Aviation Industry 2009_outlook

AVIATION INDUSTRY 2009 OUTLOOK Presented Presented by: by:

Deborah Meehan SH&E, SH&E, COO COO

American Society of Civil Engineers

12th Annual Conference April 14, 2009

2009 – Worst Year Ever?

“On Wall Street, the most unnerving stock market reports since the Depression 1930s became daily more dismal.”

“[T]he unimaginable happened: a collapse on a scale never seen before—no, not even in 1929. Prices went down, down, down, swiftly wiping out an entire year's spectacular gains. ‘I just can’t believe that this is happening,’ moaned one trader, as he took nonstop sell orders.”

“The U.S. is afflicted by a massive economic migraine, and more than 200 million Americans know too well just how much it hurts. Their incomes, savings and lifestyles are being assailed by a whole group of aches and pains. . . . The stock market has scarcely been so shaky since 1929.”

“I want to say we’re in a recession, but that’s not a strong enough word. In some regions it’s a depression.” 1

2009 – Worst Year Ever? June 1, 1970 “On Wall Street, the most unnerving stock market reports since the Depression 1930s became daily more dismal.”

Sept. 9, 1974 “The U.S. is afflicted by a massive economic migraine, and more than 200 million Americans know too well just how much it hurts. Their incomes, savings and life-styles are being assailed by a whole group of aches and pains. . . . The stock market has scarcely been so shaky since 1929.”

Nov. 2, 1987 “[T]he unimaginable happened: a collapse on a scale never seen before—no, not even in 1929. Prices went down, down, down, swiftly wiping out an entire year's spectacular gains. ‘I just can’t believe that this is happening,’ moaned one trader, as he took nonstop sell orders.”

Oct. 15, 1990 “I want to say we’re in a recession, but that’s not a strong enough word. In some regions it’s a depression.” Source: TIME Magazine and Weston Wellington at Dimensional Fund Advisors (DFA). 2

Global Recession and Tight Credit Markets Have Challenged Airlines in 2009 With Distinct But Related Effects

Recession Impacts

Global recession has already slashed demand for passenger and cargo air travel – Demand is falling more rapidly in business and premium sectors, separating winners and losers and creating opportunities for nimble airlines

Credit Impacts

The credit crunch has increased the cost of liquidity while making cash reserves more important for airline survival – Facing higher costs for all types of borrowing, successful strategies will leverage good credit as well as commercial and operational strategies to conserve cash 3

These Are Challenging Times, But Not Uniquely So (Yet) Percent Change During Recessions US Economy / US Airline Industry

8.8%

10%

7.6%

8%

6.3%

6% 4% 2%

0.1%

0%

-0.5% -0.2%

-2% -4% -6%

Recessions Since 1973**

Current Recession***

-5.8% -5.8%

-8%

Major US Airlines Net Profit Margin*

US Inflation

US Real GDP

US Unemployment

* Only includes data starting 1977 through Q3 08. Goodwill impairments of DL, NW & UA have been adjusted out ** Past recessions: Nov 73-March 75, Jan 80-Nov 82, July 90-March 91, March 2001-Nov 2001 *** Current Recession: Dec 2007-current Source: Form 41, Bureau of Economic Analysis, Bureau of Labor Statistics, US Inflation Calculator 4

Long Term, Air Traffic Growth Has Been Remarkably Resilient, Briefly Interrupted by Economic Shocks and Recessions Historical Historical World World Traffic Traffic and and GDP GDP Growth Growth Indexed: Indexed: Base: Base: 1970 1970 == 100 100

Indexed RTKs RPKs

GDP Growth

1,200

9% SARS, 2nd Gulf War

1,000

RTKs 8%

U.S. Deregulation

Oil Crises

RPKs

Asian Crises

800

6% 1st Gulf War

Recession

600

5% Sept. 11

400

3%

200

2%

0

0% ‘07 ’09F

'70

'75

'80

'85

'90

'95

Source: Source: IATA IATA Economics Economics Briefing, Briefing, December, December, 2008; 2008; Airline Airline Monitor, Monitor, July, July, 2008; 2008; Boeing Boeing and and International International Monetary Monetary Fund Fund (“IMF”) (“IMF”) World World Economic Economic Outlook, Outlook, October October 2008. 2008.

