State of the Industry

Deannath Kulatunge

Regional Head, Asia Pacific

Member & External Relations

International Air Transport Association

Kuching, 27 October 2014

Global economy fragile, but improving

2

Source: Datastream

30

35

40

45

50

55

60

65

70

-25

-20

-15

-10

-5

0

5

10

15

20

25

Jun-04 Jun-06 Jun-08 Jun-10 Jun-12 Jun-14

International trade (LHS)

Industrial production (LHS)

Business confidence (RHS)

%yoy Index, 50=no change

Air travel growth has been robust

Source: IATA, Netherlands CPB

-15%

-10%

-5%

0%

5%

10%

15%

2008 2009 2010 2011 2012 2013 2014

World industrial production and RPK growth

RPK growth

Industrial

production

growth

3

Variation across regions, but solid overall

4

Source: IATA

Overall the financial picture is also improving

5

Source: IATA, ICAO

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

2000 2002 2004 2006 2008 2010 2012 2014F

% o

f inv

este

d ca

pita

l

Return on capital invested in airlines and their cost of capital

Inadequate returns

Cost of capital (WACC)

Return on capital (ROIC)

Source: IATA

But performance has been mixed

6

Source: IATA, Airline Analyst

-15% -10% -5% 0% 5% 10% 15% 20%

Thai

Garuda

Korean Air

Lan Airline

SIA

GOL

Air France - KLM

Avianca

Lufthansa

Japan Airlines

Air Canada

British airways (IAG)

THY - Turkish Airlines

AirAsia

United Airlines

Jet Blue

American Airlines

Delta Air Lines

Ryanair

Southwest Airlines

COPA Airlines

Operating margins

2014Q2

2013Q2

And this has not gone unnoticed by the markets

7

Source: IATA, Datastream

Part of the difference is capacity

8

Source: IATA

120

130

140

150

160

170

180

190

200

210

2008 2009 2010 2011 2012 2013 2014

ASK

s b

illi

on

ASKs by region of airline registration

Asia Pacific airlines

+38%

European airlines

+18%

N America airlines

+2%

Some markets have changed in structure

9

Source: SRS Analyser

Ancillaries are also making a difference

10

Source: IdeaWorks, Airline Analyst, IATA

0%

5%

10%

15%

20%

25%

30%

35%

-20% -15% -10% -5% 0% 5% 10% 15% 20%

An

cill

ari

es

as

% r

eve

nu

es

Operating profits as % revenues

2013 ancillaries and operating profits, % revenues

Allegiant

Ryanair

Air Asia

Alaska

EasyjetAer Lingus

United

JetBlue

Delta

Flybe

SpicejetPIA SAA

Qantas

Korean

JALBA

Hawaiian

Frontier

Airline CFOs are confident about the future

11

Source: IATA quarterly survey of airline CFOs

0

10

20

30

40

50

60

70

80

90

100

2006 2007 2008 2009 2010 2011 2012 2013 2014

We

igh

ted

Sco

re (

50

= N

o C

ha

ng

e)

Airline CFOs: Do you expect your profits to be higher/lower/no change over the...

Last three months Next twelve months

But near-term

difficulties?

Blue region: falling profits

Are fuel prices coming out of the ‘tunnel’?

12

Source: Platts, IATA, Datastream

20

40

60

80

100

120

140

160

180

200

2008 2009 2010 2011 2012 2013 2014

Jet kerosene and Brent oil prices

$110/b

$140/b

Jet price

Oil price

Delivering investor returns to get even harder

13

Source: Global Insight

0

1

2

3

4

5

6

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

%

Interest rates

US 10-year bond

yield

German 10-year

bond yield

US Fed Funds rate

Forecast

Air traffic growth depends on Asia-Pacific

14

Source: OECD, Standard Chartered Research

The Eurozone recovery is stalling again

15

Source: Markit, Eurostat

Geopolitical risks are also increasing

16

Source: Deutsche Bank Research

Passenger business has supported revenues

17

Source: IATA, ICAO

30

40

50

60

70

80

90

150

200

250

300

350

400

450

500

550

600

650

2000 2002 2004 2006 2008 2010 2012 2014

US

$ bi

llion

US

$ bi

llion

Revenues from passengers and cargo

Passenger revenue

Cargo revenue

Economic openness is important

18

Source: ICAO, Haver, IATA

100

200

300

400

500

600

700

800

900

1000

1100

1200

1300

1400

1500

1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010

Indexe

d t

o e

qual 1

00 in

197

0

Air cargo, air travel, world GDP and world trade

World trade

World air travel (RPK)

World GDP

World air cargo (FTK)

Trade activity impacts business travel

19

Source: IATA, CPB Netherlands

Trade was expanding faster than local output

20

Source: IATA, Netherlands CPB

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

1995 2000 2005 2010

% c

ha

ng

e o

ver

yea

r

Growth of international trade and industrial production

Expected

international

trade growth

International

trade growth

Domestic industrial

production growth

But the relationship has broken down

21

Source: IATA, Netherlands CPB

0.5

0.6

0.7

0.8

0.9

1.0

1.1

1.2

1995 2000 2005 2010

Ind

ex,

20

05

eq

ua

l to

1

International trade / domestic industrial production

Change of trend

starting to look

permanent

Trade protectionism needs to be resisted

22

Source: World Trade Organization, Global Trade Alert, B20

Deannath Kulatunge

kulatunged@iata.org

#14-05 TripleOne Someset

111 Somerset Road

Singapore 238164

+65 6499 2300