Aviation Industry OverviewAs airline strategy continues to evolve, a new long-haul, low cost model...

Aviation Industry Overview

Prepared for:

ASCE Air Transportation Group

20th Annual Conference

April 5, 2017

Presented by:

Jared Harckham

Eric Toler

ICF proprietary and confidential. Do not copy, distribute, or disclose.ICF proprietary and confidential. Do not copy, distribute, or disclose.ICF proprietary and confidential. Do not copy, distribute, or disclose.

ICF (formerly SH&E) is a full-service global aviation consultancy

2

INDUSTRY OVERVIEW

Airports • Airlines • Aerospace & MRO • Asset Advisory

joined ICF in 2012

joined ICF in 2011

joined ICF in 2007

54 years in business (founded 1963)

100+ professional staff

− Dedicated exclusively to aviation and aerospace

− Blend of consulting professionals and experienced aviation executives

Specialized, focused expertise and proprietary knowledge

Broad functional capabilities

More than 10,000 private sector and public sector assignments

Backed by parent company ICF International (2016 revenue: US$1.19 billion)

Global presence –– offices around the world

New York • Boston • London • Singapore • Beijing • Hong Kong

http://www.ghkint.com/Home.aspx

http://www.ghkint.com/Home.aspx


Our client base spans the

aviation sector, giving us a

holistic view of the industry

3

INDUSTRY OVERVIEW

International and regional passenger airlines

Major and regional airports

National, regional and local governments

International development agencies

Tourism agencies

Air cargo, express and integrated logistics operators

IT, equipment, and service providers

Airframe, engine, and avionics suppliers

Leasing companies

Investors and financial institutions

Booking, distribution, and travel services

Maintenance, Repair, and Overhaul industry

Corporate and business aviation


ICF offers a global airline client list and network of airline contacts

4

INDUSTRY OVERVIEW

http://en.wikipedia.org/wiki/File:Continental_micronesia.png

http://en.wikipedia.org/wiki/File:Continental_micronesia.png

http://www.123yatra.com/wp-content/uploads/2009/11/Logo-etihade.gif

http://www.123yatra.com/wp-content/uploads/2009/11/Logo-etihade.gif

http://static.planespotters.net/media/images/airlines/2376_1.png

http://static.planespotters.net/media/images/airlines/2376_1.png

http://www.jordansquash.com/Gallery/RoyalJordanianLogo.png

http://www.jordansquash.com/Gallery/RoyalJordanianLogo.png

http://www.h2opaddle.co.uk/transport/Logo_MS.gif

http://www.h2opaddle.co.uk/transport/Logo_MS.gif

http://upload.wikimedia.org/wikipedia/en/a/aa/UgandaAirlines2.jpg

http://upload.wikimedia.org/wikipedia/en/a/aa/UgandaAirlines2.jpg

http://durbantaxis.co.za/FlightBookings_files/image005.gif

http://durbantaxis.co.za/FlightBookings_files/image005.gif

http://www.skylink-usa.net/images/user_images/Image/5/Skylink_USA_logo.jpg

http://www.skylink-usa.net/images/user_images/Image/5/Skylink_USA_logo.jpg

http://2.bp.blogspot.com/_mhHzlHCfJ2M/TCILtAh9uXI/AAAAAAAABqU/0jmKpIox_U8/s1600/ups-logo.jpg

http://2.bp.blogspot.com/_mhHzlHCfJ2M/TCILtAh9uXI/AAAAAAAABqU/0jmKpIox_U8/s1600/ups-logo.jpg

