State of the Industry:Update & Outlook

Alternative Fuel Symposium Singapore Nov. 2018

Andrew MattersHead of Industry Analysis

Robust pax volumes growth but an easing for freight

Source: IATA www.iata.org/economics 2

-5%

0%

5%

10%

15%

Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18

RPK FTK

Long-run average growth rate

Industry confidence has dipped…

Source: IATA

0

10

20

30

40

50

60

70

80

90

100

Jul 2007 Jul 2008 Jul 2009 Jul 2010 Jul 2011 Jul 2012 Jul 2013 Jul 2014 Jul 2015 Jul 2016 Jul 2017 Jul 2018

Last three months Next twelve months

Weighted Score (50 = No Change)

…as profitability comes under renewed pressure

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

2011 2012 2013 2014 2015 2016 2017 2018

% o

per

atin

g re

ven

ues

Quarterly EBIT margins, global airline industry sample

EBIT (actual)

EBIT (seasonally adjusted)

Source: The Airline Analyst, IATA

Rising costs are (still) a key challenge…

Source: IATA Economics using data from Platts, ICE

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

2011 2012 2013 2014 2015 2016 2017 2018

Year

-on

-yea

r %

ch

ange

Industry wide growth in unit revenues and unit costs, in US$

Unit cost growth

Unit revenue growth

Fuel and oil is a key part of that story…

Source: IEA

30.7

81.039.1

94.4

0

20

40

60

80

100

120

140

160

180

2008 2010 2012 2014 2016 2018

Brent crude oil Jet fuel

US$/ barrel (monthly average data)

Source: IATA Economics using data from Datastream, Markit, Oxford Economics 6www.iata.org/economics

7.0

7.2

7.4

7.6

7.8

8.0

8.2

8.4

CASK 2016 Q1 Fuel Labour Infra- structure Other CASK 2017 Q4

US cents per ASKUnit cost changes between 2016 Q1 and 2017 Q4

51%

30%11%

8%% contribution to increase in CASK

…but its not only due to oil prices

Source: IATA 7www.iata.org/economics

Premium passenger yields are supporting revenues…

70

75

80

85

90

95

100

105

2011 2012 2013 2014 2015 2016 2017 2018

Global average passenger yield (US$ terms)

Premium-class yield

Indices (Jan 2011=100), seasonally adjusted

…along with a pax load factor around record highs…

Source: IATA www.iata.org/economics 9

55%

60%

65%

70%

75%

80%

85%

90%

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

% of ASKs Industry-wide passenger load factor by month and over time*

2018 2017

2015

2001

1993

1992

1991

The shaded area shows the range of outcomes over time. The lines show

the outcomes for selected years.

* Data from 1990

…and with an increasing contribution from ancillaries

Source: IATA Economics using data from ICAO, IATA Statistics, IdeaWorks and our own forecasts

0

10

20

30

40

50

60

0

20

40

60

80

100

120

140

160

180

200

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

Car

go, a

nci

llari

es U

S$ p

er

pas

sen

ger

Bas

e f

are

US$

per

pas

sen

ger

Airline revenue per passenger

Base fare(left scale)

Cargo & other(right scale)

Ancillaries(right scale)

Industry profits under pressure in 2018, but still high

www.iata.org/economics 11Source: ICAO, IATA

-40

-30

-20

-10

0

10

20

30

40

-10.0

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

US$ billion% revenuesGlobal commercial airline profitability

Net post-tax profit (right axis)

EBIT margin (left axis)

Driven largely by N.America (again) plus Europe & Asia

www.iata.org/economics 12Source: ICAO, IATA

-5

0

5

10

15

20

25

30

35

40

2010 2011 2012 2013 2014 2015 2016 2017 2018f

Africa L America Middle East

Asia Pacific Europe N America

US$ billion

www.iata.org/economics 13Source: IATA

Producing good returns for investors for a 4th year

0

2

4

6

8

10

12

1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

% of invested capitalReturn on capital invested in airlines and their cost of capital

Cost of capital (WACC)

Return on capital (ROIC)

Expansion cycles don’t last forever…

Source: IATA Economics using data from ICAO, IATA Statistics and our own forecast

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020

RP

Ks

billio

n

Worldwide RPKs and peak-to-peak cycle

9 years

10 years so far

8 years

10 years

11 years

Oil crisis

dotcom bubble/ 9-11

Gulf war

GFC

Global growth remains supportive of air travel demand

Source: IMF www.iata.org/economics

3.73.7

2.4 1.7

4.7 4.9

-4

-2

0

2

4

6

8

10

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018e 2019f 2020f

World Advanced Emerging

GDP growth (% per year)

… but late-cycle cost pressures are likely to continue

0

1

2

3

4

5

6

7

8

9

-5

-4

-3

-2

-1

0

1

2

3

4

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

% o

f la

bo

ur

forc

e

% g

ap b

etw

een

GD

P a

nd

fu

ll ca

pac

ity

OECD unemployment and capacity shortage in the economy

Unemployment(right scale)

Capacity shortage in the economy(left scale)

Source: Datastream

Industry expects yields to help offset cost pressures

Source: IATA Business Confidence survey www.iata.org/economics 17

20

30

40

50

60

70

80

Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18

Cargo Pax

Weighted Score* (50 = No Change)

Yields, 12mth outlook

20

30

40

50

60

70

80

Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18

Weighted Score* (50 = No Change)

Input costs, 12mth outlook

Risks of further currency weakness versus the US$

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Ind

ex t

o e

qu

al 1

in 2

00

8Q

1

Exchange rates, US$ per unit of local currency

China

Japan

Eurozone

Indonesia

Brazil

Turkey

Argentina

What does a ‘rule of thumb’ approach suggest for 2019?

Source: IATA, IMF www.iata.org/economics

-2%

0%

2%

4%

6%

8%

10%2

00

6

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

f

20

19

f

RPK growth (% year-on-year)Based on past performance of the GDP multiplier approach, there is a:

30% chance thatRPK growth will be between 5.5% and 7.1% in 2019...

...a 60% chance of growth between 2.4% and 7.9%...

...and a 90% chance that it will be between 0% and 8.5%.

The fan shows the range of outcomes that you would expect to see in 2019 if you applied the standard GDP multiplier

approach to predict RPK growth using the IMF's latest economic forecasts.

Key downside global risks?

Source: Oxford Economics www.iata.org/economics 12Percentage of respondents citing as top risk

0% 20% 40% 60%

Demand for air travel to double over the next 20 years

21www.iata.org/economicsSource: IATA/Tourism Economics

3

4

5

6

7

8

9

10

11

2017 2019 2021 2023 2025 2027 2029 2031 2033 2035 2037

Passengers (billion, O-D basis)

Constant policies scenario

Globalization in reverse scenario

Policy stimulus and market liberalization

7.0bn

3.5bn

Where’s the growth coming from?

22Source: IATA/Tourism Economics www.iata.org/economics

#s represent the additional O-D pax journeys in 2037 vs 2017% represents the average annual pax growth rate (CAGR)

Asian travel markets rise up the Top-10 rankings

23www.iata.org/economicsSource: IATA/Tourism Economics

The markets of tomorrow

Source: IATA/Tourism Economics www.iata.org/economics 24