Air Industry Survey

Industry Surveys
Airlines
Jim Corridore, Airlines & Air Freight Equity Analyst
DECEMBER 2013
Current Environment ............................................................................................ 1

Industry Profile .................................................................................................... 13
Industry Trends ................................................................................................... 14
How the Industry Operates ............................................................................... 24
Key Industry Ratios and Statistics ................................................................... 33
How to Analyze an Airline ................................................................................. 34
Glossary ................................................................................................................ 41
Industry References ........................................................................................... 43
CONTACTS:
Comparative Company Analysis ...................................................................... 45
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This issue updates the one dated July 2013.

The next update of this Survey is scheduled for June 2014.
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Topics Covered by Industry Surveys

Aerospace & Defense
Airlines
Financial Services: Diversified
Movies & Entertainment
Foods & Nonalcoholic Beverages
Natural Gas Distribution
Alcoholic Beverages & Tobacco
Healthcare: Facilities
Oil & Gas: Equipment & Services
Apparel & Footwear:

Retailers & Brands
Healthcare: Life Sciences

Tools & Services
Oil & Gas: Production & Marketing

Paper & Forest Products
Autos & Auto Parts
Healthcare: Managed Care
Publishing & Advertising
Banking
Biotechnology
Healthcare: Pharmaceuticals
Real Estate Investment Trusts

Restaurants
Broadcasting, Cable & Satellite

Chemicals
Heavy Equipment & Trucks

Homebuilding
Retailing: General
Retailing: Specialty
Communications Equipment
Household Durables
Semiconductor Equipment
Computers: Commercial Services

Computers: Consumer Services &
the Internet
Household Nondurables
Industrial Machinery
Semiconductors
Supermarkets & Drugstores
Insurance: Life & Health
Computers: Hardware
Telecommunications: Wireless
Computers: Software
Insurance: Property-Casualty
Investment Services
Electric Utilities
Environmental & Waste Management
Telecommunications: Wireline
Thrifts & Mortgage Finance
Lodging & Gaming

Metals: Industrial
Transportation: Commercial
Foods & Beverages: Europe
Healthcare: Products & Supplies
Global Industry Surveys

Airlines: Asia
Autos & Auto Parts: Europe
Media: Europe
Pharmaceuticals: Europe
Telecommunications: Asia
Banking: Europe
Oil & Gas: Europe
Telecommunications: Europe
Food Retail: Europe
S&P Capital IQ Industry Surveys

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CURRENT ENVIRONMENT
AMR/US Airways merger completed after DOJ drops objections
On December 9, 2013, nearly ten months after signing a merger agreement, the merger of American
Airlines parent company AMR Corp. with US Airways Group Inc. was finalized and closed. In the all-stock
deal, AMR shareholders and creditors received 72% of the combined entity, and US Airways shareholders
the remaining 28% interest. US Airways CEO Doug Parker is CEO of the new company, with AMRs CEO
Tom Horton serving as non-executive board chairman through 2014. The new publicly traded company
will operate under the name American Airlines Group and will be part of the OneWorld global airline
alliance.
DOJ sues to stop merger, reaches settlement
The two airlines secured the approval of the European Union (EU) on August 5, 2013, on the condition of
surrendering some slots at Londons Heathrow Airport and Philadelphia International Airport. However,
on August 13, the US Department of Justice (DOJ), joined by the attorney generals of several states, filed a
lawsuit in US District Court (District of Columbia) to block the merger, claiming that it would violate antitrust laws, and would lead to less competition and higher prices for consumers.
The US District Court scheduled the trial to begin on November 25, 2013. However, on November 12, the
DOJ announced that it had settled its case with the two airlines. As part of the settlement, the two airlines
agreed to give up gate slots and take-offs at several major airports across the US. They also agreed to
maintain hubs in seven cities for a period of three years. Most notably, US Airways agreed to give up 52
slot-pairs at Reagan National Airport in Washington, D.C., and 17 slot-pairs at New Yorks LaGuardia
Airport, along with smaller divestitures at Bostons Logan Airport, Dallas Love Field, Los Angeles
International Airport, and Miami International. These concessions were more severe than we expected and
likely more severe than the managements of the two companies anticipated. However, the deal avoided a
court case and allowed the merger to proceed. S&P Capital IQ believes that the real power of the merger
lies in the combination of Americans global route network with US Airways low-cost culture and strong
management. We think these concessions will not prevent the economics and synergies of the merger from
being realized.
The worlds largest airline
S&P Capital IQ (S&P) believes that the merger has created the worlds largest airline (as measured by either
revenues or revenue passenger miles), surpassing United Airlines, which became the largest after its merger
with Continental Airlines in 2010. The new American Airlines will offer 6,700 daily flights to almost 340
destinations in 56 countries. It would have hubs at seven of the nine busiest US airports and a strong
presence in Europe and Latin America. The merger would reduce the number of major US airline companies
to fourthe new American Airlines, United Continental Airlines, Delta Air Lines, and Southwest Airlines.
Together, they would control more than 70% of the US market.
S&P believes that the networks of American Airlines and US Airways are complementary. While the merger
gives US Airways access to American Airlines bigger international network, it also boosts American
Airlines weak passenger feed in some domestic markets. American has a large presence at Heathrow
Airport in London, one of the worlds major financial capitals, and on key routes throughout Europe. It is
also the dominant US player in Latin America.
Americans bankruptcy plan approved, it reports profits
AMR Corp. and American Airlines had filed for Chapter 11 bankruptcy protection on November 29, 2011,
in US Bankruptcy Court (Southern District of New York). In September 2013, the court approved American
Airlines bankruptcy plan, but ruled that the decision was contingent on DOJ approval of the carriers merger
with US Airways. The airline asked the judge to allow American/AMR to consummate its merger with US
INDUSTRY SURVEYS
AIRLINES / DECEMBER 2013
Airways. On November 27, the judge gave her approval, and AMR emerged from bankruptcy on closing of
the merger on December 9.
While AMR was in bankruptcy, it reported profits, largely on the back of concessions made by employees,
and debt and leaseholders, and other cost cuts made through the bankruptcy process. For the first nine
months of 2013, the company reported a net profit of $167 million, compared with a $2.1 billion loss it
reported in the same period of 2012. For the third quarter of 2013, it reported a net income of $289 million
compared with a $238 million loss in the same quarter of 2012. In the third quarter of 2013, revenues rose
6%, year over year, while labor costs fell 13%. AMR had cash and short-term investments of $7.7 billion at
the end of the third quarter. The company expected to increase its passenger carrying capacity by 3.5% year
over year, in the fourth quarter of 2013.
Lengthy integration ahead
The two companies have started planning the integration process, which we expect will be a highly complex
and lengthy exercise. The companies plan to move to a single computer system and website, combine their
operations centers, and align employee procedures and manuals within a year of completion of the deal.
However, the two airlines must wait for receipt of a single operating certificate from the US Federal
Aviation Administration (FAA) before they can join their workforces, mix and match aircraft and crews,
and offer a single passenger experience.
OIL PRICES HAVE COME DOWN

Over the past 10 years, the US airline industry has transformed itself through mergers and restructurings,
bankruptcies, and dissolutions. Also during this time, airline executives have changed their focus from a
market share at all costs mentality to one based on obtaining and preserving profitability, along with a
focus on improving return on invested capital. However, undercutting all their hard work is one variable
they can do little to control: the price of oil.
Such prices were volatile in 2012 and into 2013
FUEL COSTS & CONSUMPTION
(Major US airlines, domestic operations)
so far. After a spike in the oil prices due to the
Syrian crisis, prices have come down. In its
420
1,400
September 2013 forecast, the International Air
360
1,300
Transport Association (IATA), a coalition of
300
1,200
some 260 airlines throughout the world, noted
that the financial performance of its member
240
1,100
Chart H01: FUEL
airlines continues to improve slowly, despite
180
1,000
COSTS &
difficult business conditions. In September
CONSUMPTION
120
900
2013, the IATA was forecasting that Brent
crude oil prices would average $109 and $105
60
800
per barrel in 2013 and 2014, respectively,
0
700
compared with the $111.80 per barrel average
2003 04 05 06 07 08 09 10 11 12 2013
in 2012.
Consumption (millions of gallons; left scale)
Price per gallon (in cents; right scale)
After peaking at a record high of $147.27 a

barrel on July 11, 2008, oil prices receded
sharply: in 2009, oil averaged $61.95 a barrel,
down 58% from the record high and down 39% from the average oil price of $99.67 a barrel for full-year
2008. In 2010, prices bounced back, averaging $79.48 a barrel for the year, up 28% from the 2009 average.
The average for 2011 increased 19% to $94.88 a barrel. In 2012, oil prices were volatile, hitting a high of
$109.39 a barrel on February 24, but then declining on worries about the economy; on June 28, prices hit a
low of $77.72 a barrel. In 2012, oil prices for WTI oil averaged $94 a barrel, down 0.9% from the prior year.
Source: U.S. Bureau of Transportation Statistics.
Year to date through October 21, 2013, Brent crude oil prices have averaged $108.4 a barrel, down 3.3%
compared with the same period last year. However, S&P expects any news of improving US and global
economies to drive oil prices higher, mitigating improvements in pricing and passenger yields that we would
expect the industry to derive from growing passenger demand.
2
INDUSTRY SURVEYS
More importantly for the airline industry, jet fuel prices have remained high due to ongoing problems with
the refining of jet fuel. The spot price of domestic jet fuel reached a record high of $4.32 a gallon on July 3,
2008, double the year-earlier level. In 2009, the price of domestic jet fuel averaged $1.90 a gallon, some
56% below the record high. In 2010, domestic jet fuel averaged $2.24 a gallon, up 18% from the average
for 2009; in 2011, it averaged $3.00 a gallon, up 34% from the average for 2010. In 2012, jet fuel averaged
$3.06 a gallon, up 1.9% year over year. Through November 1, 2013, jet fuel averaged $2.96 a gallon,
about 5% below the average for the same period in 2012. Year to date through November 1, 2013, jet fuel
prices have remained volatile, reaching a high of $3.30 a gallon on February 11 and a low of $2.60 a gallon
on May 1.
Jet fuel usage declined sharply in 2009 and modestly in 2010, based on airlines reduced overall capacity
levels and the retirement of the oldest, least fuel-efficient aircraft in their fleets to facilitate the capacity
reductions. Some of the financially stronger airlines restarted their hedging programs to protect themselves
from any upward trajectory in oil prices. These programs should allow them to lock in recent lower prices
for at least a portion of their intended fuel usage over the next couple of years. However, we believe that
most airlines are poorly hedged and are unprepared if oil prices spike sharply higher.
As oil prices have risen over the past few years, they have become increasingly volatile. Reasons for this
increased volatility include geopolitical uncertainties; worries about the nuclear ambitions of Iran and North
Korea, and about how the US and the rest of the world will address those ambitions; high oil consumption
in the US, India, and China; worries about supply disruptions in Russia, Nigeria, Venezuela, and the Middle
East; and fluctuations in the value of the US dollar versus other currencies. Though we believe that the US
has ample supplies of oil at present and that prices have already factored in much of the geopolitical turmoil
around the world, its easy to make an argument to the contrary, considering growing demand in Asia and
the ongoing risk of supply disruptions in the Middle East and elsewhere. For these reasons, we expect oil
prices to remain extremely volatile and move in much larger swings than they historically have.
Paying Brent prices for crude oil, instead of WTI prices
Other factors adding to the rising fuel problems for airlines are the increasing use of Brent pricing as a
benchmark for crude oil and its higher cost vis--vis the price of West Texas Intermediate (WTI) crude oil.
In recent years, Brent crude, which is a light sweet crude oil sourced from the North Sea, has increasingly
gained popularity over WTI as an indicator of global oil prices. Though considered slightly inferior to WTI,
it enjoys the advantages of better shipping flexibility and better access to international markets.
WTIs role as an international oil benchmark came into question in 2011 after a backlog at its delivery
point of Cushing, Oklahoma, caused it to disconnect from the global market, pushing the price difference
between the two benchmarks up to a record $28.00 a barrel. In 2012, the difference declined to $17.53 a
barrel. Because of this difference in price, the number of Brent contracts being traded has risen, while the
number of WTI contracts traded has declined. For example, according to IntercontinentalExchange Inc.
(ICE), which operates Internet-based marketplaces for commodity and energy trading, the average daily
volume for Brent futures and options stood at 804,978 contracts in October 2013, down 17.2% from
October 2012, while the average daily volume for WTI futures and options stood at 402,969 contracts, up
6.4% from October 2012. In 2013 to date, the average Brent premium has fluctuated widely and, therefore,
it still poses a threat to airlines, since jet fuel prices are usually based on the Brent price, plus the refining
spread. As of May 2013, the Brent premium over WTI crude oil stood at $7.94 a barrel. By July 23, the
spread between Brent and WTI had fallen under $3 a barrel, the lowest level in 2 years. However, as of
October 21, 2013, the spread had widened again and stood at $10.19 a barrel.
Crack spread has narrowed
In addition to the price of oil, airlines have something else they need to contend with in order to fuel their
planes: the crack spread. This measurethe cost difference between a barrel of oil and a barrel of refined
jet fuelhas traditionally hovered somewhere between $5 and $10; that is, jet fuel costs $5$10 a barrel
more than crude oil. In the initial aftermath of Hurricanes Katrina and Rita in 2005, however, that spread
widened to about $60 a barrel, exacerbating the difficulties the industry was then facing. The crack spread
remained well above historical levels through 2008. In 2009, partly related to the decline in demand for jet
INDUSTRY SURVEYS
fuel, the crack spread narrowed back toward its historical range, and averaged $7.94 for the year. The crack
widened in 2010, averaging $10.78 for the year, up 36% from the average of 2009. In 2011, the crack
averaged $31.10, up 188% from the average of 2010. In 2012, the spread increased by another 10% to
$34.30. As of October 25, 2013, the 3-2-1 crack spread in New York, based on Brent oil in Europe, had
dropped to $5.82 a barrel, according to Bloomberg. Should there be another major supply disruption, the
crack spread could easily widen further.
Fuel costs could fall if oil prices stay stable
According to a compilation by S&P, fuel costs absorbed about 32% of total airline revenues in both 2011
and 2012, up from 26% in 2010 and 25% in 2009, but down from 36% in 2008. In contrast, fuel costs
totaled 15% in 2003. S&P expects fuel costs to account for about 32% of airline industry revenues in 2013.
According to the Airlines for America (A4A), the airline industrys trade group, each penny rise in the price
of a gallon of jet fuel costs the industry $190 million to $200 million, assuming industry consumption of
between 19 billion and 20 billion gallons a year. Airlines average jet fuel costs were 43% lower in 2009
than in 2008. In 2010, average jet fuel prices rose 18% from the average of 2009, while in 2011, jet fuel
prices rose 28% from the average of 2010. In 2012, the average price rose by nearly 3% from the average
of 2011. For 2013, we see jet fuel costs rising about 5%, largely on higher capacity. While there is little
certainty in predicting the direction of future oil prices, S&P thinks it highly unlikely that oil will recede to
its historic trading range (near $30 per barrel). For US airlines to be successful, they must find ways to offset
higher fuel costs, either with revenue increases (including the addition of new revenue sources) or by cutting
costs in other areas. The latter may be difficult, however: after several years of industry-wide cost cutting,
much of the low-hanging fruit has already been plucked, and further meaningful cost cuts will be more
difficult to attain, in our view.
REFINING ISSUES
The jet fuel crack spread is also widening because a number of refineries have been idled or shut down on
the East Coast due to various reasons. For instance, the area hit by Hurricane Sandy has eight operating
refineries that have a combined refining capacity of around one million barrels of crude oil per day. The
hurricane arrived at a time when inventories of oil products such as gasoline, distillates, and jet fuel were
already quite low. According to the Energy Information Administration (EIA), jet fuel supplies in the period
right before the hurricane were 8% below the same period in 2011. The hurricane is estimated to have
caused the idling of almost 70% of the oil refineries on the East Coast. Further, refineries in the Midwest,
which account for some 20% of US refining capacity, also faced refinery shutdowns and oil pipeline ruptures.
Delta Air Lines buys a refinery
On April 30, 2012, Delta Air Lines purchased an oil refinery near Philadelphia from Phillips 66, an oil
refining and marketing company that had been recently spun off from ConocoPhillips. Delta, which
received $30 million in state government assistance as part of the deal, purchased the 185,000 barrels per
day refinery for $150 million and plans to invest an additional $100 million to upgrade and maximize jet
fuel production at the refinery. This marks the first time a refinery has been purchased by an airline. Delta
claims the move will help it bring down its fuel costs by $300 million annually and ensure jet fuel
availability for the companys Northeast operations.
As part of the deal, Delta will trade the refinerys nonjet fuel outputs for jet fuel from several energy
companies under multiyear agreements. Further, the company has entered into a three-year agreement with
British Petroleum (BP), under which BP will supply crude oil for the refinery. With this arrangement in
place, the company estimates that the jet fuel production at the refinery, along with the jet fuel received in
exchange for nonjet fuel produced, will meet 80% of its jet fuel needs. Jet fuel production at the refinery
started in September 2012 and the company attained a production level of 40,000 barrels per day as of May
2013. This represented about 25% of Deltas domestic jet fuel consumption and 22% of the refinerys
capacity. In a September 2012 presentation, the company noted that, given the large volume of fuel involved
and the crack spread expansion partly due to the recent refinery closures on the East Coast, even a small
saving on jet fuel costs would make a significant impact on the airlines cost structure.
4
INDUSTRY SURVEYS
S&P believes that in purchasing the refinery, Delta added risk and complexity to its business model, but
given the low purchase price and Deltas high cash balances, it represents a risk that the company could
afford. It is notable that the East Coast refining business has been a money loser for a long time, and Deltas
purchase of a refinery is not likely to alter the economics of that business. In periods when the price of oil is
falling, the refinery will be hurt by the cut, possibly eating away at the benefits of lower pricing that Delta
might otherwise have realized. In the first nine months of 2013, the refinery business reported an operating
loss of $70 million. However, for the third quarter of 2013, the company reported an operating profit of $3
million. We think an effective hedging program could accomplish the same goals without these risks.
However, this is an innovative approach that has not been tried before, and it may be successful in cutting
Deltas fuel costs. In addition, just keeping the refinery running means an increased amount of refined
product available in the marketplace, thus keeping prices lower than if the refinery had been shuttered.
Further, with the jet fuel crack spreads widening, the refinery might end up earning a considerable return
for the airline. Only time will tell how this plan works out for Delta, and if it will spur other such deals.
AIRLINES ATTEMPTING MORE FARE INCREASES

