthelargest driverof Networkcarrier For the12 monthsendinginSeptember2018, REVENUE DRIVERS For Networkcarriers,a0.7-centyieldincrease For Value carriers’domesticrevenue, Exhibit ULCC domesticrevenue followedasimilar International capacitygrowth forValue carriers Price andvolumedriversforULCC Fees, whichendedupasthethir million. percent increase produced inASMs million inyear-o gains. million). Growth infeesprovided an ver-y million. However, thatcontributionwas

5 million from Transports to percent, or$18 showsthesplitincapacitygrowth revenue. million duringthethird quarter. ear. Domesticcapacity outpaced million inrevenue duringthe million ofgrowth ininternational million inrevenue. Theincreases percent duringthe12 months growth. percent, or$398 ver-y

percent ofrevenue growth, million year-o

million. million, whileload ear revenue growth. million. Theexpansion

billion innew percent 1 d-largest percent percent ver-y million. ear 9 AIRLINE ECONOMIC ANALYSIS REVENUE operations, loadfactorsremain within one relatively flat.WiththeexceptionofULCC third quarter quarter 2018 yieldfalling18.3 the Pacific region remains thelaggard, withthird quarter 2016. Whilethere are signsofrecovery, 2013, butithasshownrecovery sincesecond and Atlanticregions. Latinregion yieldstilltrails 2013 levels,drivenbyrecovery inthedomestic region since2009.Systemyieldisnowbackto stabilized, followinga in theiryields.TheULCC yieldsappeartohave while Value carriersatleaststoppedthedecline carriers haveincreased andmaintainedyield, rate ininternational while theULCC group loggedtheslowestgrowth increased atthegreatest rate, up5.4 and 1.7 yield rose less thantwopercent, at1.4 For theValue andULCC carriergroups, domestic be seeninrelatively slowdomesticyieldgrowth. international capacityduringthe the otherValue carriers,Alaskadecreased increased domesticcapacity4.9 moredomestic ASMs thansevenpercent. Alaska Value carriers,HawaiianandJetBlue,increased GDP growth. Itexpandedby3.8 grew domesticcapacityatarate comparable to overall capacity2.6 has increased domesticcapacity 2.8 6.6 US GDPgrowth, atseven-pluspercent and domestic capacitysignificantlymore than carrier group, DeltaandUnited are growing employed byeachcarrier. WithintheNetwork airline andshowsthediverging strategies domestic international capacitygrowth was lowerthanfor Unlike theValue andULCC groups, Network domestic andinternationalbyabout13 by more than20 capacity bymore than40 of allthecarriers,increased itsinternational percent. Spirit,themostaggressive oncapacity about 30 Frontier expandeditsinternationalcapacityby admittedlydomestic ASMs, onasmallbase. increased more internationalASMs than boosted capacity. BothFrontier andSpirit Unlike capacityandyield,loadfactorsremain Exhibit Performance since2016 showsthatNetwork International yieldfortheNetworkgroup The impactofdomesticcapacitygrowth can Among theValue carriergroup, onlySouthwest Exhibit Yea percent, respectively. Bycontrast, American r-o percent ver-y percent anddomesticbyaboutseven growth. 9 6 showsNetworkcarrieryieldby looksatcapacitygrowth byindividual 2013. ear, ULCCs asagroup significantly respectively. percent. Allegiantgrew percent. capacity. decline. percent anddomestic percent below percent. Other percent. Unlike quarter. percent and percent, percent percent. is amongthe between NetworkandValue carriersof1.2 cents group inExhibit stabilizing betweeneightcentstonine performance istrending down,itshowssignsof performance. AlthoughtheULCC group’s RASM Value carrierscontinuetoexperienceflatRASM peak of15.5, setinthesecondquarter2014. istrendingNetwork carriers,RASM toward the Exhibit having thelongestaverage revenue persegment,partiallythe result of revenue, butmaintainsthehighest ticketed reports thelowestratio offeestototalpassenger passengers paytheleastinancillaryfees.United passenger revenue. Onaverage, theValue group $48.01, or25.4 per segmentpassenger ranging from $19.59 to dependence uponfee-basedrevenue, withfees Exhibit tracking instepwithcapacity another way, passenger growth seemstobe 2.2 increase of38.3 point. Even theULCC internationalcapacity domestic loadfactorincreased just 0.3 grew 5.4 Exhibit percentage pointoftheprevious year. (see When looking at RASM performancebycarrierWhen lookingatRASM growthRASM bycarriergroup, shownin Shifting toancillaryrevenue performance, For example,Networkdomesticcapacity percentage-point impactonloadfactor. Put 1 11 1 2 0 percent year-o demonstrates theULCC group’s , issplitacross carriertypes.For ). largest. percent to42 percent hadjustanegative 1 3 , thecurrent gap RASM ver-y segment. ear, butNetwork percent oftotal additions. cents. 10 AIRLINE ECONOMIC ANALYSIS REVENUE 200 250 US$ BILLIONS US AIRLINEREVENUE Note: Source: Exhibit 5: Source: Source: 0 50 100 150 PERCENT Exhibit 4: US AIRLINE OPERATING REVENUE, Q3 2017 VERSUS Q3 Exhibit 3: US AIRLINE REVENUE AND GDP, Q1 2003 THROUGH Q3 TOTAL ULCC VALUE NETWORK Mainline operations only;excludestransport-r Planestats.com >Form 41 T2 Mainline operations only;excludestransport-r Planestats.com >Form 41 Financials>P1.2 Income PERCENT CHANGE IN CAPACITY (ASM), Q3 2017 VERSUS Q3 2004 9.5 Network 11.4 2006 10.3 Traffic 2008 5.8 2010 Value 10.9 elated revenue elated revenue 6.2 Statement 2012 (regionals) (regionals) DOMESTIC 2014 17.6 ULCC 42.7 Recovery 14. 2016 4.9 5.3 18.9 8 CURRENT GDP

201 US$ BILLIONS 201 2018 8 8

201 10000 15000 20000 25000 5000 8 INTERNATIONAL 0 US GDP Linear (USGDP) revenue) Linear (USairline Revenue US Airline Total International Domestic 38.3 4.9 6.6 2.0 11 AIRLINE ECONOMIC ANALYSIS REVENUE Note: Source: Note: Source: 40 50 PERCENT ULCC NETWORK (20) (10) 0 10 20 30 VALUE Exhibit 7: CHANGE IN PASSENGER YIELD, Q3 2017 VERSUS Q3 Exhibit 6: PERCENT CHANGE IN CAPACITY (ASM), Q3 2017 VERSUS Q3 ULCC VALUE NETWORK NETWORK ULCC VALUE Mainline operations only;excludestransport-r Mainline operations only;excludestransport-r Alaska Planestats.com >Form 41 T2 Planestats.com >Form 41 T2 INTERNA DOMESTIC INTERNA DOMESTIC INTERNA DOMESTIC Domestic Allegiant TIONAL TIONAL TIONAL American International Traffic Traffic Delta elated revenue elated revenue Frontier Q3 US CENTS 201 Hawaiian 14. 13. 13. 13. (regionals) (regionals) Total 5.8 6.4 7 3 1 0 9 JetBlue

201 Q3 US Southwest CENTS 8 201 14. 14. 13. 13. 5.9 6.5

8 201 7 4 0 8 Spirit 8 United CHANGE PERCENT 2.84 3.35 5.42 1.0 1.4 1.6 16.2% 3.8% 5.1% 12 3 0 9

AIRLINE ECONOMIC ANALYSIS REVENUE Network 6 18 US CENTS PASSENGER YIELD Note: Source: Q3 2016/Q32018 Q3 2013/Q32018 9 12 15 18 US CENTS PASSENGER YIELD Note: Source: 10 14 Note: Source: Exhibit 10: PERCENT CHANGE IN LOAD FACTOR, Q3 2017 THROUGH Q3 Q3 Exhibit 9: LON Exhibit 8: LON ULCC VALUE NETWORK NETWORK VALUE ULCC

201 Mainline operations only;excludestransport-r Mainline operations only;excludestranspor t-r Mainline operations only; excludestransport-r Planestats.com >Form 41 Financials>P1.2 Income Planestats.com >Form 41 Financials>P1.2 Income Planestats.com >Form 41 T2 INTERNA DOMESTIC 2009 2009 8 DOMESTIC INTERNA Long-Term Growth Value INTERNA DOMESTIC Long- G-T G-T TIONAL TIONAL T erm ERM NETWORK PASSENGER YIELD TREND BY REGION, Q1 2009 THROUGH ERM DOMESTIC PASSENGER YIELD TREND, Q1 2009 THROUGH Q3 TIONAL Growth ULCC Atlantic (4.8%) Traffic 4.7% 2012 2012 elated revenue elated revenue elated revenue Domestic Statement Statement Q3 2.4% 0.2% 201 86.2 86.2 85.3 84.1 84.4 84.8 (regionals) (regionals) (regionals) 7 (7.8%) 10.7% Declin Latin Decline 2015 2015 Q3 201 84.0 86.5 84.7 84.5 84.7 86.5 8

