U.S. , Air Service & Ongoing Investment in Planes, Products and People

John P. Heimlich Vice President & Chief Economist ACH Revenue Accounting Committee Meeting April 25, 2018 Airlines for America (“A4A”) Member and Associate Member Airlines Founded in 1936 as Principal Trade Association for U.S. Passenger and Cargo Airlines

2 airlines.org BOS-LAX Was Not a Simple Journey in the So-Called “Golden Age” of Air Travel

3 airlines.org Boston-Los Angeles Air Travel, 76 Years After the Evening Post ~9 Hours Faster, 90% Cheaper (in Real* Terms)

Average Round-Trip BOS-LAX Airfare and One-Way Block Time

1941 Actual (15hrs 15mins, 12 stops) $282

1941 Inflation-Adjusted* $4,695

2017 Actual (6hrs 25mins) $473

* Adjusted using 2017 constant dollars from the Bureau of Labor Statistics (http://www.bls.gov/cpi/#tables) Source: DOT Data Bank 1B via Diio Mi; “Air Travel Is Not Expensive,” The Saturday Evening Post (Mar. 22, 1941), p. 59; Campbell-Hill Aviation Group

4 airlines.org Boston-Los Angeles* Airfare Has Declined Materially Traffic in the Popular Corridor Has Risen Sharply – Nearly Doubling From 2000-2017

BOS-LAX* Round-Trip Airfare BOS-LAX* Daily O&D Passengers (Each Way) $800 2,000 $750 1,800 $700 Current $ 2017 $ $650 1,600 $600 $550 1,400 $500 1,200 $450 $400 1,000 $350

$300 800

2002 2000 2004 2006 2008 2010 2012 2014 2016 2018

2008 2000 2002 2004 2006 2010 2012 2014 2016 2018

Source: DOT Data Bank 1B (Passenger Origin-Destination Survey) via Diio Mi * BUR/LAX/LGB; 88% of BOS-LAX passengers flew nonstop in 2017

5 airlines.org On a Daily Basis, the 706,558 Employees* of U.S. Airlines Offer an Extensive Worldwide Network Facilitating the Safe and Rapid Movement of People and Goods

27,000 flights to/from more than 800 airports 2.3 million passengers 55,000 tons of cargo in nearly 80 countries

Source: A4A and Bureau of Transportation Statistics for U.S. passenger and cargo airlines * Headcount as of February 2018

6 airlines.org 7 8 9 When Choosing an , Leisure Travelers Value Affordability Above All Else 2017 Rankings Identical to 2016 (Schedule Solidly Second, Followed by Reliability)

When traveling for personal reasons, how would you rank the following in terms of choosing which airline to fly, with 1 being your first priority and 8 being your last priority? (Base = all 2017 flyers with at least 1 personal leisure trip)

Criteria 2017 (2016) Score Affordability (airfare / ancillaries / taxes) 1 (1) 2.50 (2.65) Flight schedule (routes, timings) 2 (2) 3.12 (3.23) Reliability of on-time departure and arrival 3 (3) 4.22 (4.28) Airline seat comfort 4 (4) 4.54 (4.45) Customer service (reservation/gate agents, flight attendants) 5 (5) 4.82 (4.95) Airline frequent flyer program (earn / redeem / upgrade / status) 6 (6) 5.19 (5.00) Quality of inflight amenities (food / entertainment / WiFi) 7 (7) 5.32 (5.17) Environmental responsibility 8 (8) 6.28 (6.26)

Source: Ipsos survey of American adults (January 2018)

10 airlines.org Among 11 U.S. Airline Brands, Smaller Carriers Have Been Growing the Fastest Different Types of Carriers Market Their Prices and Services Differently

300 Allegiant Spirit 250

200

150 Alaska Hawaiian 100 JetBlue Frontier 50 Sun Country Southwest

% Change in Capacity* Since 2007 Since Capacity* in Change % 0 AAL/DAL/UA L

(50) 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Source: Innovata (via Diio Mi) schedules as of Feb. 9, 2018, for selected marketing airlines including predecessors * Systemwide scheduled available seat miles