Airlines have attempted a number of fare increases in 2013, but have failed most of the time. According to
farecompare.com, an online resource, through September 2013, there were 10 attempts at airfare hikes, of
which only two were successful,
CHANGE IN PRICE OF AIR TRAVEL VS. OTHER GOODS AND SERVICES
compared with seven successful
fare hikes (out of 15 attempts) in
% CHG.
full-year 2012 and nine successful
ITEM
1978*
2000
2012 1978- 2012
Walt Disney World ($, one-day adult pass)
6.50
45.00
89.00
1,269
fare hikes (out of 22 attempts) in
College tuition: public ($ per year)
688
3,508
8,655
1,158
2011. Delta Airlines was
College tuition: private ($ per year)
2,958
16,072
29,056
882
responsible for seven of the
National Football League game ticket
9.67
49.35
78.38
711
attempted hikes in 2013 so far.
Table B04561.6
Prescription drugs (index)
285.4
440.2
615
More recently, in August 2013,
Major League Baseball game ticketCHANGE IN
3.98
16.22
26.98
578
Delta raised the fare between $4
Gasoline ($ per gallon, unleaded) PRICE OF AIR
0.67
1.51
3.64
443
and $10 per round trip, with
TRAVEL VS.
New automobile ($)
6,470
24,923
30,910
374
United Airlines following the hike.
OTHER GOODS
New single-family home ($)
55,700 169,000 245,200
340
However, in September, both
AND SERVICES
Consumer Price Index
65.2
172.2
229.6
252
airlines rolled back their hikes
Movie ticket ($)
2.34
5.39
7.96
240
since none of the other carriers
Postage stamp ($, one ounce, first-class)
0.15
0.33
0.45
200
increased their prices.
Whole milk (index)
81.0
156.9
211.3
161
Air travel ($, round-trip dom estic fare) 186.00
314.00
355.75
91
Apparel (clothing/footw ear/jew elry, index)
81.3
129.6
126.3
55
Television (index)
101.8
49.9
5.4
(95)
*Congress enacted legislation deregulating domestic airline passenger service
in October 1978.
Source: Airlines for America.
Airfare hikes are aided by the

industrys recent capacity restraint,
since fewer seats are available. In
addition, business travel demand
has been increasing, which has led
to a more profitable mix of airfares
on the plane, since business travelers tend to buy more expensive refundable tickets and sit in more expensive
coach seats. Finally, the absence of major fare sales has also had an impact. Airlines have been doing much less
discounting than in the past, waiting longer for seats to book up before starting a fare sale. All of these factors
are driving healthy yield gains for US airlines.
Airfare hikes have been working. Year to date through September 2013, the average industry systemwide
yield was 16.18 cents, up 1.4% from the same period a year earlier. Systemwide yield averaged 15.92 cents in
2012, up 3.2% from 2011. Total passenger revenue was up 0.8% year to date through May 2013, after
rising 3.8% in 2012; such revenue increased 10.5% in 2011.
INDUSTRY SURVEYS
CAPACITY INCREASES MUTED DUE TO VOLATILE OIL PRICES, ECONOMIC UNCERTAINTY

Although demand weakened significantly in 2009, S&P believes that the US airline industry was better
positioned to handle that downturn than past industry down cycles, mainly due to the large capacity cuts the
industry had already taken. In addition, both the network and discount airlines indicated intentions to practice
continued capacity restraint. This was a change from the past, when carriers would typically abandon pricing
discipline when demand weakened, leading to severe price cuts; then, when demand started to strengthen, the
airlines would quickly add back capacity, leading to overcapacity and limiting potential fare increases. We
believe that capacity and behavioral changes clearly lessened the severity of the industrys price declines, and
should allow for greater price and revenue gains in an improving demand environment.
The first industry capacity cuts took place from late 2008 through mid-2009 in response to a sharp spike in
oil prices in the summer of 2008, which culminated with a record high oil price of $147.27 a barrel on July
11, 2008. At that time, the industry was enduring billions of dollars in operating losses while burning
through millions of dollars a day in cash.
DOMESTIC AIRLINE YIELDS
(Year-to-year % change)
In 2012, airlines held back on their capacity

expansion plans. Systemwide capacity (as
20
measured by available seat miles, or ASMs)
Table H06:
15
was up only 0.2%, and domestic capacity up
DOMESTIC
0.3%, from 2011. In 2011, systemwide
AIRLINE
10
capacity rose 1.5% and domestic capacity
YIELDS
5
increased 0.6%. Year to date through October
0
2013, systemwide capacity was up 1.1%, while
(5)
domestic capacity was up 1.4%, from the same
period in 2012, while the systemwide
(10)
passenger load factor (PLF) was up by 0.4
(15)
percentage point to an average of 83.3%,
(20)
while the domestic load factor was flat at an
2003 04
05
06
07
08
09
10
11
12 2013
average of 84.2%. In 2012, the systemwide
load factor increased by 0.8 percentage point
and averaged 82.75%, while the domestic load
factor improved by 0.5 percentage point to an average of 83.15%. In 2011, the systemwide load factor rose
0.1 percentage point, and the domestic load factor increased 0.7 percentage point.
As 2011 began, signs emerged that US carriers were starting to be more aggressive on capacity increases.
However, after oil surpassed $100 a barrel in February, many carriers dialed back their expansion plans. In
the second half of the year, economic concerns also drove the airlines to abandon much of their capacity
growth plans. The exact same pattern continued in 2012, with capacity plans being dialed back amid high
oil prices and worries about the global economy. Most of the airlines are employing larger aircraft on routes
earlier served by smaller ones, which implies additional capacity, but without adding to the staff or fleet.
For instance, in its third-quarter 2013 earnings call in October 2013, US Airways said that it was planning
to expand capacity by around 3.5% in 2013, and by 3%4% in 2014. According to Innovata, a research
firm, year to date through September 2013, 321 new airplane routes were created in the US. Further, in 121
flight routes, the number of seats available for passengers increased by more than twice the number in 2012.
Innovata expects US airlines to offer 1.3% more flights to travelers between October and December 2013.
It remains to be seen over the longer term if the carriers will start to abandon the capacity restraint they
have shown over the past several years if demand strengthens significantly, or if oil pulls back sharply from
recent price levels. We think such lack of restraint would serve them poorly for the next industry downturn,
and would hurt the much-needed pricing power they have only started to regain due to industrywide
capacity reductions. The merger of American Airlines with US Airways (discussed earlier) is likely to help
overall industry capacity levels decline modestly, in our view.
INDUSTRY SURVEYS
AIRLINES HIGH CASH BALANCES PROTECT THEM FROM NEXT DOWNTURN

A majority of US airlines are sitting on high cash balances, which S&P believes should help protect them
against the next cyclical downturn, when it occurs. The cash balances for the industry stand at an average of
about 25% of trailing twelve months (TTM) revenues. For instance, US Airways ended the third quarter of
2013 with cash and short-term investments worth $3.9 billion, up nearly 28% from the third quarter of
2012. Southwest Airlines ended the third quarter with $3.3 billion worth of cash and short-term
investments. Companies are using their cash to pay down debt and buy back stock. For instance, Delta
Airlines in May 2013 announced a shareholder-return strategy that includes a dividend and stock buybacks.
It also plans to repay $5 billion of debt in the next five years.
While airlines currently seem to have ample liquidity, cash balances can burn up rapidly in a downturn.
Because the airline industry is such a capital-intensive business and most carriers have high debt levels,
reduced cash inflows during a downturn can quickly lead to depleted cash levels. For this reason, the
airlines often keep on hand billions of dollars in undeployed cash.
PASSENGER DEMAND STILL STRONG

US airlines showed improving demand and revenues in 2011 and 2012, but encountered slower growth in
these metrics so far in 2013. Travel demand has been strong during peak periods like holidays, though
demand has been weaker during non-peak periods. Airlines have also seen a steady recovery in travel
demand from the corporate segment, despite a still-tepid US economy. If the US economy shows meaningful
growth, a recovery in air travel demand will likely follow. Conversely, if the economy starts to lose traction,
air travel demand would slow, particularly in the areas of corporate and first-class travel.
Capitalizing on the periods of strength, US airlines have begun implementing surcharges to travel during
peak travel periods, though the exact definition of what constitutes peak travel may vary. Most of the major
carriers have added surcharges of up to $50 per flight segment above the published airfare on select dates. This
action irritates passengers since these surcharges may not show up in the posted airfares on many websites,
only appearing in the total cost later in the booking process.
Year to date through October 2013, systemwide enplanements were up 0.2%, revenue passenger-miles
(RPMs, a measure of traffic volume) rose 1.5%, passenger revenues rose 3.2%, and yields were up 1.6%. In
2012, enplanements rose 0.1%, RPMs increased 0.3%, passenger revenues rose 3.7%, and yields increased
3.3%, according to the A4A trade group. In 2011, A4A reported that enplanements rose 1.1%, RPMs
increased 1.4%, passenger revenues rose 10.5%, and yields increased 9.0%. We expect positive trends in
industry revenues and profitability to continue through 2014.
NEW ANCILLARY FEES

The big US airlines are increasingly relying on ancillary fees, such as baggage charges, to support their bottom
lines. According to the Bureau of Transportation Statistics (BTS), a division of the US Department of
Transportation (DOT), the baggage fees and reservation change fees charged by 16 airlines in the US totaled
$1.7 billion and $1.4 billion, respectively, in the first half of 2013. In 2012, the ancillary fees charged by 16
airlines in the US amounted to $3.5 billion, with Delta topping the list at $865.9 million, followed by
United ($705.5 million) and American ($557.4 million). Passengers, though unhappy with the recent trend,
are gradually becoming accustomed to paying higher fees for baggage and other services.
Some airlines have started charging fees to passengers for window and aisle seat assignments. Certain other
airlines reserve window and aisle seats for members of their own loyalty programs. Low-cost carriers Allegiant
and Spirit Airlines charge a carry-on fee in the range of $5 to $35 for any seat reservations made prior to
the check-in. In May 2012, baggage fee levels witnessed a new high when Spirit Airlines announced its carryon bag fee of $100 per bag per trip, starting on November 6. The new fee, which could be lower depending on
whether it is paid at a check-in kiosk or whether the reservation has been made online, is a sharp rise from the
$45 baggage fee that the airline previously charged. In May 2013, Frontier Airlines said that it would charge
INDUSTRY SURVEYS
$25 for carry-on bags that are put into the overhead bin (small bags that can be stowed under the seat remain
free). The fee would increase to $100 for those who pay at the check-in gate.
The bigger airlines such as Delta Airlines, JetBlue, and American have been increasing their fees on the second
checked bags. United Airlines, for instance, increased its fee for second checked bags from $70 to $100 on some
international flights in June 2013.
Baggage and other customer service statistics have improved
In 2012, the 15 largest US airlines reported their lowest rate of mishandled baggage since 1987, when this
measure was first reported by the US Department of Transportation (DOT). Airlines also posted an 81.85%
on-time arrival rate in 2012, the third highest annual performance in the last 18 years, according to the
Bureau of Transportation Statistics. In its fourth-quarter 2012 earnings call in January 2013, United
Continental Holdings said that its baggage mishandling rate declined by 10% in the quarter, while its
mainline completion factor rose 0.1 point to reach 98.6%. We believe the baggage mishandling rate has
fallen largely due to a decline in the number of checked bags caused by rising baggage fees, while the other
statistics have gained support from overall capacity cuts in the industry.
According to the Air Travel Consumer Report released by the DOT in October 2013, the 16 largest airlines
operating in the US recorded a 78.8% on-time arrival rate in August 2013, and their cancellation rate was
1.0%. Their baggage mishandling rate was 3.12 per 1,000 passengers (down from 3.38 in August 2012).
The improvement in flight delays could also be partly attributed to various rules pertaining to tarmac delays
implemented by the FAA. In April 2010, a rule went into effect, whereby a domestic flight carrying passengers
would not be allowed to sit on the tarmac for more than three hours, except for reasons concerning safety,
security, or air-traffic control problems. In 2012, there were 42 domestic tarmac delays of more than three
hours versus 50 in 2011. According to the Air Travel Consumer Report, a monthly publication of the US
Department of Transportation, there were two domestic tarmac delays over three hours in the month of
August 2013.
GREEN INITIATIVES UNDER WAY

Airlines are currently fighting the perception that they are a major source of greenhouse gases (GHG) by
listing all the ways they have reduced jet fuel usage over the past 10 years: modernizing their fleets to more
fuel-efficient planes, efforts to control fuel use, and modifications to existing planes to increase fuel
efficiency, to name a few. Although the airlines may have undertaken these initiatives to cut costs in the
wake of high oil prices, they are also using their accomplishments as a way to ease environmental concerns.
S&P believes that this issue is starting to gain attention in the industry, and we expect airlines to face
increasing pressure on this front over the next
few years.
FUEL EFFICIENCY
(Gallons consumed per available seat-mile)
Numerous times in the past few years, airlines

have conducted biofuel test flights. Continental
Airlines was the first US airline to do so, in
0.020
January 2009. In November 2009, a test flight
Chart H04:
0.015
conducted by KLM Royal Dutch Airlines was
FUEL
the first to carry passengers. In July 2011, the
EFFICIENCY
0.010
use of biofuels in commercial aviation was
approved by a US technical standards group
0.005
called ASTM International, working in
0.000
conjunction with the US Federal Aviation
2002 03 04 05 06 07 08 09 10 11 12 2013*
Administration. This approval allows the use of
biofuels in commercial aviation outside of their
*Through June.
Source: US Bureau of Transportation Statistics.
prior use only for testing purposes. In
November 2011, two airlines conducted
demonstrations. United Airlines used 40% biofuel on one of its commercial domestic flights, and Alaska Air
used 20% biofuel (made of cooking oil) on two of its flights. Alaska Air had plans to operate 75
0.025
INDUSTRY SURVEYS
commercial passenger flights using this biofuel mix. According to the airline, the use of a 20% biofuel blend
in the flights will reduce GHG emissions by 134 metric tons.
What these tests have shown so far is that biofuel can perform as well as traditional jet fuel, though the fuel
is still much more expensive. While we think the full-scale deployment of biofuel is still likely to be several
years away, there could be several benefits from the development of an alternative to fossil fuels. First
would be a reduction in the reliance on oil. Second, airlines will greatly improve their image among
environmental groups. Some studies have also shown some biofuels to have a modest positive impact on
fuel efficiency.
In June 2013, United Airlines executed a definitive purchase agreement with AltAir Fuels for competitive,
sustainable, advanced biofuels on a commercial scale. In partnership with United, AltAir Fuels will retrofit
part of an existing petroleum refinery near Los Angeles to become a 30 million gallon, advanced biofuel
refinery. United has agreed to buy 15 million gallons of lower-carbon, renewable jet fuel over a three-year
period, with the option to purchase more. AltAir expects to start delivery in 2014 of five million gallons of
renewable jet fuel each year.
US, others fight EU carbon emissions trading scheme
The entire global airline industry, including US airlines, is included in the European Union (EU) Emissions
Trading Scheme (ETS) that started in January 2012. Under the ETS, carriers operating flights to and from
(and within) the EU will have to surrender one carbon allowance per tonne of CO2 emitted on each such
flight. Operators that do not comply will face a penalty of 100 per missing allowance, along with an
obligation to buy missing allowances and the possibility of being banned from operating in the EU.
Airlines get a certain amount of free allowances for the nine-year period between 2012 and 2020, based on
data gathered for airline carbon emissions for 2010. Airlines across the globe have been extremely critical of
various aspects of the scheme, and question the legality of the EU to impose the ETS on them. The US and
several foreign nations have expressed strong objections to this unilateral decision by the EU to include
international carriers in the scheme. According to an analysis by Thomson Reuters Point Carbon, an energy
market research firm, the EU ETS cost airlines approximately $1.5 billion in 2012.
While the EU has been trying to impose its scheme on airlines globally, airlines in the US, China, and India
have protested paying for their carbon emissions.
NEW TAXES AHEAD