201 (18.3%) Pacific 1.2% 8 Mixed Results PTS Mix Short-Term ed CHANGE Result

201 (2.22) (0.63) System 0.30 0.39 0.35 (3.8%) 8 1.7 2018 2018 3.7% 13 3

AIRLINE ECONOMIC ANALYSIS REVENUE US DOLLARS PER SEGMENTPASSENGER Note: Source: 8 12 16 US CENTS REVENUE PERASM Note: Source: fees Miscelleanous Q3 2008 THROUGH Q3 Exhibit 12: COMPARING THE DOMESTIC RASM OF NETWORK AND VALUE Q3 Exhibit 11: THE IMPORTANCE OF SYSTEM SERVICE FEES VERSUS TICKETED REVENUE, Domestic Network RASMxT System Network RASMxT 0

Southwest Frontier United Delta Hawaiian Spirit American Alaska Allegiant JetBlue

201 Mainline operations only;excludestransport-r Adjustment madetoAllegiantmiscellaneousrevenue, whichisreported in Planestats.com Planestats.com 2008 8 fees Baggage V System Value RASMxT D a o l m u e e

2010

201 s R $150 t A i c S 8 M x T

change fees Reservation Domestic ULCC RASMxT System ULCC RASMxT elated revenue 2012 (regionals) $300 revenue Ticketed 2014 Transports Total Fees=Misc.+BagsRes.Chg. 2016

CARRIERS from fees Revenue 1 1 2 4 1 3 2 1 1 9 1 2 8 5 3 8 1 0 7 ...... 59 0 4 0

7 8 8 9 0 2 8 6 1

8 1 6 9 0 6 , Fees as% 2018 of total 42.0 32.3 25.4 11.4 13.6

8.8 4.8 7.0 5.2 9.0 14 AIRLINE ECONOMIC ANALYSIS REVENUE 2018 2017 2016 2015 2014 2013 2012 2011 2010 2009 2008 US CENTS REVENUE PERASM Source: THROUGH Q3 Exhibit 13: COMPARING THE DOMESTIC RASM OF NETWORK AND VALUE CARRIERS, Q3 2008 US DOT T100, 13.7 14.0 12.8 13.3 12.8 13.5 11.9 12.3 10.7 11.0 11.3 12.6 13.1 13.0 13.1 14.0 13.8 14.3 13.8 13.8 14.4 15.0

201 PlaneStats.com 8 0.3 1.4 0.4 0.7 0.5 0.8 0.7 1.2 0.3 1.2 0.5 Difference Value Network 15 PROFITABLE PACIFIC? REVENUE

Since 2016, the Pacific operations of US-based passenger yields in the Pacific as well. Since international airlines have lost money, with an 2014, the average Pacific stage length has grown average operating margin of negative 1.2 percent. 24 percent, up more than 1,000 miles, largely Over the same period, Atlantic operations because of new technology that enables aircraft ANALYSIS

produced an 11.7 percent operating margin, and to avoid congested traditional hubs, such as Latin operations achieved a 7.8 percent margin. Tokyo’s Narita International Airport. According to US Department of Transportation During peak yields in 2014, adjusted and (DOT) data, Delta is the only US carrier to churn unadjusted yields were nearly equal between the out consistent profit margins over the past 10 Atlantic and the Pacific. But between 2016 and years in the Pacific. 2018, low unit passenger revenue hurt profitability AIRLINE ECONOMIC AIRLINE The region’s lack of profitability for US carriers in the Pacific. Over the period, unadjusted RASM can be attributed to several factors, including in the Pacific was more than 1.6 cents lower than rapid capacity growth and the concomitant for the Atlantic, while unadjusted CASM for the pressure on yield, increased competition, and two regions was essentially equal. rising carrier costs. Between 2014 and 2019, the Finally, higher costs also reduced profitability number of seats between the US and the Pacific in the Pacific. Labor made up nearly half of the rose nearly 25 percent, with most of that growth increased expenses, on a stage-length adjusted coming from non-US carriers. Total passenger basis, in the region. On average, labor costs are seats on US-China routes have more than doubled 13.1 percent higher in the Pacific than for Atlantic since 2014, accounting for a significant portion of operations, according to the DOT. Fuel was also the overall growth. pricier in the Pacific, accounting for one-third of During the same period, Pacific market share the cost increase over the Atlantic. Labor and fuel for what are referred to as non-alliance airlines combined represented 80 percent of the increased — almost all of which are non-US — increased 10 cost and were higher for all carriers operating in points, faster than their share growth in both the both regions. Atlantic and Latin regions. [Non-alliance carriers Reduced profitability in the Pacific region has refer to airlines not affiliated with oneworld, Star harmed the overall operating profit for US-based Alliance, or SkyTeam.] The increased capacity and international carriers. Fortunately, passenger competition from non-US carriers, especially to yield for the region has begun to recover over the China, has dampened passenger yield growth in past several quarters as US carriers have adapted the Pacific for US carriers. to rising competition. If the current yield trend On a stage-length adjusted basis, Pacific unit continues, Pacific operations could finally provide revenue was 0.6 cent lower than for the Atlantic greater margins for US carriers — maybe even region. Analysis of the two regions shows that this year. a rapidly increasing stage length has affected

PASSENGER YIELD 16

14

12

10 2014 Q3 2015 Q1 2015 Q3 2016 Q1 2016 Q3 2017 Q1 2017 Q3 2018 Q1 2018 Q3

Atlantic Atlantic Pacific Pacific SLA SLA

Source: PlaneStats.com Mainline operations only. SLA = Stage-length Adjusted COST INCREASE IN COSTS 1.5 percent for Value carriers. But for the ULCC

COST group, these costs fell 4.1 percent. Continuing the trend that began in 2017, US airlines’ systemwide unit cost (excluding transport-related costs) increased seven percent DOMESTIC UNIT COST TREND year-over-year to 12.3 cents during the third

ANALYSIS quarter 2018. Network carriers, with a seven Since 2008, the ULCC group has maintained

percent year-over-year rise to 13 cents, had relatively flat domestic unit costs, excluding fuel. the highest unit cost of the three groups. Value The domestic unit costs decreased 5.8 percent carriers saw their unit cost climb 7.6 percent to since 2008, representing a compound annual 11.6 cents. ULCCs rose 10.3 percent to 8.4 cents. growth rate (CAGR) of negative 0.6 percent. When looking only at domestic operations ULCCs are seeing a widening gap with Network

AIRLINE ECONOMIC AIRLINE (shown in Exhibit A23 in the Cost Appendix), US and Value carriers, where unit costs have trended airlines’ unit cost moved up 7.1 percent, with all higher. Non-fuel unit costs at Network carriers carrier groups seeing unit cost increases. are up 23 percent since 2008, representing a Higher fuel prices were the primary driver CAGR of 2.1 percent, while at Value airlines, for the increase in unit costs. Network carriers’ non-fuel costs have climbed 23.2 percent, or a unit fuel cost jumped 30.5 percent, while Value CAGR of 2.1 percent. carriers saw a 26 percent increase, and ULCC unit The domestic unit cost gap between Network fuel cost soared 35.4 percent. As a result, fuel and Value carriers is now two cents, compared now represents 23.7 percent of operating costs with 1.7 cents in 2008. The gap between Value for Network carriers, 25.2 percent for Value, and and ULCCs is 2.9 cents, compared with 0.9 cent 31.3 percent for ULCC. Exhibit A26 in the Cost in 2008, while the gap between Network and Appendix shows that the system average fuel ULCCs has hit 4.9 cents, compared with 1.7 cents price and fuel spot price have tracked closely in 2008. This suggests that Value airlines are since fourth quarter 2017, indicating no major performing well against Network carriers, but hedging influence. Despite the higher prices, fuel less so against the ULCC group. costs trail labor, remaining the second-largest Unit fuel costs have tracked similarly across the cost category for US airlines. carrier groups, with ULCCs achieving a slightly For the fourth straight year, labor represented lower unit fuel cost since the beginning of 2015. the largest cost category for US airlines across all carrier groups. It accounted for 35.9 percent of Network carriers’ systemwide unit cost, DOMESTIC COST 36.1 percent for Value carriers, and 22.2 percent PERFORMANCE for the ULCC group. Network carrier unit labor crept up 0.9 percent year-over-year, third On a stage-length adjusted basis, Spirit quarter. During the same period, Value and maintains its position as the lowest-cost producer ULCC unit labor cost increased 3.5 percent and in the US at 8.1 cents. Frontier and Allegiant, the 15.4 percent, respectively. other two members of the ULCC group, round Aircraft maintenance decreased 15 percent out the lowest-cost producers in the US. for Network carriers in the third quarter of 2018 The Value carrier group falls between the compared to third quarter the year before. ULCCs and the Network carriers. Hawaiian, at 10 But Value carriers experienced an 8.6 percent cents, has the lowest domestic CASM of the Value increase in aircraft maintenance, while ULCCs carriers, followed closely by Southwest. JetBlue, remained flat. Although aircraft maintenance at 12.7 cents, has the highest domestic CASM does affect quarterly profitability, it is difficult of the Value carriers. This still puts JetBlue’s to analyze such short periods because heavy domestic unit cost below that for Delta. maintenance checks can cause swings in costs. Delta has the lowest domestic CASM of the Aircraft ownership costs decreased for all Network carriers, at 13.4 cents. United has the three groups in the third quarter of 2018 versus highest CASM of US airlines, at 14.5 cents. The Q3 2017, with Value carriers dropping the most at five percent gap between United and American 6.8 percent. Network and ULCC slid 5.7 percent has been increasing since 2017. and five percent, respectively. Other unit costs, including food, insurance, commissions, advertising, non-aircraft rentals, landing fees, and minor expenses, increased 11. 8 percent for the Network carrier group and