11 airlines.org Smaller U.S. Carriers Are Serving More and More Domestic Markets Competitive Presence of Low-Cost and Ultra Low-Cost Carriers Continues to Expand

120 Allegiant

100 Alaska

80 Frontier

JetBlue 60

40 Spirit

Number of U.S. Airports Served* Airports U.S.of Number 20 Hawaiian

0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Source: Innovata (via Diio Mi) schedules as of Feb. 16, 2018, for selected marketing airlines including predecessors * July 15-21 of each year

12 airlines.org Has Become the Largest Domestic U.S. Passenger Carrier Share (%) of U.S. Domestic Origin-and-Destination Passengers by Airline Business Model

“Global Network” / “Full Service” “Hybrid” / “Niche” / “Specialist” 53.5% 13.2% American 20.1 Alaska/Virgin 6.3 Delta 19.0 JetBlue 5.5 United 14.3 Hawaiian 1.5

“The Original LCC”

23.7% “Ultra Low-Cost (ULCC)” Other* 0.6% 9.1% PenAir Spirit 3.8 Frontier 2.7 Seaborne Airlines Allegiant 2.2 Other Sun Country 0.4

Sources: Aaron Karp, “Surveying the US passenger airline landscape,” Air Transport World (Nov. 8, 2017) and DOT Data Bank 1B for year ended 3Q 2017

13 airlines.org Competitive Choices for Domestic Flyers Have Continued to Increase Contrary to Some Assertions, Traffic Analysis Shows More Competitors on U.S. City Pairs

Average Number of Competitors* on All Reported Domestic U.S. Itineraries

2000 3.33

2007 3.41

2017 3.53

* Carrying at least 5 percent of O&D passengers in the city pair; average number of competitors is passenger-weighted across city pairs

Source: Compass Lexecon analysis of DOT Origin-Destination Survey (Data Bank 1B)

14 airlines.org Boston-Akron/Cleveland Is Among Countless Domestic City Pairs on Which Competition* Increased From 2007-2017 (Real Fares Down 20%, Passengers Up 23%)

Calendar Year 2007 Calendar Year 2017 Share of BOS-CAK/CLE Passengers Share of BOS-CAK/CLE Passengers

63% 47% 28% 30% 12%

6%

Source: DOT Data Bank 1B and Innovata published schedules via Diio Mi * Defined as carrying at least 5 percent of O&D passengers in the city pair

15 airlines.org As Real Airfares Have Plunged, Growth in Flyers = 4.5x Growth in U.S. Population Ancillary Services Included, 2017 Domestic Air Travel Was ~42% Cheaper Than in 1980

Domestic R/T Airfare (in CY2017 Dollars) Passengers Enplaned (Scheduled Service) $700 1,000 3.0 Fare Fare + Ancillary $600 900 849 2.5 $500 800

$400

700 Per Capita (Orange) 2.0

$300 600

1982 1986 1990 1994 1998 2002 2006 2010 2014 2018 1978 500 1.5

Domestic R/T Airfare (% of Disposable Personal Income) 400 Millions (Gray) Millions 3.0 1.0 2.5 Fare Fare + Ancillary 300 2.0 200 Passengers tripled (up 209%) 1.5 0.5 Population up 46% 1.0 100 Pax per capita doubled (up 111%) 0.5

0.0 0 0.0

2010 1978 1982 1986 1990 1994 1998 2002 2006 2014 2018

2010 1978 1982 1986 1990 1994 1998 2002 2006 2014 2018

Source: Bureau of Economic Analysis, Bureau of Labor Statistics and Bureau of Transportation Statistics (Data Bank 1B via Airline Data Inc. and T1 for U.S. airlines)

16 airlines.org U.S. Airlines Are Moving More People and More Goods Over Longer Distances Significant Growth of Demand for Air Transportation Services in the Deregulated Era

Passenger Traffic Up 4.1x Cargo Traffic Up 5.6x Revenue Passenger Miles (Billions) Revenue Ton Miles (Billions) 1,200 45