http://en.wikipedia.org/wiki/File:Austral_new_logo.png

http://en.wikipedia.org/wiki/File:Austral_new_logo.png

https://www.3kmtravel.com/images/airlines/TAMairlinesLogo.png

https://www.3kmtravel.com/images/airlines/TAMairlinesLogo.png


ICF is especially strong in international air service experience and support

5

INDUSTRY OVERVIEW

Boston

Baltimore

Miami

Dallas/Ft. Worth

Denver

LasVegas

LosAngeles

U.S./Canada

Tampa

SaltLake City Islip

SanFrancisco

Ft. Myers

Richmond

Edmonton

Indianapolis

Omaha

San Paulo

LiberiaBogota

Port ofSpain

Medellin

Lima

South / CentralAmerica, Caribbean

*

* Mexico includes all airports managed by GAP, and MEX satellite airports

San Jose

San Juan

Quito

Santiago

Rio De Janeiro

Natal

*Spain includes all airports managed by AENA

Manchester

Newcastle

Donetsk

Cairo

Nantes

Stockholm

Istanbul

Birmingham

OmanMedinah

Heraklion

Jeddah Riyadh

Morocco

MoscowHamburg

London

Cheongju

Krasnoyarsk

Asia

SiemReap

ShanghaiKunming

Beijing

Khabarovsk

Hong Kong

Singapore

SeoulICN

Atlanta

Europe / Russia/ Middle East


Global Trends and Outlook

6


0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

19

70

19

72

19

74

19

76

19

78

19

80

19

82

19

84

19

86

19

88

19

90

19

92

19

94

19

96

19

98

20

00

20

02

20

04

20

06

20

08

20

10

20

12

20

14

20

16

20

18

20

20

20

22

20

24

20

26

20

28

20

30

20

32

20

34

GDP History & Forecast

Traffic History

Airbus Traffic Forecast (5.0%)

Boeing Traffic Forecast (4.8%)

ICF Traffic Forecast (4.0%)

IATA Passenger Forecast (3.7%)

World Traffic

World GDP

World air traffic growth has outpaced GDP growth, and this trend is expected to continue into the future

7

INDUSTRY OVERVIEW

Sources: Airline Monitor, Oxford Economics, World Economic Outlook, Airbus/Boeing/Embraer Market Outlooks, OECD, ICF Analysis (2016 data). Note: RPK (Revenue Passenger Kilometer): number of paying passengers x kilometers flown

Forecast

World GDP Growth and Air Transport World Traffic (RPKs)

Indexed: 1970 = 100

World Traffic grew 1.9x GDP from 1970-2015, and is forecast to grow 1.7x through 2035


Driven by low fuel costs and consolidation, the global airline industry achieved record profitability in 2016

8

INDUSTRY OVERVIEW

Sources: IATA, ICF Analysis

Global Airline Profitability

1997 - 2017F

$9B $8B $9B

$4B

-$13B-$11B

-$8B-$6B-$4B

$5B

$15B

-$26B

-$5B

$17B

$8B $9B$11B

$17B

$33B$36B

-$30 B

-$20 B

-$10 B

$0 B

$10 B

$20 B

$30 B

$40 B

$30B

Asia Pacific, $6.3B

North America, $18.1B

Europe, $5.6B

Middle East, $0.3B

Latin America, $0.2B

Africa, ($0.8B)

Rising fuel and labor costs will contribute to a decrease in profitability in 2017


-2%

-5%

0%

2%1%

-1%

3%5%

1%2%

3%

0%

13%

5%5%

3%

1%

-4%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

NorthAmerica

AsiaPacific

Europe LatinAmerica

MiddleEast

Africa

2008

2012

2017F

However, record profitability has been largely limited to carriers in North America and many carriers continue to struggle

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INDUSTRY OVERVIEW

Sources: IATA, ICF Analysis

Global Airline EBIT Margin by Region


IATA forecasts a 3.7% annual average growth in global air passenger journeys – differing by region

10

INDUSTRY OVERVIEW

Source: IATA

North America535 M

2.8% CAGR

Europe566 M

2.5% CAGR

Middle East245 M

4.8% CAGR Asia Pacific1,831 M

4.7% CAGR

Africa189 M

5.1% CAGR

1.9 times the number of air passenger journeys in 2035 compared with 2017

Latin America192 M

3.6% CAGR

2015-2035 Traffic CAGR and Increase in Annual Passenger Counts by Region


8%

6%

5% 5%

6%

7%

6%

5%

5%

7%

4%

5%

6%

7%6%

6%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

2010 2011 2012 2013 2014 2015 2016 2017F

Traffic (RPK) Capacity (ASK)

Airlines have found the art of “capacity discipline” in recent years, though this commitment may be tested in 2017

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INDUSTRY OVERVIEW

Sources: IATA Air Transport Market Analysis (2017) and Economic Performance of the Airline Industry (Dec 2016)

Global Passenger Traffic / Capacity Growth

Year-Over-Year Percent Change


$0.50

$0.80

$1.10

$1.40

$1.70

$2.00

$2.30

$2.60

$2.90

$3.20

~68% Decline Jan. 2014 – Feb. 2016

~46% IncreaseFeb. 2016 – Mar. 2017

Fuel prices bottomed out in early 2016, and have risen in the last 12 months

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INDUSTRY OVERVIEW

Source: EIA, ICF International analysis

U.S. Gulf Coast Jet Fuel Price per Gallon

January 2014 – March 2017

ICF proprietary and confidential. Do not copy, distribute, or disclose.ICF proprietary and confidential. Do not copy, distribute, or disclose.ICF proprietary and confidential. Do not copy, distribute, or disclose. 13

