### The Impact of Mergers and Consolidations on Air

Travel Consumers and the Aviation Industry

John P. Heimlich Vice President & Chief Economist 

### Presentation to DOT Advisory Committee for Aviation Consumer Protection October 29, 2014

### Improving Airline Finances Translating to Customer Benefits Views from February 2013

“The recent wave of consolidation has meant higher profits and more stability..., which has led airlines to invest in technology, new airplanes and better customer service... ‘A 

### healthy airline industry means a better flying experience overall.’ ”

-- “Rick Seaney , FareCompare.com, in “AMR Stands to Gain 

### Vast Route Network,” Wall Street Journal

, Feb. 7, 2013

airlines.org 2

### Improving Airline Finances Translating to Customer Benefits, Continued Views from February 2013



### “What we’re seeing in airlines is what we’ve seen in railroads, telecom, and trucking... You’ll have fewer crises, fewer bankruptcies, more predictability, more stability .”



### -- Clifford Winston, Senior Fellow, Brookings Institution

Christian Science Monitor , Feb. 14, 2013

airlines.org 3

### After Years of Staggering Losses, U.S. Airlines* Are Tackling the Mountain of Debt

“... it would be unreasonable to assume that all airline risks 

### have just disappeared ... [T]he business model requires a large cushion of cash and significant reinvestment .”

Alexander MacLennan The Motley Fool 

### Feb. 3, 2014 $79.5 $71.9 $70.2

0 10 20 30 40 50 60 70 80 90

YE12 YE13 1H14 Total Debt* ($ Billions)

airlines.org * SEC filings of Alaska, Allegiant, American, Delta, Hawaiian, JetBlue, Southwest, Spirit and United; includes capitalized op era ting leases at 7x annual aircraft rents

4

### Improving Finances Are Helping Airlines Hire/Train/Retain High

- Quality Employees



### » Job growth and security;

» Attractive wages and benefits;

» Tools and training to serve customers;

» Profit sharing;

» Accelerated contributions to employee retirement accounts.

airlines.org 5

### Earnings Momentum and Debt Reduction Are Attracting New Investors

» De

- risking (e.g., paying down debt );

» Share buybacks;

» Issuance of dividends;

» Stock price appreciation;

» Value creation (ROIC > WACC ).

airlines.org 6...and the Increasing Ability to Hire, Train and Retain High

- Quality Talent and to Lure Long

Term Investors is Translating Directly to Palpable Benefits for Our Customers



### » New or refurbished aircraft;

» Expanded route networks (scope) and schedules (seat growth );

» Enhanced tools (computers, tablets, software) and training for customer

- contact employees;



### » Improved airport check

- in areas, lounges, gates.

airlines.org 7

### ...and the Increasing Ability to Hire, Train and Retain High

- Quality Talent and to Lure Long
- Term Investors is Translating Directly to Palpable Benefits for Our Customers, Continued.

» Continued development and roll

- out of mobile technology and 

### website/kiosk functionality;

» Increasing operational reliability (controlled for weather conditions );



### » Larger overhead bins for luggage;

» Availability of lie

- flat seating with AC power and USB (incl. on select transcon flights );



### » Proliferation of domestic and international WiFi and inflight entertainment options.

airlines.org 8

### Improving Finances Enabling Significant Reinvestment in Customer Experience Airline Capital Spending Continues at Robust Clip of More Than $1 Billion per Month U.S. Airline* Capital Expenditures ($ Billions)

5.2 6.6 9.8 12.4

7.0

2010 2011 2012 2013 1H14

* SEC filings of Alaska, Allegiant, American, Delta, Hawaiian, JetBlue, Southwest, Spirit and United » Aircraft ( 317 deliveries in 2014 ), spare engines, winglets
» Premium seats, new aircraft interiors
» Ground equipment, loading bridges
» Airport (gates/lounges) and maintenance facilities
» Bag carousels, carts, scanners
» In

- flight entertainment and Wi

- Fi
» Computers, kiosks, mobile technology

airlines.org 9

### As Airlines Generate Modest Returns on Capital, Customers Are Seeing More 

### Seats Departing U.S. Airports

– 11 Consecutive Quarters of Growth Year
- Over
- Year Change (%) in Scheduled Seats Departing U.S. Airports

(10.0) (8.0) (6.0) (4.0) (2.0) 0.0 2.0 4.0

1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15

Source: Innovata (via Diio Mi) published schedules as of Oct. 24, 2014 for all airlines providing scheduled passenger service fr om U.S. airports to all destinations

Fuel Spike and Recession Economic Recovery Record
- High

Fuel Price Economic Recovery and

Modest Fuel
- Price Relief

airlines.org 10

### After a Decade of Sharp Workforce Reductions, U.S. Airline Jobs on the Rise Again August 2014 Was 9 th 

### Consecutive Month of YOY Employment Gains at U.S. Airlines

520.6

378.1 380.8 384.2

2000 2010 2013 2014 

### Employment at U.S. Passenger Airlines 

### Thousand Full

- Time Equivalents (FTEs) YTD Aug.

Source: BTS

airlines.org 11

### Airline Creditworthiness Remains Far From Stellar Per S&P, Only One U.S. Passenger Airline Has Investment

- Grade Credit

Investment Grade 1 

### (>= BBB

- ) ExxonMobil, Microsoft AAA GE, United States Government AA+ Google, Wal

- Mart AA Toyota AA

UPS A+ BP, eBay, Union Pacific A Amtrak, Starbucks A

FedEx, Marriott, Starwood BBB Ford, Lufthansa, Southwest, WestJet BBB

Passenger Airline Alaska, Qantas BB+ British Airways, Delta, LATAM BB Allegiant, Avis

- Budget, Chrysler BB

Hertz, Sabre B+ AC, AAL, GOL, HA, JBLU, UAL B SAS B



### Speculative 2 

### Grade (< BBB

- )

1 Describes issuers with relatively high levels of creditworthiness and credit quality

2 Describes issuers with ability to repay but facing significant uncertainties, such as adverse business or financial circumsta nce s that could affect credit risk

Source: Standard and Poor’s; “Guide to Credit Rating Essentials: What are credit ratings and how do they work?”

airlines.org 12

### Improving Airline Finances Translating to Customer Benefits A View from February 2014



### “ With airlines in the U.S. now generating acceptable returns, their ability to reinvest in their products has been greatly enhanced . Today’s traveler is likely to check in via smart phone, monitor the upgrade list in real time, board and enjoy a sufficiently sized overhead, and pass the time en route surfing the 

### Internet. There is no way any of this would have been possible had the industry not found its way to firmer financial footing ... Today’s business traveler is likely to enjoy direct aisle access and a lie

- flat seat suitable for sleeping, even on transcon flights. Absent the industry’s financial turnaround, these benefits simply would not be available .”

-- Jamie Baker, Managing Director, Global Equity Research, J.P. Morgan, Feb.28 , 2014

Jamie Baker is a Research Analyst at J.P. Morgan. His views may not be representative of others at the Company. For disclosures related to companies that Mr. Baker covers, please see https://jpmm.com/research/disclosures

airlines.org 13

### www.airlines.org