In his FY 2014 budget request, President Obama has proposed raising a number of taxes levied on the
airlines. The administration noted that higher taxes would be used to help reduce the deficit, improve
airports, and add new immigration and customs officers to reduce wait times for processing foreign visitors.
The proposals include raising the security fee to $5 per one-way trip from $2.50 per flight segment,
increasing taxes for customs inspections to $7.50 from $5.50 for an international flight, and increasing the
tax for immigration services to $9 from $7. According to John Heimlich, chief economist at the A4A trade
group, the tax on a $300 domestic ticket would rise 23%, to $75 from the current $61. Vaughn Jennings,
managing director for government and regulatory communications at A4A, noted that the budget proposals
would increase taxes on airline customers and airlines by 29%, leading to a $5.5 billion rise in their $19
billion annual tax burden.
The US airline industry, even without the proposed new taxes, already faces an extremely high tax burden.
Current taxes and fees in place in aggregate constitute 20% of the average ticket price. The A4A points out
that the industry is taxed at a higher rate than tobacco and alcohol, two sins that the government is
trying to reduce usage of as part of its tax policy.
The US federal government was shut down from October 1 through 16, 2013, after Congress failed to pass
an appropriations bill. An interim appropriations bill was passed on October 16, which authorized current
spending levels through January 15, 2014.
INDUSTRY SURVEYS
IS NEXTGEN ATC ON ITS WAY?

The US Federal Aviation Administration is working on a completely new system of air traffic control,
known as the Next Generation Air Transportation System (NextGen ATC), which is supposed to be
implemented in phases between 2012 and 2025. Using satellite surveillance, the new air traffic control
system would be a complete overhaul from the current radar-based system. NextGen ATC would deploy
new methods to route pilots, planes, and passengers, and implement landing procedures that would help
reduce the time currently wasted by planes waiting at the airport for a clear runway. The new global
positioning system (GPS)based technology would allow planes to be spaced closer together, a major
improvement over the current system.
The FAA has been grappling with multiple problems, such as funding and management of the technology
upgrade, and is finding it difficult to meet its deadlines. In June 2013, FAA Administrator Michael Huerta
told the NextGen Advisory Committee (NAC) that the annual budget reductions under the sequestration
process would make it difficult for the agency to complete the modernization programs on time. A
Government Accountability Office (GAO) report on the progress of NextGen, submitted to Congress in
April 2013, noted that the FAA has made progress in delivering some operational improvements, but to
demonstrate those improvements sooner, it has made trade-offs that could limit their overall benefit to
airlines in the coming years. Another case in point is the En Route Automatic Modernization (ERAM)
system, which will help provide communications and create display data to be used by air traffic controllers.
The development of this system is lagging behind the original deadline of 2014 by as much as two years and
has exceeded its budget by $500 million.
Funding in recent FAA authorization
In February 2012, President Obama signed the funding bill, thus providing $63.4 billion to the FAA
through 2015. This reauthorization of the long-term funding bill, which expired in 2007, could expedite the
ongoing work on the NextGen ATC. Having received around 23 short-term funding extensions, the FAA
had been dealing with an unstable funding plan.
In June 2013, the House Appropriations Subcommittee on Transportation, Housing and Urban
Development approved a FY 2014 funding bill that would provide the FAA with $11.8 billion, $756 million
below the current fiscal year and $103.3 million below the level from the automatic sequestration cuts.
However, air traffic controllers salaries and the contract tower program would be protected. The bill
provides $9.5 billion for operations and directs that not less than $140 million of that amount be spend
on the contract tower program. The operations funding would be $200 million below the Obama
Administrations requested amount. As mentioned earlier, Congress failed to pass an appropriations bill for
2014, with an interim bill passed on October 16, 2013.
INDUSTRY REVIEW AND OUTLOOK

According to S&P estimates, the top 10 US carriers earned $4.0 billion in both 2012 and 2011, and $3.7
billion in 2010, after losing $5 billion in 2009 and $4 billion in 2008. Results in 2012 benefited from fare
increases, improved business travel, and lower oil prices, while increases in ancillary fees such as baggage,
change fees, and premium seating, slowed.
As of late November 2013, we had a positive fundamental outlook for the airline sub-industry for the next
12 months. Traffic statistics showed improving demand and revenues in 2012, which we see carrying on
into 2014. We believe the US airline industry is seeing good demand, despite the still-tepid US economy. In
addition, we think that since the industry has reduced capacity levels, it should be able to raise fares as
passenger travel demand improves, and hold the line on fares if demand weakens. Oil and jet fuel prices,
should they continue to rise, represent a risk to the fragile industry recovery. We think the airlines are likely
to see tougher comparisons in 2014 after rising unit revenues in 2012 and much of 2013, but we expect
demand for air travel to remain strong.
10
INDUSTRY SURVEYS
Airline stock performance

We think investor sentiment on airline stocks has improved, and we expect further improvement on signs
that the US economy is recovering and if oil prices retreat. The bankruptcy filing of AMR Corp., parent of
American Airlines, has led to some domestic and international capacity cuts as American restructured. The
industry successfully instituted a number of fare hikes in 2011 and 2012, and will likely look to continue to
raise fares in 2013. Many of the shares warrant added risk premiums, in our view.
Year to date through November 22, 2013, the S&P Airlines Index rose 71.6%, versus a 27.0% rise for the
S&P 1500 Composite Stock Index. In 2012, the S&P Airlines Index increased 18.0%, versus a 13.7% rise
in the 1500. The five-year compound annual growth rate for the S&P Airlines index through November 22,
2013, was 19.6%, versus 15.7% for the S&P 1500.
AIRLINES IN FOCUS
In general, S&P believes that the airlines are seeing tougher comparisons in 2013 after rising unit revenues
in 2012, but expects demand for air travel to remain strong. Traffic statistics showed improving demand
and revenues in 2012, which are continuing into 2013. We believe the US airline industry is seeing good
demand, despite the still-tepid US economy. In addition, we think that since the industry has reduced
capacity levels, it should be able to raise fares as passenger travel demand improves, and hold the line on
fares if demand weakens. Oil and jet fuel prices, should they continue to rise, represent a risk to the fragile
industry recovery. In the midst of bankruptcies, restructurings, recoveries, mergers, and growth among
discounters, the changing shape of the airline industry is another dynamic variable that could sway results.
Delta initiates dividend, stock buyback
In May 2013, Delta announced a shareholder-return strategy that includes a dividend and stock buybacks.
The company will return more than $1 billion to shareholders over the next three years through these two
programs. Starting in September 2013, the company will pay a quarterly dividend of $0.06 per share. It also
plans to repurchase $500 million of stock by the end of June 2016.
The company also outlined a five-year financial plan that focuses on free cash flow generation through a
disciplined capital investment approach and earnings improvements. Delta plans to reinvest 50% of its
operating cash flow (about $2.0 billion$2.5 billion) annually in order to improve its fleet, facilities,
products, and technology. The company will use the remaining free cash flow to return cash to
shareholders, reduce the companys net debt (debt minus cash) to a target level of $7 billion (from $12
billion currently), and address longer-term pension funding needs.
UAL integration still running into trouble
United Airlines completed its merger with Continental Airlines on October 31, 2010, and received a single
operating certificate from the FAA on November 1, 2011. The merged company successfully implemented a
single passenger service system, a single loyalty program, and a single website in the first quarter of 2012.
However, the merger process has not been completely smooth for United Airlines. The company grappled
with a number of operational challenges, including technology issues that arose after conversion to a new IT
system. In its fourth-quarter earnings call in January 2013, the company noted that it underperformed on
passenger revenue synergy in 2012, but is confident that it will get back on track on this metric in 2013.
United, currently the largest airline in terms of traffic, posted net operating income of about $590 million in
2012. In the first nine months of 2013, the company reported a net income of $431 million on total revenue
of $28.9 billion.
Southwest integrating AirTran, pursuing business travelers
On May 2, 2011, Southwest Airlines Co., the largest domestic US airline in terms of revenue passenger
miles (RPMs), acquired AirTran Holdings Inc. for $1.4 billion in cash and stock. Among other things, the
acquisition gave Southwest a large-scale presence in Atlanta, an important business travel market. It also
allowed Southwest to grow about 20% without adding a single seat to overall industry capacity. The
company received its single operating certificate from the FAA in March 2012, and took significant steps
toward full integration in 2012.
INDUSTRY SURVEYS
11
In its third-quarter 2012 earnings call in October 2012, the company said that it had four key revenue
initiatives planned for 2013, including connecting and optimizing the combined airlines network, and
introducing a new revenue management system, and a target of achieving $400 million in pretax synergies
by 2013. In April 2013, the company noted that integration of the separate route networks of Southwest
and AirTran were complete, and was producing significant incremental bookings for future travel.
We think the acquisition of AirTran allows Southwest to continue to gain traction with business-travel
customers, while we think AirTran customers appreciate the large domestic route network Southwest brings
them. Southwest reported a 2012 net profit of $420 million. In the first nine months of 2013, the company
reported a net profit of $542 million. We expect the company to report a net profit of about $730 million
for 2013.
JetBlue to stay independent
JetBlue recorded a net profit of $128 million in 2012 (up from $86 million in 2011). In the first three
quarters of 2013, the company had a net profit of $121 million (down from $127 million in the first three
quarters of 2012). The company also reported a year-over-year increase in revenues of 7.6%. Amid the high
level of consolidation activity in the aviation industry over the past few years, JetBlue has preferred to stay
independent.
The companys network strategy in Boston and its continued focus on high-margin products and services
contributed to the solid revenue results in the first quarter of 2013. In its Boston network, the airline has
been able to attract increased business travelers, which helped drive improved yields. The company believes
there is untapped growth opportunity in its Boston network and plans to increase the number of flights on
that network from 100 to 150 per day. We expect JetBlue to record net income of $155 million in 2013.
12
INDUSTRY SURVEYS
INDUSTRY PROFILE
Airlines still face extreme challenges
The US commercial aviation industry, as of September 2012 (latest available), consisted of 15 scheduled
mainline air carriers that used large passenger jets (over 90 seats) and 70 regional carriers that used smaller
piston, turboprop, and regional jet aircraft (up to 90 seats) to provide connecting passengers to the larger
carriers, according to the Federal Aviation
US AIRLINE OVERVIEW
Administration (FAA). In addition, 33 all(For the 10 largest US passenger carriers,
cargo carriers were providing domestic
in billions of dollars except as noted)
and/or international air cargo service.
2011
Passenger revenues
Cargo revenues
Other revenues
Total revenues
% change
2012
120.5
127.0
2.2
Table B04 US 3.1
13.2
13.9
AIRLINE
135.9
144.0
OVERVIEW
8.9
10.6
Operating income
10.3
11.5
E2013
E2014
140.0
3.5
15.0
158.5
11.3
150.0
5.0
16.0
171.0
8.1
14.0
16.0
Revenue passenger-miles (bil.)

753.2
794.0
833.7
875.4
% change
1.0
5.4
5.0
5.0
Available seat-miles (bil.)
907.7
958.0 1,005.9 1,056.2
% change
0.0
5.6
5.0
5.0
Passenger load factor (%)
83.0
82.9
82.9
82.9
E-Estimated.
Sources: US Department of Transportation; Airlines for America;
S&P Capital IQ estimates.
AIRLINE MARKET SHARE LEADERS
(Based on revenue passenger-miles;
12 months ended June 2013)
MARKET
RANK COMPANY
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Delta
United
Table B03
Southw est
Airline market
American
share leaders
US Airw ays
JetBlue
Alaska
ExpressJet
AirTran Corp.
SkyWest
Others
Source: US Bureau of
Transportaion Statistics.
SHARE (%)
16.3
15.8
15.3
12.8
8.3
5.1
4.0
2.5
2.5
2.3
15.1
According to FAA estimates, the number of

aircraft in the US commercial fleet, including
regional carriers, totaled 7,024 at the end of
2012, a decrease of 174 aircraft from the
end of 2011. The 2012 number included
3,781 mainline air carrier passenger aircraft
(jets with more than 90 seats), 840 all-cargo
aircraft, and 2,403 regional aircraft (smaller
jets, turboprops, and pistons).
Based on carrier revenues, the largest US

airline in 2012 was United Continental
Holdings, which reported revenues of about
$37.2 billion in 2012. Delta Air Lines, which
reported revenues for 2012 of $36.7 billion,
was the second largest player. AMR Corp.s American Airlines placed
third with revenues of $24.9 billion. Southwest Airlines and US Airways
were No. 4 and No. 5, respectively, with 2012 revenues of $17.1 billion
and $13.8 billion.
According to Airlines for America (A4A), an industry group whose
members include most of the large US airlines and air cargo companies,
the US airline industry (the majors, nationals, and regionals) generated
total revenues of $195.6 billion in 2012, up 1.3% from $193.0 billion
in 2011. In terms of traffic, US Department of Transportation (DOT)
statistics show that the total US airline industry logged 823.2 billion
revenue passenger-miles (RPMs, the number of passengers multiplied
by the number of miles flown) in 2012, up 1.1% from 2011s 814.4
billion. Also rising in 2012 were enplanements (the total number of
passengers), up 0.8% to 736.6 million, and available seat-miles (ASMs,
the number of seats in the active fleet multiplied by the number of miles
flown), up 0.2% to 994.5 billion. Industrywide passenger load factor
(the percentage of seats filled) was up 0.8 percentage points to 82.8%.
While US airlines have experienced a difficult operating climate over the past 10 years, airlines around the
world faced a similar environment. In 2009, the global airline industry lost an estimated $9.9 billion,
according to the International Air Transport Association (IATA), a coalition of some 260 airlines
throughout the world. However, as in the US, the global environment has also improved. According to the
IATA, global industry profits were $18 billion in 2010, $8.4 billion in 2011, and $7.6 billion in 2012. In
September 2013, the IATA projected profits of $11.7 billion in 2013, down from an earlier projection of
$12.7 billion. For 2014, it projected profits of around $16.4 billion with a net margin yield of 2.2%.
INDUSTRY SURVEYS
13
INDUSTRY TRENDS
The recent history of the airline industry has been one of shrinkage, fueled by consolidation and
bankruptcies. Mergers, capacity cuts, bankruptcy filings, large-scale losses, and high debt levels are the
legacy of the first decade of the new millennium, and represent challenges that are likely to persist for some
time. On the positive side, the industry has been raising baggage and other ancillary fees that generate
additional revenues and have other benefits, and on-time and other measures have improved.
A NEW INDUSTRY LANDSCAPE