'00

'05

5

U.S. Carriers Dramatically Cut Capacity Ahead of the Expected Demand Drop, But Other Regions Have Not Responded in Kind Change in Scheduled Seat Capacity YOY November 2008 – March 2009

U.S. Carriers

European Carriers

Asian Carriers

10%

10%

10%

8%

8%

8%

6%

6%

6%

4%

4%

4%

2%

2%

2%

0%

0%

0%

-2%

-2%

-2%

-4%

-4%

-4%

-6%

-6%

-6%

-8%

-8%

-8%

-10%

Network Carriers

-10%

LCCs

-10%

India/China

-12%

LCCs

-12%

Network Carriers

-12%

Pacific Rim

-14%

-14%

Nov 2008Dec

Jan

Feb Mar 2009

NOV DEC

JAN FEB MAR

Region -7.4% -11.2% -7.1% -5.5% -6.7% Change

-14%

Nov 2008Dec

Jan

Feb Mar 2009

Nov 2008Dec

Jan

Feb Mar 2009

NOV DEC

JAN FEB MAR

NOV DEC

JAN FEB MAR

-0.6% -1.1% -2.0% -0.3% -1.7%

3.1% 1.8%

3.2% 0.8% 1.0%

Note: U.S. network carriers include AA, CO, DL, NW, UA, and US; U.S. LCCs include B6, F9, FL, and WN. European network carriers include BA, LH, and AF/KL; European LCCs include AB, FR and U2. Asian Pacific Rim carriers include CX, KE, NH, JL, SQ; India/China carriers includes 9W, AI, CA, CZ, HU and MU. Source: OAG.

6

As a Result, Many Forecasts Now Expect the U.S. Industry to Post Profits in 2009, While Other Regions Take Longer to Catch Up Global Airline Operating Profits

2009 IATA Regional Profit Forecasts

USD billions

North America 84% $3.6 Bn

$24

$19.7

$20

$15.0

$16

Asia 0% –$0.6 Bn

$12 $8

$4.3

$3.9

$4

$1.1

$0 ($4)

Europe 16% $0.7 Bn

($8) ($12) ($16)

2005

2006

2007 2008F 2009F

Source: IATA, December 2008 Financial Forecast; ICAO data to 2007.

7

Amidst the General Decline, Premium and Business Traffic is Falling Much More Rapidly Than Leisure Traffic YoY Growth in Passenger Traffic January 2007 – December 2008

10% 8%

Economy

6% 4% 2% 0% -2%

-5.3%

-4% -6%

Premium Yields Are Down an Estimated 9% North Atlantic

-8% -10%

Premium

-13.3%

-12% -14% Jan

Massive Premium Traffic and Yield Declines in High-Value International Markets

Apr

Jul

2007

Oct

Jan

Apr

Jul

OctNov

-8.8%

Within Far East

-25.1%

North/Mid Pacific

-19.7%

Within Europe

-16.3%

2008

Source: IATA Premium Traffic Monitor: http://www.iata.org/whatwedo/economics/ptmarchives.htm, Rothwell, Steve, “British Airways to Report Loss on Traffic, Currencies.” Bloomberg.com, Brothers, Caroline, “European airlines’ decline in premium ticket sales hurts earning.” International Herald Tribune. Q4 2008 UAL Corporation Earnings Conference Call

8

Recent U.S. Data Shows Traffic On Short-Haul Business Routes Falling More Rapidly Than On Long-Haul and Leisure Routes

Routes BIZ

East Coast Shuttle

BIZ

DallasHouston

MIX

Las Vegas

(Hub)

LEISURE (Upmarket)

Mainland – Hawaii

MIX

Transcon

LEISURE

Northeast – Florida

Response Traffic down much more than capacity

Traffic down same as capacity

Traffic down less than capacity

Change in Passengers1

Change in Seats1

Net Effect

(17.6%)

(7.0%)

(10.6%)

(17.0%)

(7.1%)

(9.9%)

(15.9%)

(15.1%)

(0.8%)

(19.6%)

(15.1%)

(4.5%)

(14.8%)

(15.7%)

0.9%

(11.1%)

(5.4%)

(5.7%)

1/ November 2008 over November 2007.

Source: US DOT Form T-100.

9

Hotel Data Also Shows Steeper Declines in the Luxury Segments Year-Over-Year Change in Occupancy United States Hotel Revenue per Available Room YoY, 8-14 February 2009

Global Hotel Occupancy December 2008 Luxury

Americas

(-6.6%)

Asia Pacific

(-16.0%)

Upper Upscale

Upscale

(-7.7%)

Economy

-13.6%

-12.7%

0% -5% -10% -15%

Europe

Midscale

-15.1%

-20%

-18.2%

-25%

Middle East / Africa

(-10.0%)

-30%

-28.6%

-35%

Note: U.S. results exclude independents. Source: Smith Travel Research, Inc., Weekly Hotel Report (February 19, 2009); STR Global, Press Release (February 6, 2009).