INDUSTRY OVERVIEW

Sources: Airbus, Boeing, CAPA

0

500

1,000

1,500

2,000

2,500

3,000

3,500

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

Deliveries

Orders

Boeing 2016

Airbus 2016

731 Net Orders 688 Deliveries 6,874 Backlog

668 Net Orders 748 Deliveries 5,715 Backlog

Boeing and Airbus Aircraft Orders and Deliveries 2000–2016

Aircraft production and delivery rates have increased to meet backlogs, though orders have recently fallen


5%

28%

25%5%

30%

7%Narrowbody

Jet

WidebodyJet

Turboprop

Regional Jet

27,957

Aircraft

13%

54%14%

19%

By Aircraft Type By Global Region

27,957

Aircraft

Latin

AmericaAfrica

North

America

Asia

Pacific

EuropeMiddle East

The current commercial air transport fleet consists of 28K aircraft; over half are narrowbody

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INDUSTRY OVERVIEW

Source: CAPA 2016

2016 Global Commercial Air Transport Fleet


The 787/A350 have been deployed by airlines around the world to open long-haul, medium-demand routes

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INDUSTRY OVERVIEW

Source: Innovata

New Long-Haul Markets Launched by B787/A350 Aircraft

Most 787/A350 aircraft at NYC airports are deployed on existing routes


As airline strategy continues to evolve, a new long-haul, low cost model has emerged

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INDUSTRY OVERVIEW

Sources: Innovata, CAPA Note: Aircraft includes those place by operator and by lessors assigned to operator

March 2013

March 2017

• 108 737 MAX on order

• 45 787-9 Dreamliners on order

• 9 long-haul destinations added


Norwegian is advancing its long-haul, low-cost strategy with 10 new routes from the Northeast U.S. to Europe

737 MAX: Efficient, long-range narrowbody makes far, thin routes feasible

Potential to disrupt legacy, full-service carriers operating widebody aircraft

Q2 2017 delivery in support of a June 2017 service launch

Ambitious growth plans with 108 737 MAX aircraft on order

Promotional non-stop Fares: As low as $65-$99 one-way

Additional fees for seat assignments, carry-ons, food, drinks, etc.

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INDUSTRY OVERVIEW

Source: CNN, BBC, BoardingArea


Other long-haul low cost airlines are being launched in response to Norwegian

IAG launching Level Airlines

Los Angeles and San Francisco to Barcelona via A330

beginning in June 2017

Lufthansa expanding Eurowings

New A350 flights from Cologne, Germany to Seattle,

Orlando, Miami, and Las Vegas in July 2017

Long-haul low cost challenges:

“Hidden costs” – catering, turnaround times, crew

overnight

Utilization – long hours but fewer cycles

Expectations – more services, comfort on long-haul

Fewer advantages – traditional fuel and seat density

advantages vs. mainline carriers eroded on long-haul

service

18

INDUSTRY OVERVIEW

Source: BBC, Business Traveller, BoardingArea, Conde Nast Traveler, Skift


Hybrid low cost carriers are blurring the line between full service carriers and pure low-cost carriers

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INDUSTRY OVERVIEW

New hybrid model: combination of cost savings methodology of pure LCCs with

the services, flexibility, and routes structure of full service carriers

Ultra Low

Cost Carriers

Hybrid

CarriersLow Cost

Carriers

Full Service

Carriers

Point-to-point

No codesharing

Direct Sales

Few aircraft types

Unbundled fares

Hub and spoke

Codesharing/Alliances

GDS distribution

Mix of aircraft types

Bundled Fares


Global airline alliances have reached maturity, representing more than 50% of global capacity and generating more than $380 billion in revenue annually

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INDUSTRY OVERVIEW

Source: Airways Magazine

http://www.mynetbizz.com/pages/airlines/china-eastern-airlines/china-eastern-airlines-logo.jpg


http://www.flytap.com/USA/en/Homepage/


http://www.swiss.com/web/?fromlocalsites=true



However, fault lines are beginning to emerge as airlines increasingly form partnerships across alliances

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INDUSTRY OVERVIEW

Sources: Airways Magazine, CAPA








Tactical, partner-specific models outside the three major alliances are flourishing

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INDUSTRY OVERVIEW

Equity stakes/alliances

Cross-alliance

Etihad model

Joint Ventures

Latin America and Asia partnerships key focus for U.S. airlines

Non-aligned carriers

e.g. Alaska, JetBlue, Emirates, Icelandair








Example: JetBlue has an extensive network of 40 global partners

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INDUSTRY OVERVIEW

Source: JetBlue


Example: Alaska Airlines generates $850 million in code share revenues resulting from its network of partnerships