18 Exhibit 14: SYSTEM CASM BY GROUP (EXCLUDING REGIONAL AFFILIATES), Q3 2017 VERSUS Q3 2018 COST COST PER ASM US CENTS

Average for the Average for Average Average for 10 airlines Network group for Value group ULCC group surveyed (American, (Alaska, Hawaiian, (Allegiant, ANALYSIS Delta, United) JetBlue, Southwest) Frontier, Spirit)

13.0 12.3 12.1 11.5 11.6 10.7

AIRLINE ECONOMIC AIRLINE 8.4 7.6

Other

Fuel

Labor 2017 2018 2017 2018 2017 2018 2017 2018

Source: Planestats.com Note: Mainline operations only; excludes transport-related cost (regionals)

Exhibit 15: CHANGE IN SYSTEM UNIT COSTS, Q3 2017 VERSUS Q3 2018

PASSENGER YIELD US CENTS PERCENT Aircraft Aircraft Labor Fuel Maintenance Ownership Other CASMxT 35.4 30.5 26.0

15.4 11.8 10.3 8.6 7.0 7.6 3.5 0.9 0.0 1.5

(5.0) (4.1) (5.7)(6.8)

(15.0) PERCENT OF TOTAL COSTS Aircraft Aircraft Labor Fuel Maintenance Ownership Other NETWORK 35.9 23.7 7.9 6.3 26.2 VALUE 36.1 25.2 9.9 5.9 23.0 ULCC 22.2 31.3 7.7 11.4 27.4

Source: Planestats.com Note: Mainline operations only; excludes transport-related cost (regionals)

19 Exhibit 16: GROWTH OF DOMESTIC CASM INCLUDING AND NOT INCLUDING FUEL, Q1 2008 THROUGH Q3 2018 COST COST PER ASM US CENTS 14

ANALYSIS Non-fuel CASM

7 AIRLINE ECONOMIC AIRLINE

0 2008 2010 2012 2014 2016 2018

Network CASM xF Value CASM xF ULCC CASM xF

Network fuel Value fuel ULCC fuel

Source: Planestats.com Note: Mainline operations only; excludes transport-related cost (regionals)

Exhibit 17: DOMESTIC CASM DETAILS FOR INDIVIDUAL CARRIERS, Q3 2018

STAGE LENGTH ADJUSTED COST PER ASM US CENTS

Spirit 8.1 Frontier 8.5 Allegiant 9.2

Hawaiian 10.0

Southwest 10.2 Alaska 12.2

JetBlue 12.7

Delta 13.4 American 13.8 United 14.5

Source: Planestats.com Note: Mainline operations only.Excludes transport-related revenue and cost (regionals). Stage-length adjustment = CASM × (airline stage length/1,000)0.5. Stage-length adjusting attempts to normalize airline unit costs based on the stage length flown.

20 COST AN UNCERTAIN FUTURE FOR JET FUEL PRICES ANALYSIS

After hitting a 10-year low at the beginning per-gallon price for jet fuel had fallen 19 percent of 2016, jet fuel prices have since rebounded, to $1.87. boosting overall airline expenses. In third quarter While in 2019 prices for oil and jet fuel began 2018, fuel costs per ASM jumped 30 percent for creeping up again, EIA’s Short-Term Energy the 10 US carriers included in the AEA study, Outlook expects them to flatten out at about $2

AIRLINE ECONOMIC AIRLINE versus fuel costs per ASM in Q3 2017. The sharp per gallon through May 2019. After that, they rise in fuel prices is the principal reason that could trend upward through the remainder of overall costs shot up 8.9 percent. Breaking down the year. the 8.9 percent rise, fuel accounted for 7.4 percent US airlines reported an average cost per gallon and non-fuel for the other 1.5 percent. of $2.21 during third quarter 2018. At that price, Based on recent trends, the average operating the system unit cost was three cents. Had the margin for the airline industry may fall to about industry realized the $1.91 a gallon forecast by five percent to six percent in 2019. That margin the EIA, there would have been a 0.4 cent increase would be less than 40 percent of the industry’s in profitability. peak only four years before, in 2015. But there’s generally a hazy outlook for jet fuel According to the EIA, jet fuel prices hit $2.31 per prices with demand for air travel rising at the gallon in October 2018. That price was 123 percent same time the global economy may be slowing. above the spot-price low in January 2016. But oil Adding to the uncertainty are new environmental markets were rattled by external factors such rules for cargo ships that compel them to use fuel as Qatar’s early December announcement that with a lower sulfur content. This would put them it would leave OPEC, an about-face on Iranian in direct competition for the same low-sulfur sanctions, an oversupply of oil, and forecasts for distillates used by airlines and could push slower growth than anticipated in the world’s prices higher. biggest economies. By December 2018, the

UNIT REVENUE AND EXPENSE 14

12

10

8 2016 Q1 2016 Q3 2017 Q1 2017 Q3 2018 Q1 2018 Q3

RASMxT CASMxFT Fuel Cost Per Available Seat Mile

Source: PlaneStats.com Mainline operations only

FUEL COST PER GALLON CENTS 240 Forecast 205

170

135

100 2016 01 2016 06 2017 01 2017 06 2018 01 2018 06 2019 01 2019 06 2020 01

Source: US Energy Information Agency Short Term Energy Outlook PROFIT HANGING ONTO PROFITABILITY third quarter 2018, although that was down from AMID DECLINING MARGINS 16.9 percent a year earlier. For Value carriers, PROFIT domestic profit is the key source of system profit; In looking at profitability by the three carrier even so, domestic profit tumbled 23.9 percent groups, ULCCs produced the highest operating to $1.1 billion. International profit declined margin from fourth quarter 2010 until fourth 30.7 percent to $133 million (see Exhibit 19). quarter 2015. Since the end of 2016, however, International flying produced the highest ANALYSIS the group has the lowest operating margin operating margin at 14.5 percent, compared with of the three groups. The Value carriers have 11. 7 percent for domestic flying. recently produced the highest operating margin, ULCC operating profit plunged 43.4 percent while the Network group continues to improve from $199 million to $113 million, with a operating margins. systemwide operating margin of 6.5 percent. Network carrier operating profit was relatively Domestic flying makes up nearly all of ULCCs’ AIRLINE ECONOMIC AIRLINE flat, but the mix between domestic and operating profit. In the third quarter 2018, international performance changed significantly domestic flying produced $106 million in profit, from 2017 to 2018. Network carrier operating which was down 43 percent, while international profit increased 0.6 percent to $2.1 billion flying produced just $7 million, a decline of in third quarter 2018 over the third quarter 48.6 percent. 2017. Systemwide operating margin declined Of the Network carriers, United has the highest 0.8 percentage point to 7.5 percent. International exposure to the Pacific region at 33 percent of profit soared 35.3 percent to $1.4 billion, total international revenue. Delta has the highest more than offsetting the 32.7 percent slide in exposure to the Atlantic region at 54 percent of domestic profit to $719 million. As a result, the total international revenue, and American has the international margin rose to 11.9 percent, while highest exposure to the Latin America region at domestic declined to 4.4 percent. 44 percent of total international revenue. Value carriers achieved the highest operating margin of the three groups at 11.9 percent in

Exhibit 18: SYSTEM LONG-TERM OPERATING MARGIN TREND, Q1 2001 THROUGH Q3 2018

PERCENT 40

20

0

(20)

(40) 2002 2006 2010 2014 2018

Network Value ULCC

Source: Planestats.com Note: Mainline operations only; excludes transport-related cost (regionals)

23 Exhibit 19: OPERATING PROFIT AND OPERATING MARGINS, Q3 2017 VERSUS Q3 2018

US$ MILLIONS PROFIT Total for Network group Total for Value group Total for ULCC group (American, Delta, United) (Alaska, Hawaii, (Allegiant, Frontier, Spirit) JetBlue, Southwest) 2,089 2,101 ANALYSIS 1,591

1,197

International AIRLINE ECONOMIC AIRLINE 147 55 Domestic 2017 2018 2017 2018 2017 2018

8.3% 7.5% 16.9% 11.9% 10.4% 3.3% System 7.2% 4.4% 16.3% 11.7% 10.0% 3.1% Domestic 9.8% 11.9% 23.2% 14.5% 18.0% 6.5% International

Source: Planestats.com Note: Mainline operations only; excludes transport-related cost (regionals)

Exhibit 20: INTERNATIONAL REVENUE EXPOSURE BY REGION, 12 MONTHS ENDING Q3 2018

PERCENT OF INTERNATIONAL REVENUE 0% 100%

Alaska 40 44 16 American 54 23 23 Delta Frontier Hawaiian JetBlue Pacific Southwest Spirit Latin

46 21 33 United Atlantic

Source: Planestats.com Note: Mainline operations only; excludes transport-related cost (regionals). Allegiant does not fly internationally.