40 1,000

Billions 35

800 30

25 600 20

400 15

10 200 5

0 0

1994 1978 1982 1986 1990 1998 2002 2006 2010 2014 2018

1994 1978 1982 1986 1990 1998 2002 2006 2010 2014 2018

Source: U.S. Bureau of Transportation Statistics (T1 systemwide for U.S. airlines)

17 airlines.org Improving Finances Enabling Significant Reinvestment in Customer Experience In 2017 Alone, Airlines Directly Invested ~$20B in Flight/Ground Equipment, Facilities, IT

U.S. Passenger Airline Capital Expenditures ($ Billions per Year) 2010-2017: $102.4B 19.9

17.0 17.5 15.5 13.8 13.9 12.5 9.8 7.7 6.6 6.6 5.8

5.2 Includes Includes > aircraft 450

2000 2001 2002 2003-08 2009 2010 2011 2012 2013 2014 2015 2016 2017

* Includes payments made for aircraft and other flight equipment, ground and other property and equipment, airport and other facility construction and information technology Source: SEC filings of Alaska, Allegiant, American, Delta, Hawaiian, JetBlue, Southwest, Spirit, United and merged/acquired predecessors

18 airlines.org Capital Expenditures on the Rise for U.S. Cargo Airlines $ Billions by Fiscal Year

Total Enterprise Aircraft & Related Equipment Only 12.7 3.4 10.9 3.0 3.1

8.1 2.4 2.2 2.1 6.7 7.0 2.0 1.9 6.2 6.0 6.4

4.3

2015 2017 2010 2011 2012 2013 2014 2016 2017 2010 2011 2012 2013 2014 2015 2016 2018F FedEx UPS Atlas FedEx UPS Atlas

Source: SEC filings of Atlas, FedEx and UPS

19 airlines.org Airline-Airport Collaboration Has Paved Way for Widespread Infrastructure Investment Capital Projects Have Grown 86% Since 2015 at the 30 Largest U.S. Airports

» $130B of capital projects have been completed, are underway or approved at the 30 largest U.S. airports since 2008, including, for example: Investment at Largest Airports o Multiple new runways at Chicago O’Hare and new runways at Fort ($ Billions) Lauderdale, Washington Dulles, Seattle and Charlotte $130 o New/expanded/modernized terminal facilities at New York, Miami, Las Vegas, Orlando, Honolulu, Houston, Denver, Seattle, Salt Lake $100 City and San Francisco as well as international facilities at Atlanta, Boston and Los Angeles $70 » Development is also robust at smaller airports, including: o Runway projects at Columbus, Des Moines, Erie, Nashville, Providence and Sioux Falls o Terminal projects at New Orleans, Eugene, Grand Rapids, Greenville-Spartanburg, Oakland, Dallas Love Field, San Luis Obispo, Portland (Maine), Pasco, Reno-Tahoe and Wichita

» Investment is also occurring in cargo facilities and related 2015 2017 2018 infrastructure at Louisville, Newark, Lafayette (Louisiana), Approved Completed/Underway Indianapolis, Rockford, Memphis and elsewhere

20 airlines.org U.S. Airline Industry Headcount at Highest Level Since 2000

Year-End Full-Time + Part-Time Employees at U.S. Passenger and Cargo Airlines (000s)

753.6 753.6

706.6 706.6

704.9 704.9

686.0 686.0

666.8 666.8

649.2 649.2

624.8 624.8

621.2 621.2

614.8 614.8

611.0 611.0

612.0 612.0

602.8 602.8

594.3 594.3

587.3 587.3

583.9 583.9

583.4 583.4

582.7 582.7

568.1 568.1

563.7 563.7

Feb

2006 2016 2000 2001 2002 2003 2004 2005 2007 2008 2009 2010 2011 2012 2013 2014 2015 2017 2019 2020

Source: Bureau of Transportation Statistics Note: 2016 includes FedEx acquisition of TNT on May 25, 2016, which increased headcount by approximately 55,000

21 airlines.org U.S. Airlines* Spent $47B on Wages & Benefits in 2017 ($295B in 2010-2017) Average Compensation per Employee Rose Approximately $34,000 – Up 39% From 2010