The largest of a spate of mergers that S&P Capital IQ (S&P) believes have completely changed the
competitive landscape of the US airline industry occurred on October 31, 2010, when UAL Corp., parent of
United Airlines, and Continental Airlines Inc. completed their merger, creating a global airline with 2011
revenues of $37 billion. Other important deals in recent years include the merger of Delta Air Lines and
Northwest Airlines Corp. in 2008, and the May 2011 acquisition of AirTran Holdings Inc. by Southwest
Airlines Co., the largest domestic US airline in terms of revenue passenger miles (RPMs), for $1.4 billion in
cash and stock.
The merger of United and Continental in 2010 reduced the number of major US network carriers to four
(Delta, United, American, and US Airways), plus Southwest Airlines (which does not have a significant
international network), and a few smaller carriers such as JetBlue and Alaska Air. Moreover, the reductions
may not be over. In February 2013, AMR Corp., the parent company of American Airlines, and US Airways
announced their plan to merge, with the surviving entity to operate under the American Airlines name. The
merger would create the worlds largest airline and further reduce the number of big players. (See the
Current Environment section of this Survey for a detailed discussion.)
In the wake of these deals, size and scale have become more important than ever. The US airline industry
has fewer competitors and less capacity chasing customers, which should help the industry to be more
disciplined on capacity so airlines can price their product in a way that generates a sustainable return on
invested capital. Recent capacity cuts and capacity restraint, even in the face of improving demand, are
positive trends that the elimination of several competitors should only improve.
As a result, S&P expects the supply-demand equation to continue to shift in favor of the airlines. We think
US consumers are likely to face higher airfares over the next couple of years, though fare sales during
periods of seasonal weakness will probably continue. On an inflation-adjusted basis, air travel is still
extremely cheap, particularly when accounting for the increase in oil prices over the past five years.
However, we think airfares are likely to continue to head higher.
A shrinking industry
We think the changes the industry has undergone following this period of consolidation will have a farreaching, long-term competitive impact on the industry. The shrinking number of competitors should allow
for continued capacity restraint and potential fare increases, due to a combination of less competition and
improving industry demand. In addition, while the airlines are integrating their mergers, they will be able to
redeploy and right-size their capacity to where it is most profitable. The capacity reduction that S&P thinks
is a likely result of merger integration (where redundant routes are likely to be streamlined) should lead to
fewer seats chasing air-traveling customers. In addition, with fewer airlines out there, capacity additions
during future up cycles could be more muted than in the past.
We also see a shift in strategy among airline executives, who have become much more focused on managing
their businesses for sustainable profitability rather than market share gains. This is a significant change.
S&P believes that the US airline industry, after years of suffering multibillion-dollar losses, may have finally
learned a key lesson: although size and scale are important, the industry must be disciplined on capacity so
airlines can price their product in a way that generates a sustainable return on invested capital. Recent
capacity cuts and restraint, even in the face of improving demand, are positive trends that should only
improve with the elimination of a competitor through the UnitedContinental merger.
14
INDUSTRY SURVEYS
The new United Airlines. S&P believes the new United Airlines is currently the largest passenger
airline in the world in terms of passenger revenues. Under terms of the deal, United was the acquirer, with
each Continental share getting 1.05 UAL shares. The new company adopted the name United Continental
Holdings Inc., but is flying under the United name, using Continentals logo, livery, and colors. The new
companys headquarters is in Chicago, Uniteds headquarters, but Houston, Continentals main hub, is the
combined companys largest hub.
S&P thinks the deal made strategic sense because there was not much overlap between the carriers.
Internationally, United had a strong market presence in Europe and flew out of hubs that included Chicago
and Los Angeles, while Continental flew internationally out of its hubs at Newarks Liberty International
Airport and Houston. For this reason, we think the two airlines complement each other in getting
passengers to and from Europe. Continental also adds its strong Latin America network to the combination,
while United has strength in the Pacific region, including China. We think the combined carrier is a truly
global airline, allowing its passengers to travel throughout the world.
As to the composition of the fleet, both carriers primarily fly Boeing planes, which should help keep expense
items like training, maintenance, and spare parts from becoming an issue. With several kinds of Boeing jets
in use, United should be able to put the right-sized airplane into the right market, driving revenue synergy
opportunities. The deal also gives the combined airline flexibility in streamlining the fleet and eliminating
older, less fuel-efficient planes. As of December 31, 2012, the combined carrier had an average aircraft age of
13.3 years (12.4 years in 2011), among the youngest in the industry. United said that over the next few years,
it could fly as few as 550 to as many as 700 planes, depending on industry conditions, which we think should
afford it remarkable opportunities to capitalize on improving demand, with the ability to scale back if the
industry does not recover.
Southwest gains foothold in Atlanta. The acquisition of AirTran by Southwest Airlines also made a great
deal of strategic sense, in our view. AirTran was too small to compete against the larger network carriers
effectively, but had a large market presence in Atlanta, a city that is highly attractive to business travelers
and one in which Southwest did not have a major presence. Following the acquisition, we think Southwest
is more attractive to business travelers. Moreover, the acquisition allowed Southwest to grow its capacity
about 20% without adding a single extra seat to industry capacity.
We note, however, that Southwest is taking on additional risk in the acquisition by adding its first new fleet
type. While AirTran and Southwest both fly the Boeing 737, AirTran also flies the 717, a smaller aircraft
discontinued by Boeing in May 2006. However, in its third-quarter 2012 earnings call in October 2012, the
company said that despite a spike in its engine cost component, its long-term cost outlook for maintenance
materials and repairs is quite positive with the company undertaking fleet modernization. By the end of the
third quarter of 2013, all Southwest Boeing 737-700s and 78 Boeing 737-300s, and 14 AirTran Boeing 737700s converted to the Southwest livery, had been retrofitted with the Evolve interior. We think that the
acquisition of AirTran has resulted in huge benefits for the combined airline in terms of adding Atlanta and
other attractive cities.
Could there be more deals coming?
S&P believes that the AMRUS Airways and UnitedContinental deals were spurred by the perception that
the merger of Delta Air Lines and Northwest Airlines Corp. in 2008 has been a success. In our view, the
DeltaNorthwest merger was very similar to UnitedContinental in that it combined a carrier very strong in
Europe (Delta) with a carrier strong in Asia (Northwest). We think the smooth integration of that merger,
and the apparent benefits of the size and scale of the new Delta convinced United and Continental executives
that the potential benefits of a larger, more integrated network would outweigh the headaches of a merger.
In addition, we think that the SouthwestAirTran merger agreement was also a result of the more positive
view on mergers in the US airline industry. However, United is currently facing a number of integration
issues with respect to its merger with Continental that have hurt the airlines operational statistics.
So, will there be more consolidation activity in the future? S&P has been skeptical about that possibility,
mainly because so few players are left. However, given the merger agreement between AMR Corp.s
American Airlines and US Airways, it appears that US airline industry consolidation is not yet complete.
INDUSTRY SURVEYS
15
ANCILLARY FEES
Over the past few years, the US airline industry has been cultivating a new multibillion-dollar revenue stream.
According to the Bureau of Transportation Statistics (BTS), a division of the US Department of Transportation
(DOT), US airlines collected $8.1 billion in baggage and other ancillary fees in 2010, a 47% jump over
2008. In 2011, US airlines collected $2.38 billion in reservation cancellation/change fees, up 3.6% from
2010, according to the BTS. However, in a year when the number of passengers rose 1.3%, baggage fees
declined by 1.0% to $3.36 billion.
In 2012, US airlines collected $2.55 billion in reservation cancellation/change fees, up 7.3% from 2011,
according to the BTS, while baggage fees were up 3.8% to $3.49 billion. Some of the major airlines
reported an increase in the baggage fees collected. For instance, Delta, which ranked first in terms of
baggage fees collected in 2012, reported an increase of 0.3%, while US Airways saw an increase of 1.9%.
In addition to baggage fees, most airlines have added or otherwise increased fees to book reservations over
the phone, to cancel or change a reservation, and for overweight checked bags. Many airlines have started
charging passengers for onboard snacks or meals.
According to a September 2013 press release from IdeaWorksCompany, a consultant specializing in the area
of airline ancillary revenues, total ancillary revenues disclosed by 53 global airlines were $27.1 billion in
2012. This compares with just $2.45 billion in ancillary fees reported by 23 airlines in 2007. In 2012, five
US airlines placed in the top-10 list for collecting ancillary revenues.
Of course, customers do not like the changes. Nevertheless, the air traveling public has largely been willing
to endure low-frills service for low fares; those airlines that have tried to differentiate themselves as high
service have not succeeded in gaining customer loyalty. First-class and business-class passengers, however,
continue to be treated well: most airlines waive many of these fees in order to maintain the happiness of
these much more profitable customer groups. S&P expects that this new model will endure largely out of
necessity, but also because customers have shown that they are willing to absorb these fees.
Ever-evolving baggage fees raise costs for consumers
American Airlines was the first US carrier to charge fees to check luggage: in April 2008, it adopted a $25
fee for the second bag checked. This action was a move toward what the carrier described as an la carte
pricing model: an attempt to get passengers to pay more for the services they use. All major airlines (with
the exception of Southwest) eventually followed suit. In May 2008, American again led the way by
implementing a fee to check first bags, which most of the industry also matched. Today, while most US
airlines charge bag fees on domestic flights, ranging from $15 to $35 for a first bag and $25 to $50 for a
second bag, Southwest continues to market its Bags Fly Free program as a way to differentiate its service
and gain market share.
In April 2010, Spirit Airlines, a small low-cost carrier based in Fort Lauderdale, Florida, announced that it
would start charging passengers a fee of up to $45 for a carry-on bag that is put into the overhead bin, thus
becoming the first US airline to initiate such a fee (carry-ons that fit under the seat are exempt). Spirit justified
the fee by stating that its fares are $100 lower, on average, than other airlines fares. On May 3, 2012, Spirit
announced that it would raise its baggage fee to $100, effective November 6, 2012.
On April 4, 2012, Allegiant Air, a Las Vegasbased carrier, announced fees for luggage placed in overhead
bins. The fee is $35 per flight when the luggage is checked at the airport, but a lower $15$30 if the
baggage is checked in online. Bigger airlines such as Delta, United, and others have also raised their baggage
fees, citing increased fuel and handling costs as the reason. In January 2012, Delta Airlines announced that
it had raised its fees on a second checked bag from $75 to $100 on international flights. In June 2012,
United Airlines matched the increase by raising its fee on a second checked bag to $100 on flights from the
US to Europe and a few other routes. In May 2013, Frontier Airlines said that it would charge $25 for a
carry-on bag placed in the overhead bin, while allowing free small bags under the seat. The fee would increase
to $100 for those who pay at the check-in gate. While airlines are likely to be watching customer reactions
closely, the new fee demonstrates just how far US airlines are willing to go to raise revenues.
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INDUSTRY SURVEYS
with numerous benefits for airlines

These fees have two aims. First (and most obvious) is the attempt to boost revenues in any way possible.
Since baggage fees are generally paid at the airport when the bags are checked (although there is an online
check-in option), many passengers do not consider them until they arrive for their flight; as a result, the
airlines have not seen a large reduction in travel demand attributable to baggage fees. Indeed, airlines like
Continental that waited to see what customers would do before adopting bag fees found that customers
were not booking away from airlines with fees, so they eventually joined the crowd on this issue.
The fees make it difficult for passengers to compare airfares on an apples-to-apples basis, since each airline
has different fee structures for baggage, ticket changes, and other ancillary fees. While that information is
available on the airlines websites, it is generally separate from the actual airfare the customer sees, and
requires further investigation to discover what the fees are. S&P believes that eventually legislation will be
enacted requiring all fees to be reported to the passenger upfront on the booking page to allow for
transparency of costs and the ability to compare fares with other carriers. In September 2011, the DOT
proposed collecting more detailed revenue information aimed at giving consumers more transparency on
airline pricing. However, the proposal has generated resistance from the airlines.
including fuel savings and improved baggage performance
The second, less obvious reason for fees is that they help reduce operating costs. Providing fewer meals
onboard reduces both expenses and weight to the extent that the airline is able to eliminate heavy metal
carts and kitchen galleys; in some cases, this opens up space for additional seats. Fewer phone reservations
means less staffing needed in this area.
The increased baggage fees, which have reduced the number of bags being shipped, have resulted in a better
performance for the airlines. First, fewer bags reduces the weight on planes and results in fuel savings.
Second, fewer bags reduce the pressure on the baggage handling system and can improve customer service
metrics like lost baggage, since the system is less overloaded. According to SITA, an information technology
company that works with airlines, 99.1% of bags checked in 2012 were delivered on time to passengersa
record. Furthermore, the number of mishandled bags has decreased by 44.5% in the last six years, to 8.83
bags per 1,000 passengers in 2012. Though these figures are reported on a worldwide basis, they do reflect
an improvement in the US airlines baggage handling services.
CAPACITY CUTS HAVE EASED CHRONIC DELAYS SOMEWHAT

A bright spot from the sharp capacity reductions announced by US airlines over the past two years has been
an improvement in on-time statistics. For 2012, airlines posted an 81.85% on-time arrival rate, the third
highest annual performance in the last 18 years, according to the Bureau of Transportation Statistics (BTS), a
division of the US Department of Transportation (DOT). However, in the first quarter of 2013, the on-time
arrival rate was 80.1%.
but the underlying problem remains
Though on-time and other statistics improved recently, S&P believes that once demand and capacity
strengthens in a meaningful way, the US air travel industry will return to the chronic delays and passenger
inconvenience that have been more the rule than the exception at airports in recent years. The main
contributor to the delays is the antiquated air traffic control (ATC) system that uses radar rather than the
more sophisticated satellite-based GPS (global positioning system) technology largely available in passenger
vehicles. In other words, the plane in which you fly has less tracking sophistication than you have in your
car. Though better technology is available, it will take many years and billions of dollars to implement a
new system, so we think that flight delays will be here for some time to come. (For more details on the ATC
upgrade, see the Current Environment section of this Survey.)
In the long term, the replacement of the outdated air traffic control system will be necessary to ease
congestion. In the short term, however, there are several fixes that we think could alleviate the pressure on the
system and that would go a long way toward easing airport delays and congestion until a new air traffic
control system can be deployed. Among the possible short-term solutions include the following:
INDUSTRY SURVEYS
17
Peak period flight restrictions. The Federal Aviation Administration (FAA) could impose restrictions on
US carriers to fly fewer flights during peak periods, which would force airlines to shift more flights to
off-peak periods. In addition, we think that smaller regional and corporate jets could be given less
priority for take-off than bigger legacy planes carrying more passengers.
Flight path changes. The FAA has already implemented changes to flight paths in some major markets,
including the New York metropolitan area, that are intended to allow air traffic controllers to spread
flights out over a greater geographic area and thus increase air traffic density.
Curbs on regional jets. Restrictions on the number of regional jets flown in congested markets could
also be a partial solution, since regional jets carry far fewer passengers than large jets, yet take up just
as much time taxiing, taking off, and landing as other planes. Forcing airlines to upgauge their fleets
(flying bigger jets rather than smaller planes that necessitate more take-offs) could also help cut delays,
in our view.
Congestion pricing. The FAA is also reportedly trying to implement a congestion-pricing plan, in which
it would charge higher airport fees during peak hours in an effort to encourage the spreading out of
flights throughout the day.
If the carriers themselves are unable or unwilling to take some steps, we think the US government could step
in and force some corrective action.
New FAA rules on stranded passengers may have unintended consequences
On April 29, 2010, a new DOT rule prohibiting airlines from keeping passengers stuck on domestic flights
for more than three hours took effect. The new rule allows for fines of up to $27,500 per passenger per
incident; the three-hour period is measured from the time the cabin doors close to when the flight takes off.
Exceptions include when airport operators decide it would be too disruptive to return a plane to the gate or
if a pilot decides there is a security or safety reason for the delay. At first, the rule applied only to domestic
flights. On August 19, 2011, the DOT expanded this protection to international flights where the delay was
more than four hours.
The DOT has issued two fines concerning tarmac delays. On November 7, 2011, the DOT issued the first
fine under the new rule, fining American Airlines American Eagle regional subsidiary $900,000 for several
lengthy tarmac delays where the DOT determined that Eagle had the opportunity to avoid the delays. The
second fine was charged in August 2012 on JetBlue Airways Corp. for $90,000 due to a delay at the John F
Kennedy Airport in New York.
The new rules are intended to protect passengers from those occasions, admittedly rare, when planes sit on
the tarmac for hours, and is a response to past incidents where passengers were stuck without working
toilets or food in some cases. Nevertheless, the new rules have the potential unintended consequence of
leading to flight cancellations should a three-hour delay be a possibility.
Using recent fares as a guide, a domestic cross-country flight carrying 250 passengers may generate revenues
of between $80,000 and $100,000; if such a flight ran afoul of the new stranded-passenger rules, however,
the fine could potentially exceed $6.8 million. Airlines cannot afford to bear such a risk and are likely to
choose to cancel a flight if they think there is a possibility the plane will not depart within three hours.
Passengers then would presumably be returned to the terminal and would need to be rebooked on a future
flight, turning a potential three-hour delay into a much longer ordeal. We think the American Eagle fine is
likely to lead to many more flight cancellations, particularly in the winter or during severe weather.
Since the new domestic rule has been implemented, delays of over three hours have been cut sharply.
According to the BTS, in 2012, there were 42 domestic tarmac delays of more than three hours, as against
50 in 2011. Between May 2009 and April 2010, the final 12 months before the rule took effect, the carriers
reported 693 tarmac delays of more than three hours. Since August 2011, US and foreign airlines operating
international flights at US airports have been subject to a four-hour tarmac delay limit. In addition, there
has been a decline in the flight cancellation rate. According to the BTS, in August 2013, the flight
cancellation rate stood at 1.0%. In 2012, the flight cancellation rate was 1.29%, the second-lowest annual
rate for the past 18 years (the lowest was 1.24% in 2002).
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INDUSTRY SURVEYS
BANKRUPTCIES, CONSOLIDATION EVER-PRESENT