24 BUSINESS CYCLE REVIEW ALIGNING CAPACITY AND Prior to this period, the industry was producing DEMAND TO DRIVE MARGINS its highest margins in decades, despite the REVIEW industry operating in a macroeconomic At a macro level, the US airline industry has environment that had previously contributed produced profitable margins dating back to to losses (relatively high energy cost and lower/ 2010. From 2010 to 2015, the U.S. airline industry slowing GDP growth, as shown in Exhibit 22). Yet produced growing margins, bottoming at four the industry transitioned from being unprofitable

BUSINESS CYCLE BUSINESS percent in 2011 and peaking at 15 percent in to producing its best returns in decades while 2015. However, since peaking in 2015, the margin continuing to operate in an environment for the US airline industry has declined each year, characterized by higher cost and slower most recently reaching eight percent for the first economic growth. This transition correlates to half of 2018. the period of industry consolidation.

ANALYSIS During this period of margin contraction As the industry moved through and

between 2015 and 2018, the price of oil, the emerged from the period of the most intense industry’s second-largest cost driver, dropped consolidation, capacity growth remained from the mid-$90 per barrel range to below $65 generally aligned with GDP growth and margins (and in most years was at or below $50, as shown grew. As shown in Exhibit 23, though, the in Exhibit 22). Thus, the industry transitioned significant oil price drop in 2015 appears to have

AIRLINE ECONOMIC AIRLINE from a period of margin expansion on higher contributed to a period where the industry began energy cost to margin erosion with lower energy growing capacity faster than GDP. cost . At the industry level, capacity growth aligned During the period of margin expansion, with GDP has allowed load factor to increase and industry capacity growth generally remained average fares to stabilize and increase. With the at or below GDP growth. In 2015, as oil prices recent uptick in capacity growth in excess of GDP dropped, industry capacity began to grow faster growth, fares have fallen to maintain an average than GDP. Subsequently, margin consistently load factor of 84 percent. declined as capacity growth continued to outpace GDP.

Exhibit 21: US AIRLINE INDUSTRY MARGINS, GDP, AND AIRLINE CAPACITY, Q1 2010 THROUGH Q2 2018

CAPACITY & GDP MARGIN PERCENT PERCENT 5 20

4 16

3 12

2 8

1 4

0 0 2010 2012 2014 2016 2018

Capacity GDP Margin

Source: Form 41 and Bureau of Economic Analysis accessed at bea.gov

26 Exhibit 22: US AIRLINE INDUSTRY MARGINS AND MACROECONOMIC INDICATORS, 1991 THROUGH 2017 REVIEW MARGIN & GDP OIL PPB US DOLLARS 20% $130

15% $110

10% $90 BUSINESS CYCLE BUSINESS 5% $70

0% $50

(5%) $30 ANALYSIS (10%) $10 Consolidation (15%) Bankruptcies ($10) 1991 1995 1999 2003 2007 2011 2015 2018

Margin US GDP Oil Price Growth per Barrel AIRLINE ECONOMIC AIRLINE INDUSTRY PROFITABILITY Profitable Generally unprofitable Profitable US GDP ~3-5% Slowing to ~0-3% <2% OIL PRICE <$30 bbl Rising to >$90 bbl ~$80-90bbl

Source: US Department of Transportation, Bureau of Economic Analysis, and Energy Information Administration

Exhibit 23: AIRLINE US MARGINS AND MACROECONOMIC INDICATORS, Q1 2012 THROUGH Q2 2018

YOY CHANGE OIL PPB US DOLLARS 8% $120 6% $100 4% $80 2% $60 0% $40 (2%) $20 (4%) $0 2012 2013 2014 2015 2016 2017

Oli Price GDP Industry Margin per Barrel Capacity Source: US Department of Transportation, Bureau of Economic Analysis, and Energy Information Administration

Exhibit 24: AVERAGE US DOMESTIC AIRFARE INDEXED IN 2017 US DOLLARS, 1995 THROUGH 2017

PERCENT 5% 0% (5%) Fares stabilize as industry capacity grows slower than GDP and excess (10%) capacity is absorbed (15%) (20%) (25%) Real fares decline on excess Fares begin falling industry capacity and continued again as capacity (30%) growth at or above GDP grows faster than GDP 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

Source: US Department of Transportation

27 WORLD CAPACITY TRENDS THE GLOBAL VIEW North America, comprising 24 percent of global capacity, grew ASMs by 3.2 percent while TRENDS

Capacity analysis can indicate the strength of the departures grew by less than a percent. airlines within a region. However, healthy growth The world’s third-largest market is Europe, rates vary greatly by region, driven by differences representing 22.2 percent of total ASMs. Airlines in the maturity of the air travel market. The added 4.3 percent ASMs to the European market following section analyzes capacity growth across during 2018. This was down from the 8.1 percent regions. Additional charts by region can be found ASM growth in 2017. WORLD CAPACITY WORLD in the World Capacity Appendix. Growth in the Africa/Middle East continued Worldwide, airlines added 4.3 percent to decelerate. ASMs grew just 2.1 percent while more ASMs during the year ended November departures increased 3.8 percent. The region 2018 compared to the year ended November now represents 11.7 percent of worldwide ASMs. 2017. This growth was down from 7.3 percent Latin America/Caribbean capacity increased ANALYSIS between 2016 and 2017. In all regions except 5.3 percent, surpassing the 5.1 percent growth in for Latin America, departures, seats, and ASMs 2017. This ASM growth was driven by an increase all increased. In Latin America, departures in stage length (up 1.9 percent) as departures declined two percent while both seats and declined 2.0 percent. The region comprises ASMs increased. just 7.0 percent of the global commercial Growth was more equally distributed than aviation market. AIRLINE ECONOMIC AIRLINE the previous year. Asia/Oceania was once again Since 2009, Africa/Middle East has produced the fastest-growing region in the world, with the highest capacity growth. The region’s ASMs ASMs increasing 5.5 percent over 2017. This have growth 125 percent since 2009. However, as was down from the 10 percent growth that the the chart shows, growth is slowing for the region. region achieved in 2017. The global share of All other regions continue to produce capacity Asia/Oceania ASMs increased to 34.9 percent, growth with Asia/Oceania closing the gap with continuing to make it the world’s largest Africa/Middle East. North America, arguably aviation market. the most mature aviation market, has the lowest capacity growth since 2009 at 31 percent.

Exhibit 25: WORLD CAPACITY CHANGE, NOVEMBER 2017 VERSUS NOVEMBER 2018

DEPARTURES SEATS ASM SHARE OF WORLD ASM

North America 0.2% 2.0% 3.2% 24.0%

Latin America 2.0% 3.3% 5.3% 7.0%

Europe 2.0% 3.4% 4.3% 22.2%

Africa/Middle East 3.8% 1.2% 2.1% 11.7%

Asia/Oceania 3.8% 4.8% 5.5% 34.9%

World Total 2.0% 3.5% 4.3%

Source: Planestats.com

29 TRENDS Exhibit 26: WORLD CAPACITY INDEX, 2009 THROUGH 2019

CAPACITY INDEX 1.0 = JAN 2009 2.5

WORLD CAPACITY WORLD 2.0

1.5 ANALYSIS 1.0

0.5

0 AIRLINE ECONOMIC AIRLINE 2009 2011 2013 2015 2017 2019

Africa/ Asia/ Latin World Europe North Middle East Oceania America America

Source: Planestats.com

30 OPERATIONAL RESILIENCE AIRLINE ECONOMIC ANALYSIS OPERATIONAL RESILIENCE means ariskoflosingshare torivals. guarantee thatcompetitorswillfollowsuit, which financial returns. Inaddition,there isno operational performancebysacrificingpotential operations, butmanyare reluctant tofund between commercial goalsandreliable Airlines mustconstantlymaintainabalance competition andfeweroptionsforcustomers. and less revenue, potentiallyresulting inless all ofthesealsomeanloweraircraft utilization longer turntimes,orareduction inflying.But of strategies, includingincreased blocktime, resilience intotheirschedulesthrough anumber optimize increase outcomepredictability andultimately machine learningandpredictive analyticsto using sophisticatedsolutionsinvolving operational planning.Airlinesare increasingly advanced approach tocommercial and by takingamore integrated andtechnologically other too fewrunways,taxiways,andgates,among overburdened airportinfrastructure, such as congestion affecting airtraffic control and lobbying forchange.Theconditionsinclude the control oftheindustry, despiteitsyearsof of thelogjamstemsfrom conditionsbeyond performance andcompletionfactors.Much tested, asshownbymetricsthatgaugeon-time more thatairlines’operational resilience is that bottlenecks inthesystemworsenand the USsince increase inthenumberofflights inEurope and exceeded 60 the volumeoftraffic; inEurope, thenumber 36 federal DepartmentofTransportation, almost skies andairports.IntheUS, according tothe as airlinescontendwithincreasingly congested resiliency todayhasbecomemore challenging the on theiremployees,andultimatelysuffer in fail tomeetcustomerexpectations,putpressure unexpected happens.Withoutit,airlineswould and buildinginacushiontorecover whenthe they publish,allowingforpotentialdisruption is theabilityofairlinestoadhere totheschedules Boiled downtoitsessence, operational resilience WHY RESILIENCYMATTERS capacity reductions are implemented. Although economies begintoslow, asanticipated,and be alleviatedincomingyearsifthe global Airlines canintroduce more operational Still, airlinescanaddress operational resilience The more capacitythatairlinesadd, themore While ithasalwaysbeenafocusofcarriers, Of course,someoftheproblem could percent ofreported delayswere solelyfrom marketplace. things. decision-making. 2010. percent. Exhibit 27 showsthe