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INDUSTRY OVERVIEW

Source: Alaska Airlines, Airways Magazine


Outlook

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INDUSTRY OVERVIEW

Source: IATA, Boeing CMO, Airbus GMF, Air Cargo World, South China Morning Post

Government policy will have a significant impact on industry

performance

Travel ban, personal device ban

Investment in airport infrastructure and ATC

Liberalization

Traffic growth continues to outperform GDP growth

Air traffic continues to prove its resilience to slow economic growth by

outperforming global GDP

However, the industry is still subject to exogenous shocks, e.g. terrorist events,

natural disasters, oil prices, government policy

Supply and demand factors will contribute to robust growth in 2017

Asia, Middle East, and Africa will grow the fastest, driven by growth of the middle

class

Low-cost carriers and Ultra low-cost carriers continue to expand aggressively and

promote air travel accessibility

Delivery of new aircraft, including fuel efficient and next gen aircraft, will open

new service opportunities


U.S. Trends

26


Significant consolidation has occurred in the U.S. airline industry in the past decade, and 2016 closed with yet another merger

27

INDUSTRY OVERVIEW

2003 2004 2005 2006 2007 2008 2009 2010 2011

US Airways

and Aloha

file for

bankruptcy

Delta and Northwest

file for bankruptcy

US Airways-America

West merger

Frontier files

for bankruptcy

Delta-Northwest

merger

Aloha ceases

operations

United-

Continental

merger

American Airlines

files

for bankruptcy

Southwest-AirTran

merger

2012 2013

American-

US Airways

merger

Hawaiian files for

bankruptcy

2016

Alaska-

Virgin

America

merger

http://en.wikipedia.org/wiki/File:Aloha_Airlines_Logo.svg


http://en.wikipedia.org/wiki/File:Delta_logo.svg






http://en.wikipedia.org/wiki/File:Northwest_Airlines_Logo.svg


http://en.wikipedia.org/wiki/File:Continental_Airlines_Logo.svg

http://en.wikipedia.org/wiki/File:Continental_Airlines_Logo.svg




Virgin and Alaska are building up their West Coast presence, recently announcing an aggressive route expansion

28

INDUSTRY OVERVIEW

Source: World Airline News

New Alaska/Virgin Nonstop Service from SFO and SJO

BWI

RDUBNA

IND

MSY

PHL

KOA

Virgin America Operated

Alaska Operated

MEX

ABQ

MCI

AUS

LAX

TUS

SFO SJC


With the help of low fuel prices, U.S. airlines have achieved elevated profits in the last two years

29

INDUSTRY OVERVIEW

*Note: YE 3Q 2016

Source: U.S. DOT Form 41

$5

-$8 -$8

-$4 -$3-$1

$3$5

-$6

-$0.4

$7$5 $6

$11

$14

$28$26

-$15

-$10

-$5

$0

$5

$10

$15

$20

$25

$30

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

Operating Income of U.S. Airlines, USD Billions (2000 – 2016*)


Revenue weakness and increasing expenses contributed to a small reduction in U.S. airline profitability in 2016

30

INDUSTRY OVERVIEW

Sources: A4A, analysis of airline financial reports

% Change in Operating Revenues

2016 vs. 2015

3%

-5%

-10%

6%

-1%

-12%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

% Change in Operating Expenses

2016 vs. 2015

9%

-17%

3% 2%

6%4%

1%

-20%

-15%

-10%

-5%

0%

5%

10%

15%


Labor has replaced fuel as airlines’ largest cost item, and will continue to rise in the coming years

31

INDUSTRY OVERVIEW

*Note: YE 3Q 2016


29%

18%

30%

38%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2006 2016*

Fuel

Labor

Ownership

Maintenance

Other

Share of Operating Expenses by Type,

U.S. Airlines (2006 vs. 2016*)


1%

5%

6%

13%

18%

23%

0% 5% 10% 15% 20% 25%

Network/Legacy

Other/Regional

Low CostNetwork/

Legacy

60%

Low Cost26%

8%

6%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Although ULCCs account for only 6% of domestic capacity, they are growing at a much faster rate than network carriers and traditional LCCs

32

INDUSTRY OVERVIEW

Source: Innovata Schedules

Share of Domestic U.S. Seat

Capacity (2016)

Regional/

Other

Ultra-LCC

ULCCs have a limited presence at NYC airports with a 2% share of domestic capacity

Average Annual Growth of Domestic

U.S. Seat Capacity (2013-2016)