The list of bankruptcies within the US airline industry is long. Most recently, on September 28, 2012,
Southern Air Inc., a US cargo carrier, filed for bankruptcy owing to defense budget cuts and a troop
contraction in Afghanistan. On April 1, 2012, Pinnacle Airlines Corp., parent company of Pinnacle Airlines
and Colgan Air, filed for bankruptcy as it succumbed to rising oil prices and weak travel demand. On
March 6, 2012, Ryan International Airlines, an airlift provider for the US military, filed for bankruptcy
protection. On February 6, 2012, Global Aviation Airlines, the leading commercial provider of aircraft to
the US military, filed for bankruptcy owing to reduced
AIRLINE BANKRUPTCIES
government spending and high labor costs. American Airlines
AIRLINE
DATE* CHAPTER
and its parent company AMR Corp. filed for Chapter 11
Southern Air
9/28/12
11
reorganization on November 29, 2011.
Comair
9/12/12
7
Pinnacle Airlines
4/1/12
11
Ryan Int'l Airlines
3/6/12
11
Global Aviation Holdings
2/6/12
11
American Airlines
11/29/11
11
Gulfstream Int'l Airlines
11/4/10
11
Arrow Air
6/30/10
11
Mesa Air
1/5/10
11
Primaris Airlines Table B07:10/15/08
11
AIRLINE 10/6/08
Sun Country
11
Gemini Air CargoBANKRUPTCIES
8/12/08
7
Vintage Props & Jets
7/18/08
11
Champion Air
5/31/08
7
Air Midw est
5/14/08
7
Eos Airlines
4/26/08
11
Frontier Airlines
4/12/08
11
Skybus Airlines
4/7/08
11
ATA Airlines
4/2/08
11
Aloha Airlines
3/20/08
11
Big Sky
1/7/08
7
MAXjet Airw ays
12/24/07
11
Kitty Haw k Aircargo
10/15/07
11
Florida Coastal Airlines
2/21/06
11
Independence Air
1/6/06
7
Era Aviation
12/28/05
11
Independence Air
11/7/05
11
Mesaba Airlines
10/13/05
11
TransMeridian Airlines
9/29/05
7
Delta Air Lines
9/14/05
11
Northw est Airlines
9/14/05
11
Aloha Airlines
12/30/04
11
Southeast Airlines
12/1/04
7
ATA Airlines
10/26/04
11
US Airw ays
9/12/04
11
Atlas Air/Polar Air Cargo
1/30/04
11
Great Plains Airlines
1/23/04
11
Midw ay Airlines
10/30/03
7
Haw aiian Airlines
3/21/03
11
United Airlines
12/9/02
11
US Airw ays
8/11/02
11
Vanguard Airlines
7/30/02
11
Sun Country Airlines
1/2/02
7
*Chapter 11: date filed; Chapter 7: date operations
ceased.
INDUSTRY SURVEYS
On November 4, 2010, Gulfstream International Airlines, a

small regional airline based in Florida with $105 million in
annual revenues, filed for Chapter 11 protection. Also in 2010,
both Arrow Air Inc. (a Miami-based cargo carrier) and Mesa
Airlines filed for Chapter 11 protection.
On April 12, 2008, Frontier Airlines Holdings Inc. (parent of
Frontier Airlines), filed for Chapter 11 protection. The
company was acquired by Republic Airways Holdings and
came out of bankruptcy on October 1, 2009. According to a
compilation of bankruptcies in the US by Airlines for America
(A4A), 13 US airlines filed for bankruptcy in 2008, of which
Frontier was by far the largest. Despite the sharp industry
downturn in 2009, there were no bankruptcy filings in that
year.
In todays environment, the legacy major carriers face intense
pressure to change cost structures and operational strategies.
In December 2002, UAL Corp., the parent company of United
Airlines, filed for bankruptcy, marking the largest bankruptcy
filing in the history of the US aviation industry.
Uniteds bankruptcy was a monumental event in the industry,
given that United accounted for about 25% of all RPMs flown
by US scheduled airlines in 2002 and about 24% of the US
airline industrys capacity, as measured in ASMs. On February
1, 2006, the bankruptcy court confirmed UALs reorganization
plan, and the company emerged from Chapter 11 after
operating for more than three years under bankruptcy
protection. UAL emerged with sharply lower operating costs
and lower debt levels, and without the burden of a hugely
underfunded pension plan, which was passed on to the US
Pension Benefit Guarantee Corp. (PBGC), a government
agency that insures the pensions of US corporations. In
bankruptcy, United cut annual costs by $7.0 billion, cut
capacity by about 20%, and sharply reduced debt and other
obligations.
UAL was the second major US airline company to file for
Chapter 11 protection in 2002, following US Airways Group
Inc. US Airways subsequently emerged from bankruptcy,
reentered it, and finally emerged again in September 2005,
after merging with America West Holdings Corp. ATA
19
Holdings Corp., parent of ATA Airlines (the 10th largest US airline at the time), filed for bankruptcy
protection in October 2004; the company emerged from bankruptcy in February 2006, but filed again on
April 2, 2008, and ceased all operations.
Despite the continued spate of bankruptcies, the rest of the industry seems stable, with most of the airlines
sitting on a comfortable cash position. However, bankruptcies have been a part of this business owing to
the large investments and the high operating costs involved. Most of the major US airlines, except
Southwest Airlines, have opted for bankruptcy at some point in their life.
AIRLINES STILL HIGHLY LEVERAGED

The US airline industry has always been a highly cyclical industry, with many swings of boom and bust
years. However, since the events of 9/11, the industry has mostly been in a bust cycle, one it briefly broke
out of to record modest profits in 2006 and 2007, before again reporting losses in 2008 and 2009. While no
longer appropriate to blame the events of 9/11 for the industrys woes, given that nearly 12 years have
passed since the attacks, it is important to remember that the severity of the downturn the industry faced at
that time led to some of the high debt levels and weakened balance sheets that persist today. Interest
expense related to high debt levels weakens airlines earnings power considerably. In addition, weakened
balance sheets limit carriers ability to increase capital expenditures, add to their networks, survive another
downturn, and find a willing lender to add to liquidity in a toughened credit market.
After the collapse of such companies as Lehman Brothers, Bear Stearns, and AIG, investors are increasingly
worried about balance sheet stability, as many airlines have extremely high debt levels, though with the
majority of the airlines having high cash balances, the net debt on their balance sheets might appear lower. For
example, AMR Corp., parent company of American Airlines, reported $29.6 billion in debt when it filed for
bankruptcy in November 2011. Delta Air Lines Inc. ended 2004 with debt of $13.9 billion and a negative
stockholders equity of $5.8 billion; the company subsequently filed for bankruptcy on September 14, 2005.
Before it filed for bankruptcy, Northwest Airlines Corp. also had negative stockholders equity. In contrast,
Southwest Airlines Co., which had a healthier balance sheet than the other major airlines such as United, US
Airways, Delta and JetBlue, had over $3.2 billion in long-term debt (including current maturities) and $7.0
billion in stockholders equity at the end of the third quarter of 2012, for a debt-to-total capital ratio of 32%.
However, this represented a worsening from a debt-to-total capital ratio of 23% at the end of 2007, reflecting
fuel-hedging losses that sapped cash and an increase in debt levels.
INDUSTRY EASILY SUSCEPTIBLE TO ANOTHER RECESSION

The financial meltdown that made headlines in September and October 2008 left many banks, insurance
companies, automakers, and other institutions struggling for survival, and exacerbated the economic
slowdown that was already underway in the US and abroad. The resulting stock market and housing
market struggles left many consumers feeling poorer and less inclined (or able) to open their wallets. As a
result, both consumer and business spending dampened considerably. In addition, the tightness of financial
markets has limited airlines access to capital markets.
In both 2011 and 2012, the 10 largest US airlines reported a net profit of about $4.0 billion, up from
around $3.7 billion in 2010, following net losses of $4.7 billion in 2009 and $24 billion in 2008, according
to an S&P compilation of carriers results. The net loss in 2008 included reorganization items totaling $8.9
billion at Delta Air Lines; excluding these items, the total net loss was about $15.1 billion. Much of these
losses were related to fuel hedging losses in the latter part of the year. When oil prices threatened to exceed
$150 a barrel and showed no signs of falling, many US airlines entered into fuel hedging transactions at
exactly the worst time.
NEW SECURITY RULES MAKE PROCESS LESS ONEROUS

Since the terrorist strikes in 2001, a number of federally mandated security measures have been put into
effectboth to reassure the flying public and to prevent future occurrences. Airlines are now required to
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INDUSTRY SURVEYS
either screen all bags for explosives or make sure each bag is matched to a passenger seated on that flight
time-consuming and expensive initiatives.
The new security measures have also made flying less convenient for travelers, and have led to customer
anger and major delays. On November 1, 2010, the US Transportation Security Administration (TSA)
initiated two new security procedures. The first requires passengers to submit their full name as written on
their government identification; the reaction to this change was minimal. The second, the implementation of
relatively invasive pat-downs for passengers who refuse to go through certain security lanes, generated a
nationwide uproar and could wind up hurting air travel demand if passengers decide that the invasive new
procedures make flying too much of a hassle.
The TSA has been deploying backscatter X-ray machines at airports throughout the US, with the intention
of deploying up to 1,400 of the machines nationwide by 2014. The machines, which are designed to detect
any object attached to a human body, including weapons and explosives, project low-level X-ray beams
onto an individual to create a reflection of the body as displayed on a monitor. Some object to the new
technology as overly intrusive, since the images are highly revealing: the passengers full body image is
shown to a security screener, who sits alone in a closed-off area. Others are concerned that the low-level
radiation emitted by the machines may constitute a health risk.
The increased security measures and new baggage checking requirements mean longer lines at airports, both
to check in and to pass through security. Most airlines, though, have been adding security lanes, but such
lines can, and do, back up, making air travel more difficult, frustrating, and time consuming for passengers.
In October 2012, the TSA started replacing the backscatter X-ray machines with a new security technology
known as millimeter-wave scanners, which it completed by June 1, 2013. The TSA made this move only in
an effort to speed up the screening process at the busier airports, not in response to the privacy and health
concerns raised by passengers. Further, the TSA has decided to employ the backscatter machines at the
smaller airports, keeping in mind the processing time and staffing requirements. However, based on tests
conducted in Europe and Australia, the millimeter-wave scanners have been found to have a high false
alarm rate at 23%54%, as even folds in clothing or sweat can set off the security alarm.
We think that the majority of passengers will have a grin and bear it approach towards the stricter
security procedures and that it will be impossible to quantify the number of passengers that choose not to
travel solely due to these procedures. Still, these new intrusive procedures add another layer of unpleasantness
to an air travel experience that much of the traveling public already views as difficult and disagreeable.
In October 2011, the TSA launched PreCheck, a new security program that covers frequent fliers at two of
the top airlines and trusted-traveler program enrollees. The program works by storing a passengers security
information contained in a bar code on the passengers boarding pass, and allows passengers who have been
pre-approved to go through a dedicated PreCheck security check lane. Eligible travelers are not required to
remove shoes and jackets or remove laptops from their bags. According to the TSA, passengers who are
eligible for PreCheck include US citizens of frequent traveler programs or who are the members of a US
Customs and Border Protection (CBP) Trusted Traveler Program, and Canadian citizens who are members
of CBP Nexus Programs. In September 2013, the TSA announced that the Precheck program would be
expanded to 60 airports from the current 40 airports.
REGIONAL INDUSTRY STRUGGLING

Regional jetssmall jet planes that fly shorter distances and have fewer seats than do large mainline jets
were first introduced in the late 1980s. The first airline to embrace the regional jet was Comair Inc. (now
wholly owned by Delta). Demand for these planes began to take off about 1995, when Brazils EmbraerEmpresa Brasileira de Aeronutica SA and Canadas Bombardier Inc. introduced low-cost jet planes, with
50 to 70 seats, for $15 million to $20 million each.
INDUSTRY SURVEYS
21
Regional jets open new markets

The regional jet (RJ) has stimulated air travel over shorter segments by getting people out of cars, buses, and
trains and onto planes. With its low purchase price and operating costs, the regional jet has transformed
short-haul markets, previously abandoned by major airlines, into viable destinations. Compared with the
turboprop plane, the regional jet also offers greater passenger comfort and increased range. It can handle
routes of 1,300 milesup to 2,300 nautical miles, in some caseswhile most propeller planes are confined
to flights of 350 miles or less.
Major airlines regional affiliates use these small jets to feed their hubs from smaller metropolitan areas that
do not have a large enough population or travel demand to warrant larger jet service. They also use the RJs
to provide off-peak service when demand is insufficient to warrant a standard 100-plus seat aircraft.
Regional jets can be profitable for such service because their break-even can approach a 50% level, versus a
much higher load factorhistorically about 65%, but in the past few years, closer to 85%needed for
large jets in a normal industry environment. By offering round-the-clock service, an airline gains appeal
among business travelers, who account for some 70% of regional jet passengers. With regional jets gaining
in range, they are increasingly being used not only to feed passengers into hub airports, but also to provide
point-to-point competition against carriers employing full-sized jets.
Regional airlines, majors in symbiotic relationship
The relationship between the major and regional airlines is reciprocal. The majors cannot rely solely on
their own expensive aircraft and crews to gather passengers to feed into their hubs. The regionals depend on
major carriers to provide connecting flights at central hub airports for up to 60% of their passengers. The
major airlines also provide credibility, worldwide marketing power, and the all-important designator code
in the computer reservation system (CRS). To be successful, regional and major airlines must work as a
seamless operation using a single system for booking and boarding.
However, despite the obvious contributions regional airlines make to feed the major carriers hub and spoke
networks, the major airlines are looking to their regional partners as a potential source for cost relief. The
majors have been losing billions of dollars over the past 10 years and are turning over every stone to look
for potential cost improvements. The regionals, which have largely remained profitable over the past 10
years due to contracts that reimburse them for fixed costs plus a guaranteed operating margin, have been
pressured by the major airlines to cut rates. In addition, major carriers have been cutting regional routes
where possible, and have not been adding new ones, leaving the industry without a source of new growth.
S&P thinks this is likely to remain an issue for the regional industry for years to come, and major airlines
continue to view regional costs as too high and an attainable target for their own cost improvement efforts.
According to the 2012 Annual Report (latest available) by the Regional Airline Association, a trade group
representing smaller airlines, the top 50 regional airlines in operation in the US accounted for 99.99% of the
total 2012 passenger enplanements between August 2012 and July 2013. Those regional airlines enplaned
161.9 million passengers in the period, versus 15 million in 1980 and 82 million in 2000. The Federal
Aviation Administration (FAA) predicts that the US regional aircraft fleet (both jets and turboprops) will
reach 2,520 by 2020. Although many of the new regional jets on order are intended to replace older
turboprops, the large number of incoming jets should lead to an overall increase in the number of regional
aircraft in service. At the same time, the turboprop fleet is expected to decline.
Labor contracts restrict use of regional jets
All pilot contracts have scope clauses, which establish the definition (or scope) of pilots jobs, and dictate
who may perform those jobs. Scope clauses in many existing labor contracts severely limit the ability of some
airlines to participate in the regional jet market boom.
INTERNATIONAL MARKETS FACE CHALLENGES FROM WEAK GLOBAL ECONOMY