increased 20seconds,or2.7 2017. IntheUS, thelengthofaverage delay of enroute delays,105 network generated atotalof19.1 control network,reported thattheEuropean agency thatmanagestheEuropean airtraffic increased capacityintheskies.Eurocontrol, the for the reduces utilizationandrevenue-generating time compared withdecadesearlier. Itultimately employees toflytheroutes ontheirschedules requires airlinestohavemore aircraft andmore costs. Inotherwords, lengtheningblocktimes aircraft canbeflownduringadayandraises crew increase of29 with twohours,20minutesin1995. That’s an faces ablocktimeofthree hourscompared Miami InternationalAirport,anaircraft today York’s JohnF. Kennedy InternationalAirportto Taking theexampleofroutes betweenNew the costofutilizationandrevenue generation. preserve on-timeperformance,butitcomesat increase blocktimes.Thisenablesairlinesto operational resilience, airlineshavebegunto 82.9 February 2019. However, thatwasdownfrom with 80.1 the higheston-timeperformancerecord, Of alltheregions, LatinAmericahasmaintained February 2016 to76.3 performance increasing from 73 improvement overthefouryears,withon-time the EUtoreduce delaysand an increase inpenaltiesrelated toattempts by 78.4 jumped from 73.9 arriving within15 minutesofthescheduled 81.5 Its bestyearwas2017, whenOTP improved to February 2018 to74.5 dropping from 78.7 declines overthelastfouryears,mostrecently (OTP). NorthAmericahaspostedmostly record whenitcomestoon-timeperformance Globally, airlines haveracked upanuneven O may lingerevenafter growth means thecongestioninskiesandatairports capacity isstilloutpacingGDPgrowth, which economic activity, theexpansionofairline there hasbeensomeindustryeffort tomirror N-TIME PERFORMANCE Increased blocktimesare largely aresult of To dealwiththecongestionandpreserve The AsiaPacific region hasshownsteady In 2019, European on-timeperformance percent. Ontimeisdefinedasdeparting or percent inFebruary 2018. percent inFebruary 2019. Thismayreflect aircraft.

percent offlightsarrivingontimein percent, whichlimitsthetimean percent inFebruary 2018 to percent offlightsontimein percent inFebruary 2019. percent inFebruary 2019. percent higherthanin cancellations. percent, over2017, slows.

percent in

million minutes time. 32 according to Federal Aviation Administration expected to rise for 2018 with the increase in fuel (FAA) data. prices and other operating costs. But this is a long-term trend. Here’s a simple

RESILIENCE example: If the US industry operated 2018

IS REGULATION A SOLUTION? schedules as published but used 2005 block time, the resulting crew cost reduction would In Europe and the US, regulation is increasingly be $2.2 billion, or a savings of about 2.6 percent seen as a tool to reduce delays by imposing in total operating costs. In other words, OPERATIONAL penalties on airlines and compensating increases in block time cost the industry about passengers. Flight Compensation Regulation 2.6 percentage points of margin.1 261/2004, or EU 261 as it is commonly called in Europe, was passed in 2004 and went into effect in 2005. This regulation establishes IMPROVEMENTS UNDERWAY ANALYSIS common rules on compensation and assistance to passengers when they are denied boarding or There are factors outside the airlines’ control experience flight cancellations or long delays. EU that can and do often hurt on-time performance 261 applies to flights departing from European globally. These include overburdened air traffic Union airports, regardless of the carrier’s origin, control and airport infrastructure, which are at and flights arriving at EU airports when operated the root of the disruptions. AIRLINE ECONOMIC AIRLINE by European carriers. Compensation ranges from Improvements to the air traffic control system €250 to €600, depending on flight distances, in the US and around the world are being for delays of over two hours, cancellations, or developed and implemented as soon as viable. denied boarding. These include hardware upgrades as well as In the US, the Department of Transportation procedural changes that can utilize the limited passed a rule in 2015 that prohibits US airlines, airspace more efficiently. While there remains with some exceptions, from allowing an aircraft debate on which entity will ultimately fund the to remain on the tarmac for more than three improvements, there is little doubt the upgrades hours without deplaning passengers. There are are required. also rights afforded to passengers when they Airport infrastructure is another important are denied boarding. All US airlines restricted constraint affecting on-time performance. overbooking after 2017. Airline growth throughout the world has led to EU 261 claims are growing and becoming increasing airport infrastructure challenges and material costs for European carriers. While no greater congestion. For 2019 to 2027, airport comprehensive published data exist, European operators in Europe plan to spend 4.6 times the carriers — especially low-cost carriers — have amount on infrastructure that they did between noted the impact of regulation in recent years. 2012 and 2018. In the US, plans call for spending In July 2018, Ryanair reported that EU 261 only 1.6 times more on airport infrastructure over “right-to-care” costs jumped 40 percent in the the same time frame. first quarter. Similarly, Wizz Air announced While infrastructure growth is beginning that in first quarter 2018, its EU 261 costs rose to catch up with demand, airlines still face a 203 percent after an unprecedented number mounting challenge to maintain operational of disruptions led to a 426 percent increase resilience given current and projected congestion in cancellations. levels. Better external conditions will certainly Interestingly, the US industry appears to be help, but at the end of the day the path to trying to avert punitive regulation by self-policing operational resilience will be found in strategies its on-time performance and putting more of a that optimize commercial and operational needs cushion into schedules and operating standards. and not prioritize one over the other. For instance, block time on top US routes climbed 18 percent, while block time on EU routes has edged up only five percent since 2005, when EU 261 went into effect. Trade association Airlines for America estimates that the average cost per block minute was $68.40 during 2017—a figure that is

1 Assumes that industry is defined as Alaska/Virgin America, Allegiant, American, Delta, Frontier, Hawaii, JetBlue, Southwest, United and Spirit. Uses regression-based block inflation applied to 2018 routes (regression measures block on a basket of common routes operated between 2005 and 2018 and adjusts the block based on stage length). Assumes YE Q2 2018 average crew cost per block hour. Assumes crew cost scales one-to-one with block changes.

33 AIRLINE ECONOMIC ANALYSIS OPERATIONAL RESILIENCE Source: Note: Source: S 4.4 4.8 US$ MILLIONS DEPARTURE COUNT O FEB 2016 6 7 7 7 8 8 PERCENT ON TIME DEPARTURE COUNTUSCARRIERS 0 8.4 8.8 US$ MILLIONS DEPARTURE COUNT DEPARTURE COUNTEUCARRIERS 0 Exhibit 27: NUMBER OF FLIGHTS IN EUROPE AND THE UNITED STATES, 2010 THROUGH PERFORMANCE Exhibit 28: AIRLINE INDUSTRY MAINTAINS UNEVEN GLOBAL ON-T 6 0 4 8 2 6 Percentage on-timeispercentage offlightsthatdepartorarrivewithin15 minutesoftheairline’s Planestats.com OAG FlightViewandOliverWyman 2010 2010 8.382 4.143 E FEB 2017 u M r o i d p d

e RECORD 2011 2011 l 8.428 4.251 , e E

A f a r i st ca FEB 2018 ,

2012 2012 8.241 4.265 0% Analysis -1% PERCENT YOYCHANGE PERCENT YOYCHANGE FEB 2019 A si 2013 2013 8.200 4.206 a

P a ci f i c 2014 2014 8.143 4.141 2015 2015 8.146 4.316 L a t i n

A m e r i 2016 2016 8.200 4.406 ca IME +4% +2% schedule. 2017 2017 8.282 4.528 N o r t h

YOY CHANGE YOY CHANGE A m 2018 2018 8.540 4.760 e PERCENT PERCENT r i

201 ca 8 (8) (8) 34 16 16 8 8 0 0 Exhibit 29: EXAMPLES OF INCREASED BLOCK TIMES, 1995 VERSUS 2018 RESILIENCE

1995: 1 hour, 15 mins T OPERATIONAL

1995: 55 mins T 1995: 2 hours, 20 mins ANALYSIS T

AIRLINE ECONOMIC AIRLINE Source: Planestats.com

Exhibit 30: COMPARISON OF REGULATORY FRAMEWORKS

EU 2615 US LEGISLATION

APPLICATION Flights departing from EU airports US domestic flights operated by US airlines Flights arriving at EU airports and are operated by EU carriers

DELAYS Passengers are entitled to 3 types of Flights cannot remain on the tarmac for benefits for delays, cancellations, and more than 3 hours without facing fines denied boarding4 ($27.5K per passenger)

Compensation3: Food/water must be provided no later • €250 for flights less than 1,500 km than 2 hours after a tarmac delay • €400 for flights more than 1,500 km – 3,000 km CANCELLATIONS1 • €600 for flights more than 3,000 km No Federally Mandated Protection

DENIED BOARDING2 Choice between rerouting, If rescheduled to arrive: reimbursement, or rebooking: • Within 1 hr of original arrival:  • Reimbursement of your ticket (and a no compensation return flight to your departure airport • 1-2 hours of original arrival: 200% of if you have a connecting flight) one-way fare up to $675 • Rerouting to your final destination • 2+ hours of original arrival: 400% of • Rerouting at a later date under one-way fare up to $1,350 comparable transportation conditions

Assistance: Compensation for refreshments, food, accommodation for overnight stay

DELAYED, LOST, OR Up to €1,200 in liability Up to $3,500 in liability DAMAGED LUGGAGE

