Can the US Airline Industry Sustain Itself at $100+ Oil?

1. Can the US Airline Industry Sustain Itself at $100+ Oil? April 2008

2. Some Recent Headlines • Cash Cushion Helps Big Airlines, for Now • United Reducing Size of Jet Fleet 4 Percent • Delta Plots Cuts in Jobs, Domestic Routes • Fuel Costs Are Blamed For Reduction Effort; • ALOHA AIRLINES TO SHUT DOWN PASSENGER OPERATIONS AFTER MARCH 31, 2008, ENDING A 61-YEAR TRADITION OF SERVICE TO HAWAII • Cash-Strapped Airlines: Who’s Next to Fall? • ATA Airlines has shut down all operations after it filed for Chapter 11 bankruptcy protection. • Champion Air Plans to Shut Down • Prop planes make comeback as fuel costs rise • NWA to raise fuel charge, cut capacity

3. But Arguably the Most Troubling Headline • Stagflation fears reflected in revised IATA predictions • IATA forecast global industry profits of nearly $10 billion in mid 2007 • Revised forecast down to $7.8 billion in the Fall of 2007 • Revised forecast down to $5.0 billion in December of 2007 • Revised forecast down to $4.5 billion last week • We cannot ignore the economic issues and their effects on airline industry actions • Credit crisis • Clearly a lack of credit to those carriers already vanishing the market • Recession or very, very slow macro economic activity • But I am here to talk about fuel, so let’s talk about fuel and its impact on the US airline industry

4. Cumulative Operating Profits Big 6 Carriers in Each Respective Region 2002-2006 $20,000.00 MiddleEast LatinAmerica $10,000.00 Millions of $US $0.00 Global 30 Europe ($10,000.00) Asia- Pacific US Africa ($20,000.00) Source: MIT Research

5. The Word on the Street – Airlines “Frankly, we do not believe that the U.S. airline industry can withstand $100+/bbl oil prices without major structural change and as long as the industry remains highly fragmented, sustainable profitability will remain an elusive goal.” Merrill Lynch Airline ResearchAir Mail #323 (Mar. 7, 2008)

6. Jet Fuel Prices Skyrocketing – Again – in 2008 Source: ATA, Energy Information Administration, Standard & Poor’s and Morgan Stanley Average Price ($ per Barrel) © ATA Apr-08 -- 5

7. Jet Fuel Prices Soaring – Only Partly on Soaring CrudeCrack Spread Has Returned to Hurricane Levels: Far Above $5 Historical Norm Average Monthly Price per Barrel Sources: U.S. Energy Information Administration and the Air Transport Association of America © ATA Apr-08 -- 6

8. 2008 Jet Fuel Prices on a RampageCrude Oil Surpasses $110 per Barrel; Jet Hits $145 per Barrel in NYH Dollars per Barrel Sources: U.S. Energy Information Administration and ATA © ATA Apr-08 -- 7

9. Jet Fuel Prices Seeing Surging Premium to Gasoline From Jul-07, Differential Has Risen From $2 per Barrel to $29 per Barrel Sources: U.S. Energy Information Administration and ATA Crack Spread (Dollars per Barrel) © ATA Apr-08 -- 8

10. Refinery Utilization at Lowest Level Since Katrina/RitaU.S. Refineries Adjusting to Lower Gasoline Margins Utilization of Refinery Operable Capacity (%) Source: Energy Information Administration © ATA Apr-08 -- 9

11. 2008* Jet Fuel Expense Will Break 2007 Record Average Price Paid per Gallon Could Approach $3.00 *Passenger and cargo airlines Sources: Air Transport Association, Energy Information Administration, Department of Transportation © ATA Apr-08 -- 10

12. Airline* Fuel Efficiency Has More Than Doubled Source: ATA analysis of DOT Form 41 traffic data (T2-Z240) and DOT monthly fuel consumption * U.S. passenger and cargo airlines operating worldwide – cargo revenue ton miles (RTMs) Jet Fuel Consumption (Billions of Gallons)* Average Fuel Efficiency (RTMs per Gallon)* © ATA Apr-08 -- 11

13. As of Early 2008, Domestic Airfares Remain Below 2000 Levels, While Jet Fuel Prices Have Tripled Jan-Feb-08vs. 2000 Fares (2.4%) Fuel 198.3% Average Charge to Fly 1,000 Miles Domestically Average Jet Fuel Price (¢ per Gallon) Source: ATA monthly passenger revenue report (DOM + EXP) and U.S. Energy Information Administration © ATA Apr-08 -- 12

14. So, Absent Structural Change in the Industry • Continuing to focus on cost-cutting will remain paramount • But the historic pools of cost are not as readily available • Labor costs are not a source of saving; labor will push hard to get back • Distribution costs have largely been wrung out of the system • Fear is maintenance costs will head up; materials costs already an issue • The infrastructure is not the industry’s friend; will continue to mute efficiency efforts • And fuel is an uncontrollable cost • So, the industry will look to cut capacity • Not as easy outside of bankruptcy when contracts cannot be altered • But the industry spends in excess of $15 billion per year with regional carriers • Really only large pool of expense to consider • Capacity cuts have risk • Political • Financial

15. The High Cost of Fuel Will Be the Primary Catalyst Driving Structural Change in the US Airline Industry • Certainly not the only catalyst, but a primary driver of change • Consolidation • Consolidation through liquidation • Process underway • Consolidation through continued shrinkage • Process underway • Consolidation through merger and acquisition activity • Process underway but on hold • The talk of a Delta – Northwest merger is far from dead • Consolidation has Risks • Political • Financial • Just, not many rabbits left in the hat accepting that the price of oil is here to stay

16. About the MIT Global Airline Industry Program

17. About Us • The MIT Global Airline Industry Program represents a large-scale effort that provides the means for MIT and the academic community to make contributions in studying the airline industry and in educating its future leaders. This effort is funded under the umbrella of the Sloan Foundation’s Industry Studies Program. • The MIT Airline Industry Research Consortium is an outgrowth of the MIT Global Airline Industry Program, sponsored by the Alfred P. Sloan Foundation. Its goal is to engage industry stakeholders in the next phase of the Program's research and to provide a forum for addressing key issues facing the airline industry during this critical period of transformation. • Another goal of MIT’s Global Airline Industry Program is to develop a body of knowledge for understanding development, growth and competitive advantage in this industry, which is one of the most diverse, dynamic and perplexing of the world. To further this goal, and to support the goals of the Sloan Foundation Industry Studies Program and the goals set forth in establishing the MIT Airline Industry Research Consortium, the MIT Global Airline Industry Program recently introduced the establishment of the Airline Data Project.

18. Members of the MIT Airline Industry Consortium • Air Canada • Air Transport Association of America • Amadeus s.a.s. • American Airlines • Federal Aviation Administration (FAA) • Jeppesen Systems • jetBlue Airways • Lufthansa German Airlines • Massachusetts Port Authority • Metropolitan Washington Airports Authority (MWAA) • Scandinavian Airlines System • United Airlines

19. How to Find Us http://airlinedataproject@mit.edu swelbar@mit.edu belobaba@mit.edu