Many US airlines see international markets as an avenue for profitable growth. These flights, which are
longer-haul in nature, tend to have higher average fares and lower unit costs, and are generally much more
profitable that US domestic flights. During the global economic slowdown, international travel demand fell
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sharply, leading many US carriers to cut international capacity. In response to some economic improvement
and partly due to relatively easy prior-year comparisons, international markets rebounded sharply in 2010.
For US-based airlines, international enplanements rose 2.0% in 2012, after increasing 1.7% in 2011 and
7.0% in 2010; they fell 4.8% in 2009. International RPMs rose 1.1% in 2012, after increasing 1.7% in
2011 and 6.7% in 2010. Year to date through July 2013, international enplanements were up 2.7% and
international RPMs were up 2.5%.
To compete effectively for international traffic, airlines need a level playing field. This requires the
enactment of open skies aviation treaties: bilateral agreements that reduce economic regulation of airlines
and allow code sharing, alliances, and partial ownership deals among international carriers. However,
domestic routes in the US and overseas remain closed to foreign competition. Cabotagethe transport of
passengers by a foreign carrier on purely domestic flightsis illegal in all nations.
Since the late 1970s, the US government has favored deregulation of international aviation markets. Because
domestic carriers suffered heavy losses following US deregulation, the government did not pursue open skies
policies until the early 1990s. The worlds first open skies pact was reached in 1992 between the United
States and the Netherlands. By July 2012, over 100 nations had signed agreements with the United States,
the most recent being agreements with Sierra Leone and Montenegro. Not all of these aviation pacts provided
for unfettered competition, but all moved strongly in that direction, providing for phased-in deregulation.
Open skies for US carriers
In the past few years, the US government has been pursuing open skies treaties aggressively. Most notably,
on March 23, 2007, the US signed an open skies agreement with the European Union that supersedes
individual open skies treaties with individual European nations. This deal, which became effective on March
28, 2008, opened up restricted trans-Atlantic routes and allows US airlines to fly anywhere in the 27-nation
European Union to any point in the United States.
US carriers are now able to fly within Europe without giving up similar domestic rights to international
carriers. In particular, the deal has opened up the London market to more competition, as several new carriers,
including Continental Airlines and Delta Air Lines, were awarded landing slots at extremely desirable
Heathrow airport. We think the deal increased competition in some European markets. US carriers that did
not previously enjoy landing slots at Heathrow, including Continental Airlines and Delta Air Lines, have
launched new routes from that airport. Carriers such as United, American, and British Airways, though,
saw increased competition.
Global partnering
International alliances are crucial to achieving profits on many international routes. Having a global partner
that feeds traffic through a hub generates numerous benefits. By facilitating smoother connections and
stimulating traffic, an alliance can help a carrier to lower its costs dramatically, cut fares, and increase flight
frequency, without requiring substantial investment in additional aircraft, airport facilities, or route authority.
Alliance partners realize cost savings in several ways: by sharing cargo and passenger terminal facilities;
integrating frequent-flyer programs; consolidating sales, maintenance, and administrative operations;
combining information technologies; coordinating advertising; and engaging in joint procurement where
feasible. Alliances are currently structured so that partners remain independent entities, but with
coordinated schedules and combined frequent-flyer programs.
Alliances aid airlines abroad
There are currently three major global airline alliances: Star Alliance, SkyTeam, and OneWorld. Each
alliance includes large US and European airlines, as well as numerous secondary carriers.
Star Alliance. Anchored by United Airlines, Lufthansa, Scandinavian Airlines, Thai Airways
International, and Air Canada to name a few, Star Alliance had 28 members, with more than 21,900 daily
departures to 1,328 airports in 195 countries, as of October 2013.
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SkyTeam. Anchored by Delta, Air France, and KLM, SkyTeam had 19 members, with nearly 15,200
daily flights to 1,024 airports in 178 countries, as of October 2013.
OneWorld. Anchored by American Airlines and British Airways, this alliance had 12 members serving
more than 850 destinations in 155 countries as of October 2013, with several other airlines slated to join in
late 2013early 2014. The new American Airlines Group, formed in December 2013 on the merger of AMR
Corp. and US Airways Group, is now part of the OneWorld global airline alliance.
HOW THE INDUSTRY OPERATES

Few inventions have had as profound an influence on the way people live, work, and experience the world
as the airplane. By shortening travel time from weeks to hours, air travel has altered our concept of distance.
The world has become smaller, as people can visit and conduct business in places once considered far-flung.
The transformation of the Wright brothers early twentieth-century invention from a novelty to a
commercial industry required considerable technological refinements and government assistance. Until the
1920s, the airplane was envisioned principally as a military tool. That view broadened in 1925, when
airplanes began carrying mail. With the passage of the Air Commerce Act of 1926, the US airport and air
traffic control infrastructure began to take shape.
To promote the then-fledgling passenger travel industry, the Watres Act of 1930 changed the airmail fee
structure: fees paid to air carriers to move mail were increased expressly to subsidize passenger service.
Furthering the cause of air travel was the introduction in the United States of the jet aircraft for passenger
service in 1958. With greater seating capacity and faster speeds, the jet dramatically cut operating costs and
thus facilitated lower fares.
The industry was deregulated in 1978, freeing it from government control of fares, routes, merger and
acquisition activity, and alliances. This step helped to complete the transformation of air travel from a
luxury to a mass-market service. Government involvement is still evident in controls over international
routes, however, and the US Department of Justice (DOJ) has halted some merger attempts, as discussed in
the Industry Trends section of this Survey.
PROVIDING TRANSPORTATION
Airlines today derive most of their revenues from the fares charged to passengers, but they also generate
revenues by carrying mail and cargo, selling alcoholic beverages, and offering in-flight entertainment and
services to passengers. Additionally, airlines sell frequent-flyer credits to hotels, auto rental agencies, credit
card issuers, and other organizations, which in turn offer these credits as premiums or as a way to build
goodwill. Some airlines have begun selling food to coach customers onboard the plane, replacing the longtime custom of supplying it free. Many airlines have started charging to check baggage onboard the plane
and some also charge extra fees for window and aisle seats or exit row seats with extra legroom.
Business travelers: less willing to pay up
The airline industry has promoted the globalization of commerce, making the world into one big
marketplace. Many business people use air travel to conduct sales trips, visit remote factories, and attend
industry conventions. Business trips are often scheduled within seven days of the flight, so business fares
have historically been the highest, whether for coach or first-class seats. Because their firms pick up the tab,
business travelers long tended to be relatively price-insensitive.
Business fares climbed significantly faster than leisure fares; in recent years, however, corporations became
more cost-conscious. The economic slowdown that began in 2001 led to significant cuts in corporate travel
budgets. In addition, corporate downsizing made organizations leaner, with fewer managers and executives
authorized to travel. As part of their cost-cutting efforts, some companies are directing employees to travel
coach or to patronize low-fare carriers. To reduce travel costs further, many companies negotiate travel
deals, under which they promise to do most of their travel with a certain airline in exchange for sharp fare
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discounts. In addition, the rising prominence of online ticket distribution has made it far easier to obtain a
lower fare for traveleven on short notice.
Airlines actively solicit the business traveler. Many larger aircraft contain designated business sections,
which offer roomier seats and premium food service. Recently, some airlines have expanded their businessclass sections. Airlines compete for business passengers by offering priority check-in, expedited baggage
handling, luxurious airport lounges, and in-flight amenities such as faxes, telephones, and power outlets for
recharging laptop computers. To appeal to this class of traveler, airlines must provide frequent flights,
reliable on-time performance, and top safety records.
Leisure travelers look for price breaks
Compared with the business traveler, the leisure traveler is highly price-sensitive. The cheaper fares resulting
from deregulation have allowed people from all walks of life to travel by air to visit distant friends and
relatives or take vacations more frequently.
Leisure travelers can secure discount fares in two ways. First, low fares are available to individuals who
book flights at least 14 days in advance. Second, deeply discounted fares are also available, mainly via the
Internet, a few days before departure. Many leisure travelers defer making trip arrangements until a fare
sale is offered. The upshot of these patterns is that over short periods, leisure travel can be erratic. Over the
longer term, leisure travel is more cyclical than business travel; it waxes and wanes together with consumer
sentiment and disposable income levels.
International travel
International travel (defined here as flights between the United States and a second nation) encompasses
both business and leisure travel. In 2012, international travel accounted for 12.8% of enplanements for US
airlines, up from 12.7% in 2011, but down from 13.8% in 2010, according to the US Department of
Transportation. Because the average stage (or flight) length is nearly four times longer for international than
for domestic flights, international travel generates a disproportionately high level of revenue passengermiles: 30.8% of total revenue passenger miles in 2012 (the same as in 2011) and 35% in 2010.
Freight and other revenues
All passenger aircraft are capable of carrying cargo, but most freight moves on wide-body jets on long stage
lengths. Major airlines carry significantly more mail and cargo in the belly space under the passenger cabin
than do regional and commuter airlines.
Passenger airlines view freight transport as a sideline to their main business. They garner freight business by
offering discounted rates compared with those charged by specialized air freight carriers, and do not rely on
large sales forces to pursue this business. Airlines often accept freight from only a few air forwarders.
Among passenger airlines, United Continental Holdings generated the most revenues from cargo in 2012:
$1.0 billion (or 2.7% of its revenues) for that year. Delta Airlines was second with $990 million (2.7%),
while AMR Corp.s American Airlines was third, with $669 million (2.7%). For the nine largest US airlines,
cargo and mail together accounted for 2.2% of total revenues in 2012. In addition, airlines generate
revenues from the sale of in-flight alcoholic beverages and various amenities and services, accounted for as
other revenue. This category may also include income from international code-sharing programs. On
long-haul flights, most carriers provide telephone, ATM, fax, and TV and entertainment services for a fee.
Some international flights even offer video gambling. Although such supplementary sales carry high
margins, they account for a relatively small portion of industry revenues.
Most airlines have added various fees to check bags, change tickets, make phone reservations, and for just
about any other service involving air travel. These fees have become an important part of the overall revenue
makeup for the US airline industry. While not specifically broken out on the airlines income statements, the
majority of these revenues fall into the other revenue category.
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INDUSTRY STRUCTURE
The airline industry is an imperfect oligopoly. A few carriers dominate long-haul passenger traffic, while
several dozen small carriers compete for short-haul flights.
Size categories
The US Department of Transportation (DOT) classifies airlines as major, national, or regional carriers,
according to revenue base.
Major airlines. To be classified as a major airline, a carrier must have annual revenues of more than $1
billion. Major airlines typically operate jet aircraft that have 130 to 450 seats and average stage lengths of
about 1,000 miles. The large aircraft used for international flights can travel 5,000 miles before refueling.
National airlines. These are carriers with revenues between $100 million and $1 billion. Despite this
designation, some of these carriers limit their service to regional markets, while others offer international
service. Their aircraft are usually smaller (about 100 to 150 seats) than those of the majors. National carriers
may operate more short-haul flights than the majors do; they typically specialize in point-to-point service.
Regional airlines. Regional airlines (those with revenues of less than $100 million) comprise two distinct
types of carrier: short-haul/commuter airlines and start-ups.
Commuter airlines primarily serve low-density, short-haul markets that are, strictly speaking, regional
in scope. Their average stage length is about 245 miles, but they often provide point-to-point service for
flights of up to 400 miles. Most commuter airlines are partners with major airlines, sharing the majors
gate space at hub airports and their computer reservation system (CRS) codes. They shuttle passengers
to and from the secondary cities on major airlines hub-and-spoke systems, sometimes using turboprop
aircraft that seat 20 to 50 persons (though they have recently begun using jets with 90100 seats). A
few small commuter airlines, however, operate independently of the majors and provide service on lowdensity rural routes.
Start-up carriers often are classified as regional airlines based on their revenues. With an average stage
length of 400600 miles, they may initially serve a single region, though their goal is typically to offer broad
coverage. Indeed, few start-ups stay in the regional category for long; either they quickly grow into the
national and/or major classification, as did AirTran Holdings Inc. and JetBlue Airways Corp., or they fail.
Start-up airlines often either cannot obtain or cannot afford gate space during peak business travel
hours at the major airlines hub airportsa significant disadvantage. Moreover, even if they do get the
space, the big carriers frequently match their discounted fares. Consequently, successful start-up airlines
have chosen to fill niche markets overlooked by the larger carriers.
Charter airlines
Charter or unscheduled service is another form of airline operation. It consists of transporting passengers on
callan irregular service like that of a taxicab. Charter service is popular with tour operators, the military
and professional sports teams. Major airlines sometimes book charter space on other airlines when they
have a capacity shortfall. Most airlines provide some charter service, but only a few specialize in this line;
those that do may be classified as major, national, or regional carriers. Charters aircraft types and stage
lengths are similar to those of other airlines.
Two-tier operators
A relatively new breed of airline is the two-tier operator. Typically, these carriers are major airlines that service
long-haul markets via a hub-and-spoke system, but which also operate a fully independent, point-to-point air
service in the discount excursion market. Most routes served by low-fare affiliates are shorter haul and
consequently use smaller capacity aircraft. These affiliates also typically operate with separate wage scales.
One example is AMR Corp.s American Eagle. Delta Air Lines Inc. discontinued its own Delta Express
service and now operates through a network of regional affiliates operating under the Delta Express name.
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COMPETITORS ON ALL SIDES

Airlines confront a variety of competitors. In some markets, major airlines face competition from other
majors and from national and regional airlines as well. All airlines compete with other transportation
modes, such as automobiles, railroads, and buses.
Before 1978, the Civil Aeronautics Board regulated the fares that airlines could charge and which routes
they could fly, severely limiting new entrants into the industry. Following deregulation in 1978, competition
in the airline industry intensified. As regulatory barriers to entry were dismantled and risk capital poured in,
established carriers faced an unending parade of aggressive start-up airlines that targeted the larger carriers
high-margin business. In recent years, however, competitive pressures have eased, as risk capital has become
scarcer for start-ups and as established carriers have limited their geographic horizons.
The automobile is the airline industrys chief competitor. For short trips, airline travel is neither practical
nor economical. For long distances, however, travelers prefer flying to driving. Airlines also face
competition from intercity railroads (specifically Amtrak), which have fares that have been partly subsidized
by the US government. While Amtrak operates some long-distance routes, its passengers use it for an
average journey length of about 280 miles. Intercity bus travel, although much more popular than railroads,
rarely competes directly with air travel, because the typical bus journey is just 140 miles.
Airlines compete with each other on both service and price. For business travelers, the frequency and
reliability of flights are critical factors; frequent-flyer programs, cuisine, and other amenities are also
influential. Small airlines that cannot obtain gate space during peak travel periods have difficulty attracting
business travelers.
Service information is disseminated by the DOTs Office of Consumer Affairs, which each month reports
the on-time performance for the larger airlines. The DOT also collects and disseminates information about
airlines performance in baggage handling, passenger bumping, and overall complaint record statistics that
can influence business travelers carrier selection. Such reports have less effect on leisure travelers; aside
from the few first-class non-business passengers, price is the leisure travelers main criterion for carrier
selection, in our opinion.
To differentiate themselves from their competitors, airlines may strive to build brand loyalty through
frequent-flyer programs. Targeting mainly business travelers, frequent-flyer programs let travelers chalk up
bonus miles by booking flights or by conducting business with other organizations that have tie-ins with the
airlines. Bonus miles can be redeemed for free air tickets or service upgrades. Frequent-flyer programs are
designed to promote repeat business for an airline; members tend not to defect to other carriers to reap
minor price savings.
AIRLINE FARES: VARIABLE PRICING