Notes: 1. Under EU 261, the airline is required to compensate you for a canceled flight if you were notified less than 14 days before your originally scheduled departure date. Additional restrictions apply if notified within 14 days and are able to be rescheduled. 2. Only applies to involuntary denied boarding situations 3. Compensation for delays can be reduced by 50 percent if a passenger arrives within 2-4 hours of the originally scheduled arrival. 4. Benefits do not apply if the airline can prove that extraordinary circumstances caused the cancellation or delay. 5. Statute of limitations depends on the country where the claim is processed and generally ranges from two to five years. Source: Oliver Wyman Analysis

35 AIRLINE ECONOMIC ANALYSIS OPERATIONAL RESILIENCE Source: Source: 0 94 96 98 100 102 104 106 PERCENT 2018 BLOCKTIMEVERSUS2005 CTS Note: Source: VS. 2019THROUGH Exhibit 33: AIRPORT INFRASTRUCTURE INVESTMENT, IN US$ MILLIONS, 2012 THROUGH 2018 Exhibit 32: US PASSENGER CARRIER DELAY US Exhibit 31: PERCENT CHANGE IN BLOCK TIME ON REPRESENTATIVE LARGE EU AND Airport Other Aircraft Other New Maintenance Fuel Crew –Pilots/Flight Completion TOTAL DIRECT OPERATING TOTAL CALENDAR YEAR

MARKETS 0 Reflects projects thathavebeencompleted,are underconstruction,orare BRU |CDG Airport STAGE LENGTH(MILES) Airlines forAmerica, Planestats (OAG)forroutes betweenrepresentative large Business Monitor AMS |BRU AMS |CDG

Expansion Ownership BRU |ZRH CDG |LHR BRU |LHR AMS |LHR FCO |ZRH Year CDG |ZRH LHR |ZRH 500 AMS |ZRH

201 CDG |FCO International

Attendants 2027 http://airlines.org/dataset/per-m 7 AMS |FCO BRU |FCO FCO |LHR 1,000

COSTS 2012 – $1 0 102 108 114 120 126 132 138 PERCENT 2018 BLOCKTIMEVERSUS2005 S CTS $1 2 1

$427 201 $13 ,838 ,422 0 EUROPE 4 8 DCA |ORD DIRECT AIRCRAFT OPERATING PER BOS |LGA BOS |DCA BOS |JFK DCA |JFK DCA |LGA LGA |ORD

500 COSTS LAX |SFO inute-cost-of-delays-to-u- BOS |ORD 2019 - markets $58 $20 $38 LGA |MIA 1,000 JFK |ORD

2027 ,948 ,421 ,566 STAGE LENGTH(MILES) DCA |MIA x 4.6 committed. JFK |MIA MIA |ORD BLOCK 1,500 BOS |MIA s-airlines/ 2012 – LAX |ORD

$28 MINUTE $26 $68.48 $22.67 $21.27 $12.37 $ $2.77 $9.40 2,000 1

201 ,757 ORD |SFO ,838 ,889 DCA |LAX $30 USA 8  LAX |MIA JFK |LAX 2,500 2019 - Δ MIA |SFO JFK |SFO vs $44 BOS |LAX $44 BOS |SFO X 1.8 (0.4 . 15.

7.4 201 2027 2.8 $265 6.7 1. ,91 ,649 3,000 3 3 %) % % % % % 36 6 4 APPENDIXES REVENUE APPENDIX

38 Exhibit A1: RELATIVE SIZE OF AIRLINE GROUPS

SHARE OF OPERATING REVENUE REVENUE 2009 APPENDIX

NETWORK DOMESTIC 44.7% NETWORK INTERNATIONAL 30.8% VALUE DOMESTIC 21.6% VALUE INTERNATIONAL 0.4% ULCC DOMESTIC 2.1% ULCC INTERNATIONAL 0.2%

201

NETWORK DOMESTIC 41.2% NETWORK INTERNATIONAL 29.3% VALUE DOMESTIC 23.0% VALUE INTERNATIONAL 2.3% ULCC DOMESTIC 3.8% ULCC INTERNATIONAL 0.3%

Source: PlaneStats.com Note: Mainline operations only. Excludes transport-related revenue (regionals)

Exhibit A2: NETWORK GROUP’S CHANGE IN OPERATING REVENUE, Q3 2017 VERSUS Q3 2018 OPERATING REVENUE US$ MILLIONS

27,874 25,271

11,589 10,401

Y0Y CHANGE PERCENT 2,602 10.3% 14,870 16,285 1,188 11.4% International 1,415 9.5% Domestic 2017 2018

Source: PlaneStats.com Note: Mainline operations only. Excludes transport-related revenue (regionals)

39 Exhibit A3: VALUE GROUP’S CHANGE IN OPERATING REVENUE, Q3 2017 VERSUS Q3 2018

OPERATING REVENUE US$ MILLIONS REVENUE APPENDIX 9,434 10,021 831 922 Y0Y CHANGE PERCENT 587 6.2% 8,603 9,100 91 10.9% International 496 5.8% Domestic 2017 2018

Source: PlaneStats.com Note: Mainline operations only. Excludes transport-related revenue (regionals)

Exhibit A4: ULCC GROUP’S CHANGE IN OPERATING REVENUE, Q3 2017 VERSUS Q3 2018

OPERATING REVENUE US$ MILLIONS

Y0Y CHANGE PERCENT

1,412 1,678 266 17.6% 104 73 31 142.7% International 1,339 1,575 266 18.9% Domestic 2017 2018

Source: PlaneStats.com Note: Mainline operations only. Excludes transport-related revenue (regionals)

Exhibit A5: NETWORK CARRIER DOMESTIC REVENUE INCREASE – PRICE AND VOLUME DRIVERS, Q3 2017 VERSUS Q3 2018 REVENUE DRIVERS US$ MILLIONS

Capacity Impact Rank: #1 ASMs up 5.3% 698

Yield Impact Rank: #2 Yield up 0.4 cent 398

Fees/Other Impact Rank: #3 Baggage/reservation and cancel fees increase 273

Load factor Impact Rank: #4 Percent of seats filled rises slightly 49

Cargo Impact Rank: #5 Domestic cargo decreases slightly 3

Revenue change Q3 2017/Q3 2018 1,415

Source: PlaneStats.com, Oliver Wyman Analysis

40 Exhibit A6: NETWORK CARRIER INTERNATIONAL REVENUE INCREASE – PRICE AND VOLUME DRIVERS, Q3 2017 VERSUS Q3 2018 REVENUE DRIVERS US$ MILLIONS REVENUE Yield Impact Rank: #1 Yield slightly up 0.7 cent 510

Fees/Other Impact Rank: #2 Baggage/reservation and cancel fees increase 321

APPENDIX Capacity Impact Rank: #3 ASMs up 2.0% 182

Cargo Impact Rank: #4 International cargo increases 26.7% 131

Load factor Impact Rank: #5 Percent of seats filled rises 0.4 point 43

Revenue change Q3 2017/Q3 2018 1,188

Source: PlaneStats.com, Oliver Wyman Analysis

Exhibit A7: VALUE CARRIER DOMESTIC REVENUE INCREASE – PRICE AND VOLUME DRIVERS, Q3 2017 VERSUS Q3 2018 REVENUE DRIVERS US$ MILLIONS

Capacity Impact Rank: #1 ASMs up 4.9% 384

Yield Impact Rank: #2 Yield up 0.2 cent 114

Load factor Impact Rank: #3 Percent of seats filled down 0.6 point 61

Fees/Other Impact Rank: #4 Baggage/reservation and cancel fees increase 51

Cargo Impact Rank: #5 Domestic cargo up 9.8% 9

Revenue change Q3 2017/Q3 2018 496

Source: PlaneStats.com, Oliver Wyman Analysis

Exhibit A8: VALUE CARRIER INTERNATIONAL REVENUE INCREASE – PRICE AND VOLUME DRIVERS, Q3 2017 VERSUS Q3 2018 REVENUE DRIVERS US$ MILLIONS

Capacity Impact Rank: #1 ASMs up 6.6% 50

Yield Impact Rank: #2 Yield up 0.4 cent 27

Fees/Other Impact Rank: #3 Baggage/reservation and cancel fees increase 8

Load factor Impact Rank: #4 Load factor up 0.4 point 3

Cargo Impact Rank: #5 Insignificant volume 2

Revenue change Q3 2017/Q3 2018 91

Source: PlaneStats.com, Oliver Wyman Analysis

41 Exhibit A9: ULCC GROUP DOMESTIC REVENUE INCREASE – PRICE AND VOLUME DRIVERS, Q3 2017 VERSUS Q3 2018 REVENUE DRIVERS US$ MILLIONS REVENUE Capacity Impact Rank: #1 ASMs up 14.8% 126

Fees/Other Impact Rank: #2 Baggage/reservation and cancel fees increase 73

APPENDIX Load factor Impact Rank: #3 Percent of seats filled rises 1.7 points 20

Yield Impact Rank: #4 Yield up 0.1 cent 17

Cargo Impact Rank: #5 Insignificant volume 0

Revenue change Q3 2017/Q3 2018 235

Source: PlaneStats.com, Oliver Wyman Analysis

Exhibit A10: ULCC GROUP INTERNATIONAL REVENUE INCREASE – PRICE AND VOLUME DRIVERS, Q3 2017 VERSUS Q3 2018 REVENUE DRIVERS US$ MILLIONS

Capacity Impact Rank: #1 ASMs up 38.3% 18

Fees/Other Impact Rank: #2 Baggage/reservation and cancel fees increase 14

Load factor Impact Rank: #3 Load factor down 2.2 points 2

Yield Impact Rank: #4 Yield up slightly 1

Cargo Impact Rank: #5 Insignificant volume 0

Revenue change Q3 2017/Q3 2018 31

Source: PlaneStats.com, Oliver Wyman Analysis

Exhibit A11: LONG-TERM DOMESTIC CAPACITY INDEX, 2009 THROUGH 2018

CAPACITY INDEX 2009 = 1 4

3

2

1

0 2009 2011 2012 2015 2017 2019

Network Value ULCC

Source: PlaneStats.com > Form 41 T2 Traffic, Capacity = ASMs Note: Mainline operations only.

