us airline competition and...

US Airline Competition and Consolidation 2010P t P B l b b

0

Peter P. Belobaba

November 4, 2010

i li d fUS Airline Industry Performance

• Review: A roller‐coaster decade 2000‐09Review: A roller coaster decade 2000 09– Rapid growth of LCCs and intense fare competition

– Restructuring, cost cutting and productivity improvements

– After $40 billion in losses a brief return to profits 2006‐07

– Fuel shock and financial meltdown in 2008

• Return to profitability in 2010 and beyond– How much room to cut cost or improve productivity?p p y

– Can capacity discipline be maintained?

– Have LCCs reached their peak in US domestic markets?

1

US Industry Profits in 2006‐2007 after $40B of LossesUS Industry Profits in 2006 2007 after $40B of Losses 2001‐2005; More Losses in 2008 and 2009

$20,000

$25,000

$10,000

$15,000

$0

$5,000

986

987

988

989

990

991

992

993

994

995

996

997

998

999

000

001

002

003

004

005

006

007

008

009

Milli

ons)

Oper ProfitN t P fit

$

($10,000)

($5,000) 19 19 19 19 19 19 19 19 19 19 19 19 19 19 20 20 20 20 20 20 20 20 20 20

(USD

M Net Profit

($25,000)

($20,000)

($15,000)

Source: ATA data($30,000)

($25,000)

2

US C i Fi i l R lt 2009US Carrier Financial Results 2009

Source: Airline Business, March 20103

US C i C l ti N t I Q1 Q3 2010US Carriers Cumulative Net Income Q1‐Q3 2010800

400

600

200

400

Millions

Net Profit

200

0

USD

M Net Profit

‐400

‐200

‐600Source: Airline Business

4

US C i RPM T ffi Sh 2009US Carrier RPM Traffic Share 2009

26.0%

30%

19.4%20%

25%

16.0%

12.7%11.8%

15%

9.2%

4.1%3 0% 2 9%

5%

10%

3.0% 2.9% 2.8%2.0%

1.3%

0%

Source: Aviation Daily, 1/21/2010 5

d i liUS Legacy and Low Cost Airlines

Network Legacy Carriers Low Cost CarriersNetwork Legacy Carriers

AA – American Airlines

Low Cost Carriers

WN – Southwest Airlines

UA – United Air Lines

DL – Delta Air Lines (incl. NW)

B6 – JetBlue Airways

FL – AirTran Airways

CO – Continental Airlines

US – US Airways (incl. HP)

F9 – Frontier Airlines

VX – Virgin America

• Legacy group carried 67% of total US airline traffic in 2009.

• These airlines carried another 17% of total US traffic (RPMs).

U it C t ( l “T t R l t d”) S ik d i 2008Unit Costs (excl. “Transport Related”) Spiked in 2008

CASM Ex Transport ($/ASM)

0.12

0.13

0.14

0.09

0.10

0.11

/ASM `

0.06

0.07

0.08

$/

0.05

0.06

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

NLC LCC

7

Non‐Labor Unit Cost Difference Still About 1 CentNon Labor Unit Cost Difference Still About 1 CentThe “Structural Gap”

CASM Non labor ($/ASM)

0.050

0.055

CASM Non-labor ($/ASM)

0.040

0.045

/ASM `

0.025

0.030

0.035$/A

0.0201995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

NLC LCC

8

NLC LCC

L b U it C t I i A i f B th S tLabor Unit Costs Increasing Again for Both Sectors

CASM Labor ($/ASM)

0.045

0.050

C S abo ($/ S )

0.035

0.040

AS

M

0.025

0.030

$/A

0.0201995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

NLC LCC

9

NLC LCC

Ai ft Utili ti D d i 2008 d 2009Aircraft Utilization Decreased in 2008 and 2009

12.0

10 5

11.0

11.5

ircr

aft

Day

9.5

10.0

10.5

Hou

rs p

er A

i

8.5

9.0

9.5

Blo

ck-H

8.01996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

NLC LCCNLC LCC

10

LCC E l P d ti it Still 15% Hi h th NLCLCC Employee Productivity Still 15% Higher than NLCs

3,100,000

2,700,000

2,900,000

yee

2 100 000

2,300,000

2,500,000

M p

er E

mpo

ly

1,700,000

1,900,000

2,100,000

AS

M

1,500,0001999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

NLC LCC

11

G i S l i /B fi E l Di d i 2006Gap in Salaries/Benefits per Employee Disappeared in 2006

100,000

70 000

80,000

90,000

,

e

50,000

60,000

70,000

per

Em

plo

yee

20,000

30,000

40,000

US

D p

0

10,000

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

NLC LCC

12

US D ti T ffi d C it G th b YUS Domestic Traffic and Capacity Growth by Year

8 0

10.0

4 0

6.0

8.0

0.0

2.0

4.0

Traffic (RPM)

(4.0)

(2.0)