Price competition is a fundamental weapon that carriers commonly use to seek a greater share of the market.
Fare differentials of just a few dollars can persuade leisure travelers to select one airline over another or to
make their journey by a different mode. Business travelers are also becoming more price-sensitive.
To attract leisure travelers, airlines advertise deeply discounted fares. However, most passengers do not get
these fares: by law, carriers do not have to offer more than 10% of the seats on a flight at the discounted
rate. On a given flight, passengers who fly coach may have booked fares at as many as a dozen different
prices. Fares differ in part according to how far ahead of time the seat is booked. Walk-up fares, paid by
passengers at the airport gate at departure time, tend to be high. Since the advent of online sales, however,
last-minute discounts have become increasingly prevalent.
Consumers level of price sensitivity varies. At one extreme are passengers willing to make several
connections and book red eye flights through online ticket auctioneers such as priceline.com Inc. Other
travelers are willing to pay somewhat higher fares for direct flights at convenient times.
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Perishable inventory
Airline seats are perishable inventory: once a plane is aloft, its empty seats can no longer be sold. To minimize
such losses, the industry has developed sophisticated computer programs to help determine how much demand
there will be for each route at different times of the day, days of the week, and seasons of the year.
Airlines attempt to calculate how much of a flight should be booked by a given point in time through a
practice known as yield management. Yield management alerts the carrier to abnormal booking patterns, to
which it can react by either cutting or raising fares well before a flight is scheduled to depart. By offering
deeply discounted last-minute fares via the Internet, airlines can now fill seats that otherwise would have
gone empty. The down side is that the Internet is making consumers even more price-conscious, which is
exerting downward pressure on yields.
Yield management also helps carriers estimate the number of passengers who will cancel their flights and
how many seats can be overbooked without the risk of having to bump customers (deny them seating on an
overcrowded flight). Only 0.99 passengers per 10,000 were bumped in 2012, up from 0.77 passengers per
10,000 in 2011. The industry tries to avoid bumping, since by law they must pay $400 to passengers
involuntarily denied boarding. Carriers use computer programs to redeploy smaller aircraft to routes where
sales are slower than anticipated and put their larger-capacity jets into markets that are more popular.
Igniting fare wars
Since deregulation, the airline industry has been prone to periodic bursts of destructive fare wars. Much of
the blame lies in the aggressive pricing tactics of start-up carriers, which operate with substantially lower
costs than the major airlines and are eager to gain a foothold in the market. Southwest Airlines Co. and
JetBlue (though no longer start-ups) have been the source of much fare pressure.
Generally, the industry is susceptible to fare wars when capacity levels far exceed demand. Because airlines
have high fixed costs (for equipment and maintenance facilities) relative to their marginal costs (the cost of
flying one additional passenger), fare wars can reach extremes before order is restored.
THE INTERNET CREATES OPPORTUNITIES, BUT ALSO POSES THREATS FOR AIRLINES
The Internet has profoundly changed the way in which airlines price and distribute their product. By selling
tickets online, airlines have dramatically cut distribution costs by eliminating paper shuffling, bypassing
agents, and reducing airline staff. On the other hand, the Internet has led to more competitive pricing.
Since 1995, carriers have had a presence on the Internet. Initially, their websites displayed schedule and fleet
information, as well as promotional material. Today, travelers can use these sites to check the status of their
frequent-flyer accounts, to book flights and select seats, and, increasingly, to book hotels and other nonairlinerelated travel.
Online travel agencies, such as Expedia Inc., Travelocity.com LP, and Orbitz Worldwide Inc., have taken
significant market share from traditional travel agents, a trend that S&P expects to continue over the next
several years, as consumers become even more comfortable with e-commerce and as internet purchases
become an increasingly everyday part of peoples lives.
Helping to cut costs, but increasing competition
In 1995, Alaska Airlines (a unit of Alaska Air Group Inc.) became the first airline to allow tickets to be
booked via the Internet. Alaska booked about 51% of its tickets on its own website in 2011. The company
has since been surpassed by many of its competitors, particularly discounters like JetBlue, whose strategy is
to keep costs low through extensive use of its own website and reservation agents. In September 2012,
Alaska Airlines launched its mobile booking facility and started a Flight Status On the Go service, which
would allow passengers to get details about the airlines current flight schedules through their mobile
devices. In 2012, Southwest Airlines (excluding AirTran) led all major airlines in bookings over the Internet,
getting 84% of its sales over its own website.
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The Internets appeal for airlines is apparent. A commercial website can be kept open for business 24 hours
a day, seven days a week. It allows an airline to reduce the number of customer service agents, since fewer
are needed to answer flight information questions. Southwest Airlines reported in 2002 that its Internet
bookings cost about one dollar to make, while its cost to book with a travel agent was between $6 and $8.
According to IATA, e-ticketing saves up to $3 billion per year for the global airline industry.
Indeed, a big incentive for airlines to distribute tickets via the Internet is to reduce travel agent commissions.
In 2002, US airlines cut base commission rates entirely on domestic flights (as discussed in the How the
Industry Operates section of this Survey). Recent cuts in commission rates and increased Internet sales are
the major reasons for the trend toward lower commission costs.
On the down side, however, the Internet may ultimately hurt airline profitability by making travelers too
price-sensitive. With airfares changing at lightning speed and the Internet keeping customers apprised of
these changes, airlines must respond quickly to match rivals fare cuts. Consequently, the range of fares that
competing airlines can charge on a point-to-point route will tend to be extremely compressed. In addition,
the premium charged for travel booked on short notice has eroded. Airlines cannot use business travel as
effectively to subsidize discounted pleasure travel, now that business travelers can make low-price, nearterm travel arrangements online.
E-tickets reduce costs
Ever on the lookout to cut costs, airlines have enthusiastically embraced ticketless travelthe practice of
issuing electronic tickets (e-tickets) to customers. E-tickets are booked in the usual manneronline, through
a travel agent, or directly through the airlinebut no paper ticket is issued. Instead, passengers are issued
an e-ticket number. They can print boarding passes at home, obtain boarding passes at the airport check-in
counter, or get them from an automated dispensing machine, which is activated with a credit card, frequentflyer card, or e-ticket number.
According to United Airlines, electronic ticketing eliminates 14 accounting and processing procedures and
thus costs just 50 cents per ticket, versus $8 for paper. Much of the savings comes from not having to mail
actual tickets. Travelers can get a receipt and itinerary via fax or e-mail, or at the airport. E-tickets are now
the norm: S&P estimates that they accounted for over 99% of tickets sold in 2012.
Improving service
Many travelers appreciate the speed of air travel. However, the process leaves much to be desired, with long
lines to check in and obtain boarding passes, and frequent delays or cancellations of flights. Conditions
worsened when the airlines had to institute heightened security measures.
Technology has helped with some of these problems. For example, many airlines passengers can skip the
boarding pass counter by printing their own documents through their personal computers. In addition, a
growing number of airlines have installed hundreds of self-service kiosks that allow passengers to check in
luggage, obtain boarding passes, and check their frequent-flyer credits. Such kiosks have been around in one
form or another since 1995.
AIRLINE COSTS
The airline industry is both labor- and capital-intensive. Additionally, fuel costs have absorbed a growing
portion of revenues in recent periods.
Fuel
Airlines are energy-intensive operations; at the 10 largest US carriers, fuel accounted for 32.1% of total
revenues in 2012, compared with 31.6% in 2011, 26.5% in 2010, and 25% in 2009. How much a carrier
spends on fuel depends not only on fuel prices but also on consumption, which varies with the age of its
aircraft and its average flight length. The fuel efficiency of different aircraft varies widely, with the number of
engines a major determinant. Takeoffs and landings (which are more frequent for short-haul carriers) consume
a lot of fuel.
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Some carriers attempt to hedge their fuel costs by striking deals with suppliers or by buying and selling futures
on the commodities market. Because the jet fuel futures market is thin, carriers sometimes hedge with crude oil
or heating oilan imperfect process, since neither moves in exact harmony with jet fuel prices.
Labor
Labor is the second largest airline expense. Labor accounted for 22.5% of total revenues in both 2012 and
2011, 24.1% in 2010, and 26.2% in 2009. Employment can be divided into several broad positions: flight
crews (pilots and engineers), flight attendants, ground service (including baggage handlers, and ramp
workers,), dispatchers, maintenance, and customer service (bookings and boardings).
Most airline workers belong to one of a dozen major unions. The larger unions include the Association of
Flight Attendants, the Air Line Pilots Association, and the International Association of Machinists and
Aerospace Workers. At any given time, an airline might be in negotiations for half dozen or more labor
contracts. Union contract talks tend to be protracted, often lasting two years or more before settlement,
largely because the industry follows procedures laid out by the Railway Labor Act of 1926 (RLA). Strikes
occur infrequently because under the RLA, airline contracts do not expire, but become amendable. Before a
strike can occur, labor disputes must be submitted to the National Mediation Board, an impasse must be
declared, and a cooling-off period served.
Equipment
Airline equipment costs, excluding fuel and maintenance, are equal to about 10% of total expenses. Aircraft
may be obtained new or secondhand, or they may be leased.
For carriers with balance sheets that are stretched, leasing is the most affordable method of obtaining
equipment. Many major airlines lease the bulk of their aircraft (about 55% of their fleets) from
intermediary companies known as lessors. Lessors often can finance the purchase of new aircraft more
cheaply than airlines can because of their superior credit rating. They then pass on some of the savings to
the airlines, reducing carriers equipment costs while earning a profit for themselves. For financially strong
carriers, however, it is cheaper to buy aircraft outright than to lease them.
Carriers incur the costs of maintaining their fleets, whether leased or owned. Most carriers perform routine
maintenance, but many outsource heavier repairs to firms that specialize in such work. Even if they contract
out the maintenance work, though, airlines are still responsible for the airworthiness of their aircraft.
The high cost of bad weather
Weather is another unpredictable variable that can have a profound short-term effect on airline costs and
operations. Wind speeds and air temperatures influence how much fuel an aircraft will require to reach its
destination. Floods, fog, ice, and snow can shut airports and force the cancellation of flights. Weather is the
second largest cause of airline accidents, after pilot error.
The industry must obtain detailed weather forecasts that include cloud height, horizontal visibility, and
wind speed and direction. Some airlines have their own meteorology departments to provide this
information, although most rely on government agencies and pilot reports.
OPERATIONS OVERVIEW
Airline flights are either nonstop or connecting. A nonstop flight has a point-to-point itinerary, in which
the aircraft flies from origin to destination without interruption. A connecting flight is one that involves at
least two legs and passes through at least one hub.
Short flights typically have no intermediate stops, while flights covering longer distances tend to be routed
through a hub. The hub-and-spoke system lets airlines gather passengers from lightly traveled markets to a
single point to build up densities for the longer leg of a flight. To bring passengers to the hub, the hub
carrier will use either its own smaller capacity aircraft or the services of a regional airline, which the major
airline often owns wholly or in part. Until recently, the regionals typically employed only turboprop
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aircraft, but they are aggressively phasing out these small, noisy aircraft in favor of comparatively larger
jets. On the longer leg of the route, larger capacity jets are used.
To connect flights from central hubs to low-density destinations or vice versa, large airlines and small
regional carriers often complete different portions of a tripa practice known as interlining passengers.
Such joint flights are typically scheduled through a code-sharing arrangement.
Through code sharing, a carrier sells seats for flights on joint routes. Although two carriers are to provide the
service, the customer receives a single ticket. In these arrangements, the regional airline typically operates
under the major airlines code, and flights are booked as such in computer reservation systems. Federal
regulations require airlines to inform passengers when they are booking a flight that involves code sharing.
Another technique, used mainly for short duration, is a wet lease arrangement, in use both in the United
States and overseas. A larger airline leases an aircraft accompanied by a full crew to provide service on a
route that it cannot or chooses not to operate directly. Once traffic on the new route reaches a level where
the carrier can use its own aircraft and crew, it often drops the wet lease.
DISTRIBUTION CHANGING WITH TECHNOLOGY

The airline industry historically distributed tickets primarily through travel agents, but it also books flights
directly through company clerks and on the web. In addition, online travel sites are gaining market share.
According to the US Bureau of Labor Statistics (BLS), approximately 82,800 travel agents operated in the
US in 2010 (latest available), down from around 105,300 travel agents in May 2008. As of October 2013,
nearly 20,000 accredited points of sale were using transaction settlement services offered by Airlines
Reporting Corp. (ARC), a provider of technology, data, and financial services to the airline industry. These
numbers have been declining due to both a more difficult operating environment, in which airlines are
reducing commissions, and growing Internet competition.
In April 2002, most of the major US airlines eliminated the payment of base commissions to travel agents
on domestic tickets. Many airlines substituted incentive commissions to travel agents that booked a
predetermined volume of tickets for that airline. Many travel agents have responded to these cuts by
charging customers a service fee to book air travel, which means that the airlines have essentially passed
much of the cost of booking tickets on to the consumer.
Airlines try to encourage travel agents to steer customers their way by offering commission overrides. A
commission override is an incentive whereby an airline agrees to compensate an agent at a higher-thancustomary rate once the agents bookings exceed a predetermined level.
Computer reservation systems
To book a flight, the travel agent harnesses one of several major computer reservation systems (CRS).
Nearly all airlines now supply their flight and fare information to CRS operators, though most carriers hold
back special fares for their own Internet sites. When a flight is booked, the airline pays the CRS operator a
fee of between $2.50 and $3.00 per ticket. In addition to offering real-time airfare and route information,
the CRS can be used to book hotels and cruises and to rent cars.
The leading CRS is Sabre Holdings Corp., which began as the internal reservations system for American
Airlines before it was opened to other airlines in 1976. Air carriers have sold or spun off controlling stakes
in Sabre and other CRS operators such as Amadeus IT Group SA, Galileo International LLC., and
Worldspan LP (the latter two are affiliated with Travelport). In March 2007, Sabre was acquired by private
equity groups Silver Lake Partners and Texas Pacific Group.
After deregulation, the CRS became indispensable, as air carriers began offering a multitude of fares per
flight and making frequent changes in their fare offerings. These systems contribute to a more efficient
market in airfare pricing, because they provide customers and carriers with full knowledge of existing fares.
INDUSTRY SURVEYS
31
Air travelers can book flights and secure fare information via the Internet. Airlines allow flights to be
booked through their Internet home pages. Another option for passengers is to book flights via the Internet
by utilizing cyber-travel agentsintermediaries that pull together all airline schedules into a synthetic
variant of a CRS. The Internet version of the CRS is accessible to all PC owners and is in a format that is
more user-friendly than a traditional CRS.
REGULATION UNDER DEREGULATION

Federal regulation of domestic airline fares and markets ended with the Airline Deregulation Act of 1978.
However, the DOT and its affiliated agency, the Federal Aviation Administration (FAA), continue to
regulate the industry with regard to safety, labor, operating procedures, aircraft fitness, and emission levels.
The International Civil Aviation Organization (ICAO), an entity affiliated with the United Nations,
proposes noise standards, though the standards are not legally binding in a given country unless the country
has formally agreed to them.
The FAA, established in 1958, primarily promotes safe air travel. It does this by monitoring the industrys
maintenance and operating practices. The FAA certifies aircraft and airlines and establishes age and medical
requirements for pilots. One of the agencys chief functions is to operate the nations air traffic control
system at some 288 airports. Another 161 airports are operated under contract from the FAA.
The DOT levies civil penalties against airlines that engage in fraudulent marketing practices or that violate
code-sharing rules. It also oversees compliance with denied boarding (bumping) compensation rules and
renders decisions on airline ownership and control issues. The DOT plays an important role in negotiating
bilateral aviation treaties with foreign nations.
When US airlines operate in international markets, they are subject to economic regulation by individual
foreign governments and collective organizations such as the European Commission. The degree of
regulation varies from country to country, and the rules are laid out through formal bilateral aviation
treaties. These accords govern reciprocal landing rights and typically limit the number of carriers that can
operate in a country, the level of rates, the type of aircraft, and the frequency of flights.
Feds take jurisdiction over airport security
In response to public worries about air travel security following the terrorist attacks of September 2001,
President George W. Bush signed the Aviation and Transportation Security Act in November 2001. The law
federalized the airport security industry and created the Transportation Security Administration (TSA). As
of May 2012, there were roughly 47,000 federal screeners, who were deployed at all 429 US commercial
airports.
Federal control of airport security is aided by the use of information from the Federal Bureau of
Investigation and other agencies in the screening process. The government pays workers salaries; the
airlines are responsible for some costs, including equipment expenditures and airport charges. In addition,
airlines pay a federal tax of $5 per passenger per segment to cover a portion of the governments added
security costs. This fee is passed along to passengers.
The 2001 law also required that all bags be checked for explosives. At present, this is done by passing bags
through a bomb detector or by assuring that each bag is matched to a passenger who actually boards the
same plane. Ultimately, all checked baggage must pass through scanning equipment.
The Federal Air Marshal Program, operated by the FAA, deploys specially trained, armed teams of security
specialists on domestic and international flights. While the number of total marshals in place and their
itineraries are secret, the FAA says it has taken steps to sharply increase the number of marshals in the sky.
32
INDUSTRY SURVEYS
KEY INDUSTRY RATIOS AND STATISTICS

Revenue passenger-miles (RPMs). This measure of airline traffic is calculated by multiplying the total
number of passengers carried by the number of miles flown. The most frequently reported aggregate figure
is RPMs for the 10 largest carriers, a group for which data are available on a timely basis. Accounting for
over 90% of total US traffic in 2012, the 10 largest airlines are a good proxy for the entire industry.
Industrywide RPM numbers are available on a monthly basis from Airlines for America (A4A), an industry
trade group representing larger passenger airlines and leading air cargo companies. Examining this
indicators year-over-year change for each month shows the pace at which the industry is growing or
contracting. (An examination of month-to-month changes is irrelevant, however, because the indicator is not
adjusted for seasonal factors.) For the US industry as a whole, RPMs (including domestic and international
flights and express carriers) rose 0.6% in
AIRLINE TRAFFIC STATISTICS
2012 to 770.2 billion. Year to date
(System operations, twelve-month moving total)
through July 2013, RPMs were up 1.7%,
year over year, to reach 492.1 billion.
1100
84
1025
82
950
80
875
78
800
725
650
76
CHART H02 Airline

Traffic Statistics
74
72
575
70
500
68
1998 99 00 01 02 03 04 05 06 07 08 09 10 11 12 2013
ASM (in billions, left scale)
RPM (in billions, left scale)
PLF (in percent, right scale)
ASM-Available seat-miles. RPM-Revenue passenger-miles.