42 Exhibit A12: LONG-TERM INTERNATIONAL CAPACITY INDEX, 2009 THROUGH 2018

CAPACITY INDEX 2009 = 1 REVENUE 6

4 APPENDIX

2

0 2009 2011 2012 2015 2017 2019

Network Value ULCC Source: PlaneStats.com > Form 41 T2 Traffic, Capacity = ASMs Note: Mainline operations only.

Exhibit A13: LONG-TERM INTERNATIONAL PASSENGER YIELD TREND, Q1 2009 THROUGH Q3 2018

PASSENGER YIELD CENTS 18

12

6

0 2009 2011 2012 2015 2017 2019

Network Value ULCC Source: Planestats.com > Form 41 Financials > P 1.2 Income Statement Note: Mainline operations only.

Exhibit A14: NETWORK CARRIER DOMESTIC LOAD FACTORS, JANUARY 2008–AUGUST 2018

LOAD FACTOR 100%

10.5 9.0

80%

60% 2008 2010 2012 2014 2016 2018

Point Monthly Rolling 12-month difference average

Source: US DOT T100, PlaneStats.com

43 Exhibit A15: NETWORK CARRIER INTERNATIONAL LOAD FACTORS, JANUARY 2008 THROUGH MAY 2018

LOAD FACTOR REVENUE 100%

12.4 12.1

APPENDIX 80%

60% 2008 2010 2012 2014 2016 2018

Point Monthly Rolling 12-month difference average

Source: US DOT T100, PlaneStats.com

Exhibit A16: VALUE CARRIER DOMESTIC LOAD FACTORS, JANUARY 2008 THROUGH AUGUST 2018

LOAD FACTOR 100%

8.9

80% 12.5

60% 2008 2010 2012 2014 2016 2018

Point Monthly Rolling 12-month difference average

Source: US DOT T100, PlaneStats.com

Exhibit A17: VALUE CARRIER INTERNATIONAL LOAD FACTORS, JANUARY 2008 THROUGH MAY 2018

LOAD FACTOR 100%

8.9 15.0 80%

60% 2008 2010 2012 2014 2016 2018

Point Monthly Rolling 12-month difference average

Source: US DOT T100, PlaneStats.com

44 Exhibit A18: ULCC GROUP’S DOMESTIC LOAD FACTORS, JANUARY 2008 THROUGH AUGUST 2018

LOAD FACTOR REVENUE 100%

12.3 10.6

APPENDIX 80%

60% 2008 2010 2012 2014 2016 2018

Point Monthly Rolling 12-month difference average

Source: US DOT T100, PlaneStats.com

Exhibit A19: ULCC GROUP’S INTERNATIONAL LOAD FACTORS, JANUARY 2008 THROUGH MAY 2018

LOAD FACTOR 100%

20.5 18.1

80%

60% 2008 2010 2012 2014 2016 2018

Point Monthly Rolling 12-month difference average

Source: US DOT T100, PlaneStats.com

Exhibit A20: LONG-TERM CARGO REVENUE INDEX, YE 2009 THROUGH 2018

REVENUE INDEX 2009 = 1 1.5

1

0.5

0 2009 2011 2013 2015 2017

Value Network Network CARGO AS PERCENT OF OPERATING REVENUE Domestic Domestic International NETWORK DOMESTIC 1.0% NETWORK INTERNATIONAL 5.9% VALUE DOMESTIC 1.0% VALUE INTERNATIONAL 1.1%

Source: US DOT T100, PlaneStats.com

45 Exhibit A21: SYSTEM BAGGAGE, RESERVATION CHANGE AND MISCELLANEOUS FEES, Q1 2008 THROUGH Q3 2018

SERVICE FEES REVENUE US$ BILLIONS 6 $4.5 Billion per Quarter

4 APPENDIX $1.0 Billion $3.5 Billion per Quarter 2

0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Baggage Misc Reservation Fees Fees

Source: PlaneStats.com > Form 41 Financials > P1.2 Income Statement for all carriers in study Note: Adjustment made to Allegiant miscellaneous revenue, which is reported differently. Ancillary revenue as reported to DOT differs from ancillary revenue reported on SEC filings.

Exhibit A22: DOMESTIC RASM BY AIRLINE, STAGE-LENGTH ADJUSTED TO 1,000 MILES, Q3 2018

STAGE LENGTH ADJUSTED DOMESTIC RASM US CENTS

6.7 Frontier 6.7

9.6 Spirit 9.5

9.7 Allegiant 10.5

11.9 Hawaiian 14.5

12.0 Southwest 13.8

12.4 JetBlue 12.0 ULCC 14.0 United 12.8 Value 14.5 American 14.2 Network

15.0 Delta 15.8 RASMxT SLA 16.5 Alaska 14.6 RASMxT

Source: PlaneStats.com Note: Mainline operations only, Excludes transport-related revenue (regionals).

46 COST APPENDIX

47 Exhibit A23: DOMESTIC CASM BY GROUP (EXCLUDING REGIONAL AFFILIATES), Q3 2017 VERSUS Q3 2018 COST COST PER ASM CENTS

Average for 10 Average for Average for Average for airlines surveyed Network group Value group ULCC group (American, Delta, United) (Alaska, Hawaiian, (Allegiant, Frontier, Spirit)

APPENDIX JetBlue, Southwest) 13.7 12.5 12.8 11.7 10.9 11.7 8.5 7.7

2017 2018 2017 2018 2017 2018 2017 2018

Labor Fuel Other Source: PlaneStats.com Note: Mainline operations only. Excludes transport-related revenue and cost (regionals).

Exhibit A24: CHANGE IN DOMESTIC UNIT COSTS, Q3 2017 VERSUS Q3 2018

PERCENT Aircraft Aircraft Labor Fuel Maintenance Ownership Other CASM xT

34.9 28.2 24.3

15.2 16.5 10.2 7.5 7.2 7.0 3.4 0.2 0.0 0.8

(3.7) (5.6)(6.8)(4.9)

(16.8)

PERCENT OF TOTAL COSTS

Aircraft Aircraft Labor Fuel Maintenance Ownership Other NETWORK 36.8 21.2 8.0 6.2 27.8 VALUE 36.6 25.0 9.9 5.8 22.7 ULCC 22.3 30.9 7.8 11.4 27.6

Source: US DOT T100, PlaneStats.com

48 Exhibit A25: US CARRIER SYSTEM LABOR UNIT COSTS, Q3 2016 VERSUS Q3 2017 VERSUS Q3 2018 COST COST PER ASM US CENTS 6 APPENDIX 4

2

0 Alaska Allegiant American Delta Frontier Hawaiian JetBlue Southwest Spirit United

2017/2018 9.4% (5.0%) 1.7% (2.5%) 42.9% 0.6% 5.0% 1.9% 15.9% 1.1% 2016/2018 19.4% 10.3% 7.8% 3.6% 8.1% 12.9% 13.1% (4.4%) 9.4% 6.2%

2016 2017 2018

Source: PlaneStats.com Note: Mainline operations only.

Exhibit A26: SYSTEM AVERAGE FUEL PRICE (US CARRIERS) AND FUEL SPOT PRICE, DECEMBER 2009 THROUGH OCTOBER 2018

PER GALLON US CENTS 350

250

150

50 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Fuel spot System average price fuel price

Source: Oliver Wyman research based on US Energy Information Administration data

Exhibit A27: DOMESTIC CASM GAPS, Q1 2008–Q3 2018

COST PER ASM CENTS 15

11

7 2008 2010 2012 2014 2016 2018

Network Value ULCC

Source: PlaneStats.com Note: Mainline operations only. Excludes transport-related cost (regionals).

49 Exhibit A28: AVERAGE STAGE LENGTH VERSUS CASM, Q3 2018

COST COST PER ASM US CENTS 15

APPENDIX American Southwest Delta United JetBlue 11 Hawaiian

Alaska Allegiant Frontier

7 Spirit 700 900 1100 1300 1500 1700 STAGE-LENGTH (MILES)

Network Value ULCC

Source: PlaneStats.com Note: Mainline operations only. Excludes transport-related cost (regionals).

Exhibit A29: DOMESTIC CASM BREAKDOWN BY CARRIER, Q3 2017 VERSUS Q3 2018

COST PER ASM US CENTS 0

2017 7.6 Spirit 2018 8.0

2017 6.8 Frontier 2018 8.4

2017 9.5 Allegiant 2018 10.0

2017 9.4 Alaska 2018 10.7

2017 11.4 Southwest 2018 11.8

2017 11.4 Hawaiian Labor 2018 12.2 Fuel 2017 10.9 JetBlue 2018 12.3 Other 2017 12.1 United 2018 13.4

2017 12.3 ULCC American 2018 13.6 Value 2017 14.0 Delta 2018 14.1 Network

Source: PlaneStats.com Note: Mainline operations only. Excludes transport-related cost (regionals).

