Five Reasons Why The Airline Industry Will Never Be Profitable

Transcription

1 Five Reasons

2 Five Reasons Why The Airline Industry Will Never Be Profitable

3 Pretax Profit Margin (%) Airline Industry Profitability Elusive Pretax Profit Margin Highly Cyclical and Well Below U.S. Corporate Average Q09 3Q U.S. Passenger Airlines U.S. Corporate Average -25 Sources: (1) IRS Statistics of Income (Historical Table 13) Net income (less deficit) divided by Total receipts ; (2) ATA Cost Index 3

4 Macro Scale Drivers US Airline Net Profit

5 World Airlines Net Profit (from 1978 to 2009)

6 Aircraft Profits

7 #1 It s A Capacity Lead Business Model Causes Constant Over Capacity

8 QSI Market Forecasting Model Quality of Service Index Values a service relative to other service offerings Allows forecasters to determine potential of new markets and services Developed in the 1960s Very accurate

9 Basically a Share Model QSI for Montreal to Ft. Lauderdale Number of Nonstops x Number of Onestops x Number of Connections x Market QSI 6.23

10 Forecasting A New Service Montreal Fort Lauderdale QSI 6.23 New nonstop QSI 1.0 New Montreal Fort Lauderdale QSI 7.23

11 Demand For The New Service Note: Demand for air travel historically grew at the same rate as GDP. Market Demand New Service 1 =.138 x 250 = 34.6 YUL-FLL QSI 7.23 Passengers Per Day

12 Carriers Always Get Their Share Frustrates many a marketing department Steak and eggs More legroom in coach Food Widebody aircraft Why carriers focus on price not product

13 Impact On Current Services Market share before Market share after Less Passengers per day

14 Standing Still Not An Option If others add, and you don t, you lose revenue Can t grow revenue without adding capacity first Doesn t matter how good a product one has, one always gets your share

15 This Simple Display Is To Blame Cleveland to Orlando Service and Fare Display For All Participating Carriers More service leads to more display space

16 Airlines are managing demand to capacity, not capacity to demand

17 #2 Airplanes Don t Go Away They Just Become More Efficient

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19 #3 Labour Leverage Political Organization Can t Manage Economic Reality

20 Politically, Short Term Trumps Long Term Timing of settlements Deciding how much is enough

21 Twelve Days Of Christmas (Well, OK, fifteen)

22 It Takes Two To Tango It Takes Two To Tango Contract Settlements

23 It Takes Two To Tango Contract Settlements

24 Why would Management agree to a contract they could not afford?

25 #4 Input Costs Are Too Volatile Revenue Cycle and Cost Cycle Out of Sync

26 Cost Breakdown By Category 100.0% 90.0% 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 21.2% 25.0% 14.0% 8.0% 7.8% 7.1% 4.7% FUEL LABOR TRANSPORT-RELATED EXPENSES PROFESSIONAL SERVICES OTHER OP. EXPENSES AIRCRAFT RENTS & OWNERSHIP NON-AIRCRAFT RENTS & OWNERSHIP INTEREST UTILITIES & OFFICE SUPPLIES NON-AIRCRAFT INSURANCE ADVERTISING & PROMOTION COMMUNICATION PASSENGER COMMISSIONS AIRCRAFT INSURANCE MAINTENANCE MATERIAL LANDING FEES FOOD & BEVERAGE 0.0%

27 Percent of flight capacity booked Book Revenue Now, Buy Fuel Later Ye Old Booking Curve

28 Fuel Volatility Very Difficult To Manage

29 Cost Volatility and Low Margins Not a Good Match Total Cost By Year Indexed to Year 2000

30 Even In Quiet Years, Cost Jump 20 Points Total Cost By Year Indexed to Year 2000

31 Not Impossible To Manage Just Unlikely Need large cash reserves to manage volatility

32 Airline CEO s Favorite Game Hide The Cash!

33 #5 Nobody Really Wants It To Be Fixed Value Chain, Customers and Governments Benefit From The Way It Is

34 Inflation-Adjusted Price to Fly One Mile on U.S. Airlines 11 Average, in Constant 1978 Cents Domestic International Source: ATA analysis of data from the U.S. Department of Transportation and the U.S. Bureau of Labor Statistics

35 One Way Fares from Montreal in 1968 and 1982

36 Consumers Are Happy June 2008 Fares from Montreal

37 Governments Are Happy Tax Bite on a $300 One-Stop Round Trip* Has Nearly Tripled 1972 Taxes 7% ($22)* 1992 Taxes 13% ($38)* 2009 Taxes 20% ($60)* Airfare Taxes * Sample itinerary assumes one-stop domestic round trip with maximum passenger facility charge (PFC) per airport; $300 total price includes taxes and fees. Source: ATA analysis of federal tax code 37

38 Average ROIC (%) Upturn ROIC divided by Downturn ROIC Best Way To Make Money Service The Airline Industry Average ROIC (LHS) Volatility in ROIC (RHS)

39 Summary A capacity lead model fostering commoditization Capacity never leaves Labour has leverage, but cannot manage its responsibility Input costs are volatile and would require a level of cash that is difficult to maintain Value chain does not want to see things fixed

40 Five Opportunities 1. Capacity driven business model 2. Airplanes don t go away 3. Labour leverage 4. Input costs too variable 5. Nobody really wants it to be fixed

41 It may be dull... but never boring