Employee Wages and Benefits*

47.2 Total ($Mils) 43.9 Per FTE ($000) 40.2 35.8 119.0 32.8 33.1 30.6 31.3 113.6 107.8

99.5

94.0 92.4

85.3 86.4

2010 2011 2012 2013 2014 2015 2016 2017

* SEC filings of Alaska/Allegiant/American/Delta/Hawaiian/JetBlue/Southwest/Spirit/United and A4A Cost Index

22 airlines.org 2017 U.S. Airline Flight Ops Impacted by Hurricanes, Airport and CBP Power Outages Best Ever Recorded Performance for Baggage Handling and Involuntary Denied Boardings

Flight Completion Factor (%) On-Time Arrival Rate (%)

2017 98.54 2017 80.18 2016 98.83 2016 81.42 2015 98.46 2015 79.92 2014 97.82 2014 76.25

Properly Handled Bag Rate (%) Involuntary Denied Boardings per 100K Psgrs.

2017 Best ever 99.75 2017 Best ever 3.4 {By quarter: 6.2, 4.4, 1.5, 1.8} 2016 99.73 2016 6.2 2015 99.68 2015 7.6 2014 99.64 2014 9.2

Sources: BTS and DOT Air Travel Consumer Report (http://www.dot.gov/airconsumer/air-travel-consumer-reports)

23 airlines.org In 2017, Customer Complaints Fell Again, Reaching Lowest Rate Since 2013 Customer Complaints to DOT per 100,000 Passengers

2.0 1.8 1.90 1.6 1.4 1.52 1.42 1.38 1.2 1.35 1.13 1.0 1.07 0.8 0.95

0.6

0.4

0.2

0.0 2012 2013 2014 2015 2016 2017 Jan Feb

Sources: DOT Air Travel Consumer Report (http://www.dot.gov/airconsumer/air-travel-consumer-reports)

24 airlines.org Customers Are Seeing All-Time High of 3M+ Daily Seats Departing U.S. Airports Daily Seats (000) Departing U.S. Airports in Scheduled Service: Up 18% Since 2010

3,500 2017: DOM +3.6%, INT +5.8%, SYSTEM +3.9% 2018: DOM +3.1 INT +3.9%, SYSTEM +3.2 3,027 2,931 3,000 2,834 2,823 2,743 2,717 2,586 2,584 2,620 405 288 2,567 2,567 2,558 389 292 368 2,500 351 2,546 275 282 292 299 310 330 2,542 2,622 2,454 2,451 2,366 2,292 2,285 2,294 2,259 2,274 2,289 2,000

1,500

1,000

500

0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Domestic International

Source: Innovata (via Diio Mi) published schedules as of Apr. 20, 2018, for all airlines providing scheduled passenger service from U.S. airports to all destinations

25 airlines.org In Addition to Expanding Schedules, Airlines Are Deploying Larger Aircraft Replacement of 50-Seaters With Larger Regional Jets Is Primary Driver

. Factors include availability of pilots, fuel efficiency, congested airspace/airfields, improving economics of large regional jets, lack of new-generation in-production small aircraft

% of Domestic U.S. Departures by Aircraft Size

47 48 53 56

8 15 20 22 45 38 27 22

2005 2010 2015 2018

≤ 50 Seats 51-100 Seats > 100 Seats

Source: Innovata (via Diio Mi) published schedules as of Dec. 29, 2017

26 airlines.org 2017 Revenues Rose 4.5%, But All Major Expenses Rose Faster – Up 8.3% Yields Lagged U.S. Inflation; Profitability (Average Pre-Tax Profit Margin) Fell to 11%

Pre-Tax Profits Year-over-Year Change (%) in Operating Revenues and Expenses and Margin (%)