10

Even Before This Downturn, Airlines Were Building Up Their Cash Positions Days Days Cash Cash at at Quarter-End Quarter-End Q3 2000 vs. Q3 2000 vs. Q3 Q3 2007 2007 Average 2000

Average 2007

82

112

Š Average cash holdings for U.S. carriers up to 112 days from 82 at the peak of the last business cycle

78 84

AirTran

– At the end of Q3 2007 Lufthansa held about 100 days

132 127

JetBlue

119 110

American

Q3 2007

79

Delta

60

Q3 2000

110

Continental

– High fuel prices in summer 2008 depleted some reserves: at end Q3 2008, U.S. carriers’ holdings were approx. 90 days

84

Š Even in good times, this cash

101

Hawaiian

71

is expensive to carry – roughly $1.5b per year for this group

120

United

74 110

Southwest

61 161

US Airways

69

0

50

100

150

200

Source: Form 41. Cash position calculated as the sum of cash and near-cash assets (cash, short-term investments, notes receivable, accounts receivable and pre-paid expenses). Cash expenses calculated as the sum of operating expenses and net interest expense less depreciation and amortization. Cost of cash estimate based on a WACC of 8%.

11

However, the Cash Position of U.S. Airlines Has Severely Diminished in the Last Two Quarters Days of Cash to Cover Operating Expenses

164.1 150.3

Allegiant Air 83.9 76.5

Delta/Northwest

78.7 69.2

JetBlue Southwest

66.0 66.0

Continental

68.7 64.1 55.8 48.6

American

Restricted and Unrestricted Days of Cash

60.1 47.8

AirTran

Unrestricted Days of Cash

36.3 35.3

United

49.7

US Airways

29.4 0

50

100

150

200

Source: SEC Filings as of December 2008, except Air Canada from their latest Annual Report 12

High Cash Balances Are Critical to Survival Š Helps airlines weather demand shocks

Š Allows airlines to outlast fare wars, and therefore discourages predators in the first place

Š Signals to suppliers and capital markets that the airline will survive, reducing the cost of all kinds of borrowing – Credit ratings – Borrowing covenants – Supplier credit terms – Avoiding credit card holdbacks

13

On Average, Traffic at U.S. Airports Declined by 3.3% from 2007 to 2008 Percent Change In Enplaned Passengers CY 2007 vs. CY 2008 0% -1% -2% -3%

-2.8% -3.4%

-4%

-3.3%

-5%

-5.4%

-6%

Large Hubs

Medium Hubs

Small Hubs

Total Total

Note: Includes: May Not Include All Airports in Each Hub Grouping, But Includes All Major Airports (30 large, 30 medium and 32 small hubs) Source: Airport Records

14

Among the Largest Airports, Traffic Has Declined Further Percent Change In Enplaned Passengers at Top Large Hub Airports January 2009 vs. January 2008

ORD

LAX

JFK

SEA

DEN

ATL

0%

-0.8% -3%

-2.7%

-6%

-6.1% -9%

-5.8%

2.8% Standard for Large Hubs

-10.6%

-12%

-12.4% -15%

Source: Airport Records 15

Cargo Volume’s Decline is Even More Dramatic Percent Change In Freight at Top Large Hub Airports January 2009 vs. January 2008

JFK

ORD

LAX

ATL

DEN

SEA

0%

-10%

-8.7% -13.2%

-20%

-24.3% -30%

-24.2%

-28.1% -34.1%

-40%

Source: Airport Records 16

The Drop in Traffic Exceeds the Reduction in Capacity -15.4%

Percent Change in RPMs and ASMs for Selected Major and LCC Airlines

Frontier

-19.9% -14.8%

Northwest

-17.5%

February 2009

-15.9% -17.2%

United -9.1%

AirTran

-13.6% -10.1%

American

-13.5% -9.4%

Continental

-13.1% -9.3% -9.3%

ASMs

US Airways

RPMs

-5.5%

JetBlue

-8.3% -4.5%

Delta

-7.6% -6.5% -6.0%

Southwest

Allegiant Air -25% Source: Airline Reports

-20%

-15%

-10%

-5%

0%

1.9% 6.3%

5%

10% 17

The Drop in Traffic Exceeds the Reduction in Capacity Percent Change in RPMs and ASMs for All U.S. Carriers February 2009

Network Carriers

Low Cost Carriers

Total

0%

-3%

-6%

-6.9%

-6.0%

-9%

-8.4%

-9.0% -12%

-11.1%

RPMs

ASMs

-10.3%

-15%

Source: Airline Reports 18

So, Where Are We Going?

19

So, Where Are We Going?

20

No End In Sight – Latest Reports Show Unemployment Worsened

Underemployment – Devastating!

9.0M

3.2M 8.5% 694K March 2009

Total Unemployed

Unemployment Working P/T, Rate Unable to Find F/T 21

Versus…

Š “Fears ebb” Š Dow ends above 8000 in best four-week run since 1933

Š Pace of decline in auto sales has slowed

Š Houses are beginning to sell Š Accounting rule of mark-to-market reversed

Š Consumer spending leveled off Š Government spending surge 22

What’s to Come? “Airlines Hopeful of Summer Upturn” Air Canada Likely to Need Court Protection

23

24

25

No End In Sight – Latest Reports Show Unemployment Worsened

Underemployment – Devastating!

13.2M

9.0M

8.5% 694K March 2009

Total Unemployed

Unemployment Working P/T, Rate Unable to Find F/T 26