2001 2002 2003 2004 2005 2006 2007 2008 2009Capacity (ASM)

(8.0)

(6.0)

(10.0)

Source: Air Transport Association13

Domestic Mainline Carrier Capacity Down 28% Since 2000;Domestic Mainline Carrier Capacity Down 28% Since 2000; Total Domestic ASMs Still 16% Lower

llion

s

600

650

tic ASM

s in M

i

550

US Dom

est

450

500

4002000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Mainline Domestic Capacity Regional Carrier Capacity

14


N t k C i H C t D ti C itNetwork Carriers Have Cut Domestic Capacity

15

LCC D ti C it H G B t L li OffLCC Domestic Capacity Has Grown, But Leveling Off

16

Regional Partners Carry An Increasing Proportion ofRegional Partners Carry An Increasing Proportion of Decreased Domestic Passenger Traffic

460

480

500

ons

400

420

440

RPMs in M

illio

320

340

360

380

Dom

estic

300

320

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009


17


Pre‐Downturn, Capacity Reduction Was Having aPre Downturn, Capacity Reduction Was Having a Positive Effect on Unit Revenue Measures

PRASM (¢) -- Domestic + Express

12 50

13.00

PRASM (¢) -- Domestic + Express12 Months Ended

11.50

12.00

12.50

10.00

10.50

11.00

9.00

9.50

-01

-02

-03

-04

-05

-06

-07

-08

-09

-10

18

Jan-

Jan-

Jan-

Jan-

Jan-

Jan-

Jan-

Jan-

Jan-

Jan-

Source: Air Transport Association

LCC C 1 i 3 US D ti PLCCs Carry 1 in 3 US Domestic Passengers

LCC Market Share is still growing but leveling off, reaching 34% of g g g gtotal US domestic passengers in 2008

19

LCC Sh f D ti RPM i A hi 25%LCC Share of Domestic RPMs is Approaching 25%

20

Domestic Market Concentration Virtually UnchangedDomestic Market Concentration Virtually UnchangedMerged Southwest Larger than Delta and United in Domestic Capacity

i h i hDomestic ASM ShareFirst Quarter 2000

Domestic ASM ShareSecond Quarter 2009

WN + FLDL WN FL18%16%

UACO + UA

17%

All Other49%

UA15%All Other

54%

NW + DL16%

AA15%

21Notes: Mainline only. Exludes Regional Operations.

Southwest’s Recent Growth Has OnlySouthwest s Recent Growth Has Only Been Into the Largest Markets

Largest Metro Areas Without Southwest ServiceAnchorage gg

Burlington

New York‐EWR/JFK/LGA

SyracuseMinneapolis

Pittsburgh

MilwaukeeGrandRapids

Rochester

Westchester Co.Toledo

Madison Flint

Eugene

South d

Burlington

Lansing X

XX

BostonXMilXwauee

DenverEWR/JFK/LGA

MemphisCharlotte

RichmondGreensboro

Akron

FresnoDayton

Knoxville

Bakersfield Wichita

Colorado Springs

Ft. WayneDes Moines

Monterey

SantaBarbara

MolineBend

CharlestonSan LouisObispo

Atlantic City

Springfield

XWashingtonXSan Francisco oX

Knoxville

Population 1 Million +

Atlanta

Memphis

Charleston

Greenville

Honolulu

Columbia

PensacolaGulfport

Barbara

Savannah

Myrtle Beach

Knoxville

22

Population 500,000 – 1 MillionPopulation Less Than 500,000 Sarasota

Tallahassee

Southwest has Increased Domestic Share through Growth inSouthwest has Increased Domestic Share through Growth in Capacity (ASM) Share at Below Average Load Factors

23

Southwest “Share Gap” Narrowed in 2009 – Due to ExtensiveSouthwest Share Gap Narrowed in 2009 Due to Extensive Marketing of No Ancillary Fees?

1 00

Southwest's Share Gap

0.50

1.00

SHARE GAP = RPM SHARE – ASM SHARE

0 50

0.00

‐1.00

‐0.50

‐1.50

‐2.002000 2001 2002 2003 2004 2005 2006 2007 2008 2009

24

f i d i li fi biliProspects for Sustained US Airline Profitability

• Exogenous forces remain the primary drivers of profit– Strong economic recovery is critical to the demand/revenue side– Fuel prices are climbing, continue to be the greatest wild card

C d d i i i h l l d ff d/ d• Cost and productivity gains have leveled off and/or reversed– Non‐fuel and especially labor unit costs increasing for NLCs and LCCs– Upcoming labor negotiations will be particularly difficult

• Return to profitability largely due to capacity management– Shifts by NLCs to international flying; lower domestic capacity overall

C lid ti th h i b th t– Consolidation through mergers in both sectors

• LCCs continue to grow in largest markets, albeit more slowly– Their 2011+ capacity decisions will greatly affect industry performance

25

Their 2011+ capacity decisions will greatly affect industry performance

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