U.S. legacy carriers have introduced bare-bones “basic economy” fares in response to ultra-low-cost-carrier pressure

33

INDUSTRY OVERVIEW


U.S. legacy carriers have introduced bare-bones “basic economy” fares in response to ultra-low-cost-carrier pressure

34

INDUSTRY OVERVIEW

MCO - ATL


Domestic load factors have consistently increased since 2001, now reaching 85%

35

INDUSTRY OVERVIEW

Source: U.S. DOT T100

71% 69% 70% 73% 74%77% 79% 80% 80% 81% 82% 83% 83% 83% 84% 85% 85%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

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

Average Domestic U.S. Load Factor, U.S. Airlines (2000 - 2016)

Average load factors in 2016 at NYC airports matched the national average of 85%


West Coast airports in particular have seen the largest capacity gains in the last 5 years, while many rust belt airports are among the biggest losers

36

INDUSTRY OVERVIEW


Bottom 10 U.S. Airports – Largest

Capacity Decrease (2011-2016)

Top 10 U.S. Airports – Largest Capacity

Increase (2011-2016)

61%

37%35%

28% 28% 28% 26% 26% 25% 25%

0%

10%

20%

30%

40%

50%

60%

70%

-4%-5% -6% -6%

-8%

-13%-14%

-19%

-25%

-28%-30%

-25%

-20%

-15%

-10%

-5%

0%

NYC airports saw a 13% gain in seat capacity between 2011-2016

ICF proprietary and confidential. Do not copy, distribute, or disclose.ICF proprietary and confidential. Do not copy, distribute, or disclose.ICF proprietary and confidential. Do not copy, distribute, or disclose. 37

INDUSTRY OVERVIEW

*Note: YE 3Q 2016


$1 $1 $1 $1 $1 $1 $1 $1

$3

$5$6 $6

$6 $6$6

$7 $7

$0.0

$1.0

$2.0

$3.0

$4.0

$5.0

$6.0

$7.0

$8.0

U.S. Airline Baggage and Cancellation Fee Revenue, Billions (2000-2016*)

Revenue from baggage and other ancillary products has become a key element in the airlines’ ability to achieve top-line growth


U.S. airlines have robust aircraft orders, supporting fleet renewal and expansion

38

INDUSTRY OVERVIEW

Source: CAPA, March 2017

U.S. Airlines Current Fleet and Orders (as of March 2017)

940849

734

15551

726

23063 97 64 87

273

235262

46

24

252

132

40 74 78 12

0

200

400

600

800

1,000

1,200

1,400Current Fleet Orders

Network/Regional Carriers Low Cost Carriers Ultra Low Cost Carriers


Airlines are investing profits in improving the passenger experience and operational performance

New or refurbished aircraft, larger

overhead bins for luggage

Increased availability of power/USD

outlets, wifi, and inflight entertainment

Improved design of airport check-in areas

and departure lounges

Investment in improving security

screening process

Continued development of mobile apps

and kiosk functionality

Improved operational reliability

Enhanced tools (e.g. tablets) for customer-

facing employees

39

INDUSTRY OVERVIEW

Source: A4A


U.S. airlines have seen continual operational improvements over the last several years

40

INDUSTRY OVERVIEW

Source: A4A

Flight Completion Factor (2016)

97.8%

98.5%

98.8%

2014

2015

2016

99.64%

99.68%

99.73%

2014

2015

2016

Properly Handled Bag Rate (2016)

On-Time Arrival Rate (2016)

76.3%

79.9%

81.4%

2014

2015

2016

Oversales per 10,000 Customers (2016)

0.92

0.76

0.62

2014

2015

2016

Best since 1992

Best ever recorded

Best since 2012

Best ever recorded


NYC airports seat capacity has grown faster than the national average in the last 5 years, and new routes will support continued growth

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INDUSTRY OVERVIEW


3.6%2.3% 1.8% 1.6% 1.6%

-5.7%-7.1%

-9.1%-10.0%

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

Average Annual Seat Capacity Growth (2011-2016) New 2017 Routes (through August)

JFK

Delta – Glasgow and Bangor

Xiamen Airlines – Fuzhou

Newark

United – Sacramento, San Jose

Alaska – San Jose

Southwest – Oakland

LOT Polish – Warsaw

Allegiant – Ft. Walton Beach

Stewart

Norwegian – Edinburgh, Dublin,

Shannon, Belfast, Bergen (83%

increase in summer capacity)

Thank you!

Aviation Industry OverviewAs airline strategy continues to evolve, a new long-haul, low cost model...

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