U.S. inflation up 2.1% 17.9

14.1 13.0 11.0 8.3 7.8 7.1 7.5 6.0 4.5 4.8 4.7 3.0

0.9

$17.6B $21.4B

Fuel

2016 2017

Labor

Aircraft

Airports

Other (3) Other

Cargo Rev Cargo Pax Traffic Pax

Total OpExp Total

Total OpRev Total

Pax Yield (1) Yield Pax

Maintenance Other Rev (2) Rev Other

1. Yield = passenger revenue per passenger-mile flown (cents per RPM) 2. Sale of frequent flyer award miles to airline business partners, pet transportation, in-sourced aircraft and engine repair, flight simulator rentals, inflight sales, etc. 3. Professional fees, food/beverage, insurance, commissions, GDS fees, communications, advertising, utilities, office supplies, crew hotels, nonfuel payments to regionals Source: A4A analysis of reports by Alaska, Allegiant, American, Delta, Hawaiian, JetBlue, Southwest, Spirit and United

27 airlines.org In 2017, U.S. Passenger Airline* Profitability Respectable But Below Average Pre-Tax Profit Margin (% of Operating Revenues)

37.6 35.9

27.1 27.5 28.0 25.0 19.3 15.8 17.0 12.4 13.2 10.8 11.0

5.2 6.2

Ford CSX

Apple

Disney

Boeing

Marriott

Chipotle Airlines*

Comcast

Starbucks

Caterpillar

Honeywell

McDonald´s

Union Pacific Union U.S. Corp. Avg. Corp. U.S.

* A4A analysis of reports by Alaska, Allegiant, American, Delta, Hawaiian, JetBlue, Southwest, Spirit and United Source: Company SEC filings

28 airlines.org Airlines Are Now Operated As Businesses – for the Betterment of All Stakeholders

“If started a funeral parlor, no one would die.” Martin Shugrue, vice chairman, Pan Am, January 1987

“I think historically, the airline business has not been run as a real business. That is, a business designed to achieve a return on capital that is then passed on to shareholders. It has…been run as an extremely elaborate version of a model railroad, that is, one in which you try to make enough money to buy new equipment.” Michael Levine, executive vice president of , 1996

“Our industry has been fundamentally and structurally changed. Things are different now. When down cycles come, you won’t see losses. The bad years won’t be cataclysmic. They will just be less good than the good years.” Doug Parker, chief executive officer, , June 2016

29 airlines.org Jet-Fuel Prices Creeping Up Again A Penny per Gallon per Year Equates to ~$200M in U.S. Airline Industry Fuel Expenses

EIA Spot Price* of Crude Oil/Barrel (Brent) EIA Spot Price of Jet Fuel/Gallon (U.S. Gulf) $80 $2.00 $70 $1.80 1.90 $1.60 $60 67 $1.40 1.52 1.56 $50 54 $1.20 52 1.25 $1.00 $40 44 $0.80 $30 0.85 29 $0.60 $20 $0.40

$10 $0.20 Average YTD

$0 $0.00

2000 2015 2016 2017 2018

2015 2017 2000 2016 2018

Source: A4A and Energy Information Administration (http://www.eia.gov/dnav/pet/pet_pri_spt_s1_d.htm)

30 airlines.org Federal Reporting and Disclosure Requirements Are Far More Onerous on Airlines Than on Other Commercial, Interstate Modes of Transportation

“Full-Fare” Advertising w/Taxes X X X  Operations and Capacity by Route X X X  Passengers and Miles by Route X X X  Freight and Mail Carried by Route X X X  Fare Paid by Origin-Destination X X X  Expenses by Region/Vehicle Type X X X  Cancellations/Diversions/Delays X X X  Mishandled Baggage X X X  Oversales X X X  Complaints to U.S. Government     Animal Injuries/Deaths X X X 

31 airlines.org “Making the movement of people and goods easier, and stimulating economies”

“The combination of creative freedom and new-generation aircraft has led to another hugely significant development in recent years: the hundreds of new city pairs that airlines have launched and continue to add to their networks. These directly link communities by air as they’ve never before been connected, making the movement of people and goods easier, and stimulating economies.”

-- Karen Walker, Editor-in-Chief, Air Transport World (April 2018)

Source: “Celebrating an industry,” Air Transport World (April 2018)

32 airlines.org