50 Exhibit A30: DOMESTIC CASM DETAILS BY CARRIER, Q3 2017 VERSUS Q3 2018

COST AIRLINE YEAR CASMxT LABOR FUEL OTHER CHANGE %

2017 7.6 1.5 1.9 4.2 Spirit 2018 8.0 1.7 2.6 3.7 0.4 4.60

2017 6.8 1.2 1.6 4.0 APPENDIX Frontier 2018 8.4 1.7 2.4 4.4 1.6 23.75

2017 9.5 2.8 2.6 4.1 Allegiant 2018 10.0 2.7 3.2 4.1 0.5 5.05

2017 9.4 3.4 2.0 4.0 Alaska 2018 10.7 3.4 2.8 4.5 1.3 13.62

2017 11.4 4.7 2.5 4.2 Southwest 2018 11.8 4.8 2.9 4.1 0.4 3.60

2017 11.4 3.6 2.2 5.6 Hawaiian 2018 12.2 3.6 3.0 5.6 0.8 6.67

2017 10.9 3.5 2.4 5.0 JetBlue 2018 12.3 3.6 3.3 5.4 1.4 12.83

2017 12.1 5.0 2.1 5.0 United 2018 13.4 5.2 2.2 6.0 1.3 10.58

2017 12.3 4.6 2.3 5.3 American 2018 13.6 4.7 3.2 5.7 1.3 10.68

2018 14.0 5.5 2.4 6.1 Delta 2017 14.1 5.3 3.2 5.6 0.2 1.22

Network Value ULCC Source: PlaneStats.com Note: Mainline operations only, excludes transport-related revenue and cost (regionals).

51 PROFIT APPENDIX

52 Exhibit A31: COMPARISON OF SYSTEM RASM AND CASM, Q3 2017 VERSUS Q3 2018

CENTS PER ASM PROFIT 16

1.1 1.2 2.2 1.6 8 1.2 0.6 APPENDIX

0 RASM CASM RASM CASM RASM CASM RASM CASM RASM CASM RASM CASM 2017 2018 2017 2018 2017 2018

Total for Network group Total for Value group Total for ULCC group (American, Delta, United) (Alaska, Hawaii, (Allegiant, Frontier, Spirit) JetBlue, Southwest) Source: PlaneStats.com Note: Mainline operations only. Excludes transport-related cost (regionals).

Exhibit A32: COMPARISON OF DOMESTIC RASM AND CASM, Q3 2017 VERSUS Q3 2018

CENTS PER ASM 16

1.0 0.6 2.1 1.5

8 1.2 0.6

0 RASM CASM RASM CASM RASM CASM RASM CASM RASM CASM RASM CASM 2017 2018 2017 2018 2017 2018

Total for Network group Total for Value group Total for ULCC group (American, Delta, United) (Alaska, Hawaii, (Allegiant, Frontier, Spirit) JetBlue, Southwest)

Source: PlaneStats.com Note: Mainline operations only. Excludes transport-related cost (regionals).

Exhibit A33: SYSTEM RASM VERSUS CASM BY CARRIER, Q3 2018

RASM (CENTS) CASM (CENTS) MARGIN (CENTS) MARGIN %

Delta 14.8 12.6 2.1 14.5

Allegiant 12.1 10.0 2.1 17.6

Southwest 13.7 11.7 2.0 14.6

Hawaiian 13.4 11.7 1.7 12.9

Alaska 11.8 10.3 1.5 13.1

Spirit 9.5 8.0 1.5 15.9

American 14.3 13.6 0.7 5.0

JetBlue 12.5 12.1 0.4 3.1

United 13.0 12.7 0.3 2.3

Frontier 6.5 8.2 (1.7) (26.5)

Network Value ULCC

Source: Planestats.com Note: Mainline operations only. Excludes transport-related cost (regionals).

53 Exhibit A34: CHANGE IN UNIT PROFIT, Q3 2017 VERSUS Q3 2018

US CENTS

PROFIT 2017 2018 CHANGE

Spirit 1.3 1.5 0.2

Delta 2.1 2.1 0.1

American 0.7 0.7 0.0

APPENDIX United 0.5 0.3 (0.2)

Southwest 2.2 2.0 (0.2)

Allegiant 2.8 2.1 (0.6)

Alaska 2.4 1.5 (0.9)

JetBlue 1.6 0.4 (1.2)

Hawaiian 3.1 1.7 (1.4)

Frontier 0.2 (1.7) (1.9)

Network Value ULCC

Source: PlaneStats.com Note: Mainline operations only. Excludes transport-related cost (regionals).

Exhibit A35: DOMESTIC RASM VERSUS CASM BY CARRIER, Q3 2018

US CENTS PER ASM 18

1.7 0.6 (0.5) 2.3 (0.5) 2.0 1.6 2.1 9 1.5 (1.7)

0 Alaska Allegiant American Delta Frontier Hawaiian JetBlue Southwest Spirit United

RASM CASM

Source: PlaneStats.com Note: Mainline operations only. Excludes transport-related cost (regionals).

Exhibit A36: INTERNATIONAL RASM VERSUS CASM BY CARRIER, Q3 2018

US CENTS PER ASM 18

0.9 2.7 1.3 2.8 0.6 1.1 9 1.5 1.6

(1.4)

0 Alaska American Delta Frontier Hawaiian JetBlue Southwest Spirit United

RASM CASM

Source: PlaneStats.com Note: Mainline operations only. Excludes transport-related cost (regionals).

54 BUSINESS CYCLE APPENDIX

55 Exhibit A37: LABOR COST AND REVENUE PER ASM, INDEXED TO 1991

CYCLE 180

BUSINES 120 Labor contracts renegotiated as multiple US airlines begin entering bankruptcy

60 APPENDIX 0 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

Labor Revenue

Source: US Department of Transportation for American, Continental, Delta, Northwest, United, US Airways

Exhibit A38: US AIRLINE DOMESTIC INDUSTRY LOAD FACTOR, 1992 THROUGH 2018

100%

90%

80% Industry fills ~63% of capacity 70% Industry fills ~84% 60% of capacity

50% 1992 1996 2000 2004 2008 2012 2016 2018

Source: US Department of Transportation

Exhibit A39: US AIRLINE DOMESTIC INDUSTRY CAPACITY VERSUS US GDP GROWTH, 1992 THROUGH 2017

10% Incentivized by low oil prices, industry grows faster than GDP 5%

0% Despite low fill rate, (5%) industry grows with GDP

(10%) 1992 1996 2000 2004 2008 2012 2016 2018

Capacity GDP Source: US Department of Transportation and Bureau of Economic Analysis

56 WORLD CAPACITY APPENDIX

57 Exhibit A40: ASIA/OCEANIA CAPACITY INDEX

CAPACITY INDEX TRENDS

1.0 = JAN 2009 3.5

2.5 WORLD CAPACITY WORLD

1.5

0.5

APPENDIX 2009 2011 2013 2015 2017 2019

China Asia Asia World Oceania (no China)

Source: PlaneStats.com

Exhibit A41: NORTH AMERICA CAPACITY INDEX

CAPACITY INDEX 1.0 = JAN 2009 1.8

1.2

0.6

0 2009 2011 2013 2015 2017 2019

World Canada North USA America

Source: PlaneStats.com

Exhibit A42: EUROPE CAPACITY INDEX

CAPACITY INDEX 1.0 = JAN 2009 3

2

1

0 2009 2011 2013 2015 2017 2019

Eastern World Europe Western

Source: PlaneStats.com

58 Exhibit A43: AFRICA/MIDDLE EAST CAPACITY INDEX

CAPACITY INDEX TRENDS

1.0 = JAN 2009 3

2 WORLD CAPACITY WORLD

1

0

APPENDIX 2009 2011 2013 2015 2017 2019

Middle World Africa Africa East /Middle East

Source: PlaneStats.com

Exhibit A44: LATIN AMERICA/CARIBBEAN CAPACITY INDEX

CAPACITY INDEX 1.0 = JAN 2009 2

1

0 2009 2011 2013 2015 2017 2019

Central South World Caribbean America America

Source: PlaneStats.com

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61 About Oliver Wyman

Oliver Wyman is a global leader in management consulting. With offices in 60 cities across 29 countries, Oliver Wyman combines deep industry knowledge with specialized expertise in strategy, operations, risk management, and organization transformation. The firm has more than 5,000 professionals around the world who work with clients to optimize their business, improve their operations and risk profile, and accelerate their organizational performance to seize the most attractive opportunities. Oliver Wyman is a wholly owned subsidiary of Marsh & McLennan Companies [NYSE: MMC]. For more information, visit www.oliverwyman.com. Follow Oliver Wyman on Twitter @ OliverWyman.

Our aviation, aerospace, and defense experts advise global, regional, and cargo carriers; aerospace and defense OEMs and suppliers; airports; MROs; and other service providers in the transport and travel sector to grow shareholder and stakeholder value, optimize operations, and maximize commercial and organizational effectiveness.

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