PLF-Passenger load factor.
Source: US Bureau of Transportation Statistics.
Available seat-miles (ASMs). This

capacity indicator measures the total
number of seats in the active fleet,
multiplied by the number of miles flown;
it can be calculated for an individual
airline or for the entire industry. The
A4A compiles an industrywide figure on
a monthly basis. Changes in ASMs are
influenced by net additions of aircraft to
the fleet, by the pitch and mix of aircraft
seats (number of first-class seats versus
business and economy), the average
length of flights, and by how quickly the
airline (or industry) turns around its
aircraft between flights.
For the US industry as a whole (including domestic and international flights), ASMs totaled 994.5 billion in
2012, an increase of 0.2% over 2011. Through July 2013, ASMs were up 0.8%, year over year, to reach
590.6 billion.
Load factor. This indicator, compiled monthly by the A4A, measures the percentage of available capacity
(as measured in ASMs) that is taken up by revenue-paying passenger traffic. It may be calculated as a single
airlines capacity utilization, or for the entire industry.
Once the industrys load factor exceeds the break-even point (which is a moving target), profit margins can
expand dramatically as incremental revenues flow to the bottom line. Because seasonal elements influence
the load factor, year-over-year comparisons are more meaningful than month-to-month changes. As
deregulation has forced down fares and helped fill aircraft cabins, the direction of the industrys load factor
has generally been upward. In the early 1970s, the average flight was half-empty.
The load factor was 82.1% in 2010, 82.0% in 2011, and 82.8% in 2012. Year to date through July 2013,
the load factor improved 0.7 percentage point, year over year, to 83.3%.
Consumer confidence. The Conference Board, a private research firm, compiles this index monthly.
Consumers from every US geographic region are surveyed about their near-term spending plans and overall
economic expectations. The index peaked at 144.7 (1985=100) in January 2000, surpassing the record high
that had stood since October 1968. Subsequently, however, consumer confidence fell sharply, reflecting the
economic slowdown. As of October 2013, the index stood at 71.2, down sharply from 80.2 in September.
According to the Conference Board, Consumer confidence deteriorated considerably as the federal
INDUSTRY SURVEYS
33
government shutdown and debt-ceiling crisis took a particularly large toll on consumers expectations.
Similar declines in confidence were experienced during the payroll tax hike earlier this year, the fiscal cliff
discussions in late 2012, and the government shutdown in 1995/1996. However, given the temporary
nature of the current resolution, confidence is
likely to remain volatile for the next several
AIR TRAVEL PLANS
(Percentage of consumers planning a vacation in the next six months)
months.
70
60
One component of consumer confidence that

has direct relevance for airlines is consumers
plans for vacation travel, along with the
percentage planning to travel by air. According
to a survey conducted in May 2013 by
TripAdvisor, a web-based travel site, 74% of
those traveling planned to drive to a vacation
site in the summer of 2013, and 64% planned
to fly.
Chart H03 Air

Travel Plans
50
40
30
20
10
0
2002 03
04
05
06
07
08
09
10
11
12 2013
Disposable personal income. Reported each

month by the US Department of Commerce,
this measure calculates aggregate consumer
Source: The Conference Board.
income (in dollars) after taxes. Changes in
disposable income have a bearing on leisure travel. Although growth in nominal disposable income
(unadjusted for inflation) tends to be positive, real (inflation-adjusted) disposable income rises and falls with
the economic cycle. It was up 3.1% in 2010, 3.8% in 2011, and 3.5% in 2012. As of October 2013,
Standard & Poors Economics (which operates separately from S&P Capital IQ) was projecting disposable
personal income to rise 1.8% in 2013 and 4.7% in 2014.
Planning a vacation
Traveling by air
Corporate profits. Reported quarterly by the US Department of Commerce, this figure is a measure of
aggregate business profits, in dollars. Although corporate profits are reported both before and after taxes,
the pretax number is more useful. Changes in corporate profits, unless extremely minor, have major bearing
on business travel. For example, the sharp drop in corporate earnings that often accompanies a recession
will ultimately lead to a curtailment in business travel. Pretax corporate profits rose 36.8% in 2010, 2.1%
in 2011, and 16.6% in 2012. As of October 2013, Standard & Poors was projecting an increase of 1.9% in
pretax corporate profits in 2013. For 2014, pretax corporate profits were projected to rise 12.0%.
Jet fuel prices. The spot price for jet fuel (at New York Harbor) can be found on the Bloomberg
Terminal, which tracks transactions with a 15-minute delay. Changes in jet fuel prices are often the swing
factor in airline profits. Its important to remember, however, that because of purchase contracts and
hedging strategies, airlines buy very little of their fuel at the spot market price.
The highest price for jet fuel was reached in July 2008, when it averaged $3.70 a gallon for the month. For
2012, jet fuel averaged $3.05 a gallon, up 43.2% from the average for 2011, which was up 25.3% from the
average for 2010. Year to date through October 21, 2013, the cost of jet fuel averaged $2.93 a gallon,
down 4.9% from the average for the same period in 2012.
HOW TO ANALYZE AN AIRLINE

Factors to examine when analyzing an airline include its traffic and pricing, market share, costs, profitability
and load factor, balance sheet stability, service and safety record, and equity valuation, as discussed following.
Other important factors are managerial strength and employee morale. Although difficult to quantify, these
characteristics are typically reflected in an airlines cost and asset performance measures.
34
INDUSTRY SURVEYS
REVENUE-RELATED FACTORS
Traffic is the starting point in analyzing a passenger airline. It can be measured in terms of revenue passengermiles (RPMs) or enplanements (the total number of people carried). Both provide useful measures of a carriers
market share. Traffic levels and yield, a measure of pricing trends, are the two determinants of revenues.
Traffic: revenue passenger-miles
For any given period, revenue passenger-miles (RPMs) equal the total number of passengers enplaned,
multiplied by the average distance flown. This measure is superior to enplanements as an analytical tool,
because airline revenues closely correspond to RPM levels. Short-haul carriers sometimes rank high based
on total enplanements, but appear smaller when measured by RPMs or revenues.
Changes in RPMs should be compared with industry averages to determine whether a carrier is gaining or
losing market share. Traffic performance must be viewed in conjunction with yield analysis to determine
whether a carrier is buying market share at the cost of profits. Each month, scheduled airlines report their
traffic data to the US Department of Transportation (DOT). Start-up carriers and regional and charter
OPERATING STATISTICS OF THE MAJOR US AIRLINES
CONTIYEAR AIRTRAN ALASKA AMERICAN NENTAL
DELTA JETBLUE
NORTHWEST
SOUTHWEST
UNITED
US
AIRWAYS
TOTAL
MAJORS
NA
NA
NA
NA
83,882
86,142
85,603
91,745
91,378
88,593
128,137
120,579
98,437
98,002
103,271
99,636
92,663
85,173
76,861
71,790
248,860
252,528
169,565
140,716
152,025
158,191
158,835
140,300
145,361
136,630
88,425
86,673
85,818
85,092
89,104
90,001
76,983
NA
61,352
58,017
933,563
929,123
838,400
897,176
903,749
883,002
866,000
859,612
837,825
760,078
NA
NA
NA
NA
71,216
72,924
72,606
75,820
73,312
68,476
102,875
97,583
78,047
74,457
73,492
72,319
67,691
60,223
53,418
47,943
205,485
207,531
140,857
114,245
122,216
130,048
129,727
114,272
115,198
104,464
73,318
71,321
69,593
68,459
71,425
71,594
60,689
NA
45,087
41,464
771,842
761,318
686,621
721,913
722,323
734,554
703,187
611,962
621,498
545,513
AVAILABLE SEAT- MILES (MILLIONS)
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
NA
NA
24,062
23,294
23,809
22,692
19,007
15,370
11,977
*10,046
31,428
166,223
NA 230,415 40,075
29,627
167,828
NA 234,656 37,232
27,669
165,420
NA 232,684 34,744
26,436
163,340
97,407 230,331 32,558
24,218
163,491 102,527 128,979 32,442
24,210
169,862 103,139 127,749 31,904
23,278
173,945
97,666 125,480 28,594
22,292
175,922
89,646 133,935 23,703
22,277
173,836
84,685 129,974 18,911
20,804 Table
164,791
78,390 120,462 *13,639
B01 Operating
statistics of major US
REVENUE PASSENGER- MILES FLOWN (MILLIONS)
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
NA
NA
19,578
18,588
18,956
17,298
13,836
11,302
8,479
*7,143
27,007
136,620
airlines
25,032
136,386
22,800
134,298
20,770
130,672
18,711
131,730
18,452
138,421
17,822
139,396
16,915
138,227
16,231
130,029
14,554
120,012
NA
NA
NA
79,824
82,807
84,310
79,189
71,261
65,734
59,168
192,974 33,563
192,767 30,698
193,169 28,279
188,943 25,955
105,700 26,071
103,452 25,737
98,911 23,320
103,742 20,200
98,280 15,730
89,432 *11,527
PASSENGER LOAD FACTOR (PERCENT)
2012
NA
85.9
82.2
NA
83.8
83.8
NA
80.3
82.6
82.9
2011
NA
84.5
81.3
NA
82.1
82.5
NA
80.9
82.2
82.3
2010
81.4
82.4
81.2
NA
83.0
81.4
NA
79.3
83.1
81.1
2009
79.8
78.6
80.0
81.9
82.0
79.7
NA
76.0
81.2
80.5
2008
79.6
77.3
80.6
80.8
82.0
80.4
84.9
71.2
80.4
80.2
2007
76.2
76.2
81.5
81.7
81.0
80.7
84.7
72.6
82.2
79.5
2006
72.8
76.6
80.1
81.1
78.8
81.6
84.8
73.1
81.7
78.8
2005
73.5
75.9
78.6
79.5
77.5
85.2
82.6
70.7
81.4
NA
2004
70.8
72.9
74.8
77.6
75.6
83.2
80.2
69.5
79.2
73.5
2003
*71.2
70.0
72.8
75.5
74.2
*84.6
77.3
66.8
76.5
71.5
*For comparison only; not included in total. Company w as not classified as a major airline until 2004. NA-Not available.
Acquired by Southw est Airlines in May 2011. Merged w ith United in May 2010. Acquired by Delta Airlines in 2008.
Sources: Aviation Daily ; US Department of Transportation.
INDUSTRY SURVEYS
82.7
81.9
81.9
80.5
79.9
83.2
81.2
71.2
74.2
71.8
35
airlines typically outperform the majors in RPM growth because their traffic base is much smaller. Again,
growth rates should not be confused with profitability.
A comparative analysis of different carriers RPM performance over a short period can yield a distorted
picture. Vacation travel tends to be concentrated during the summer months, creating uneven seasonal traffic
patterns. For small regional airlines with a high proportion of business travelers, these seasonal swings may be
largely absent. Consequently, using data for the off-season winter travel period might lead one to conclude
erroneously that small, business-oriented airlines were outperforming their larger competitors.
Yield: a look at pricing trends
The other component of revenues is pricing, or fare levels. The passenger revenue generated per RPM is
commonly referred to as the yield. It is useful to compare the trend in a carriers yield with the trend in yield
for other airlines; however, comparing the yield levels for different carriers is useful only if the carriers
provide a similar mix of flights.
Although international flights have yields that tend to be lower than those on domestic routes, they may be
more profitable. Thus, one should take into consideration the percentage of domestic versus international
travel in a carriers mix. In addition, airlines that have a larger mix of business or first-class seats will report
yields that are higher than carriers flying the leisure trade on identical routes. While short-haul flights tend
to have higher yields, their costs are also higher and their load factors tend to be lower.
MARKET SHARE AND GEOGRAPHIC MIX

The best method for determining a carriers relative market performance is to look at the specific city pairs
that it servesits share of total enplanements at the airports where it operates. An analysis of city-pair
traffic can pinpoint exactly where a carrier is facing the greatest degree of competitive pressure. In todays
environment, it is not unusual to find major airports where a single airline accounts for 75% or more of
total enplanements. Carriers that have low market shareor that serve cities where no single airline
dominateswill face greater competitive pressure on fares.
An airlines geographic mix is also important. Economic growth and the level of discretionary spending
and, hence, air travelvary from region to region and nation to nation. Airlines that serve a limited market
can see their traffic diverge from overall national trends. A carrier that primarily serves Hawaii, the Florida
tourist market, or the oil-patch states could beat or underperform other carriers at times. Likewise, carriers
that derive a high percentage of their total RPMs from international travel may see their traffic occasionally
out of step with those that serve domestic markets exclusively.
Whatever markets an airline serves, however, it is not locked into them in the same way that a railroad is
because airlines can reposition their assets depending on where the best growth opportunities lie. Airlines
can shift resources out of weaker international locations and into stronger ones, or out of weak,
underperforming, or money-losing domestic markets into those with better growth potential. There are
limits to this strategy, however, since not all aircraft types can be operated in every market. For example,
jumbo jets need dense, long-haul routes for profitable operation and require airports with long runways.
COSTS
When evaluating an airline, it is often more important to analyze its cost performance than its traffic.
Among start-up airlines, the aggressive, high-growth carrier is frequently the one to suffer defeat. In
contrast, carriers that pursue a manageable level of growth while controlling costs tend to thrive.
Labor
Labor has historically been the industrys largest cost item, though from 200508, and again in 2010, fuel
was the largest cost category for most carriers. According to data compiled by S&P Capital IQ (S&P), labor
costs at the 10 major US airlines averaged 22.5% of total revenues in both 2012 and 2011, ranging in 2012
from a low of 17.9% (US Airways) to a high of 35.8% (Southwest Airlines Co., surprisingly to many).
36
INDUSTRY SURVEYS
How much an airline spends on labor depends on its efficiency and the labor-intensity of its routes. For
example, short routes on which meals are not served have lower personnel and cleaning costs than those
that require meal service. They also have lower gate rental fees. Aircraft can be turned around quickly
because they do not require catering entrances and other facilities needed by long-haul flights; also, they do
not need to refuel as often. Thus, short-haul operators typically incur lower labor costs than do the major
national airlines.
Outsourcing certain functions, such as maintenance or reservation services, reduces labor costs as a
percentage of the total and can cut total costs as well. Similarly, a technology-intensive airlineone with a
high percentage of sales booked over the Internet, for example, and/or electronic ticketing and self-service
check-in kioskswill enjoy high labor productivity.
While most airline employees are union members, wages and work rules differ from carrier to carrier.
Aircraft type and design will determine the size of the flight crew: some aircraft require two copilots, while
others need only one. Nonunion airlines instruct flight attendants to perform tasks that are restricted to fleet
service operators in union airlines. Some airlines offer sizable profit-sharing programs or may have
employee stock ownership programs (ESOPs) in addition to salaries and benefits. Although these may not
be recognized as an expense category on the income statement, such airlines will record a charge to earnings
to cover distributions under the ESOP planequaling as much as 5% of revenues.
Labor efficiency should be measured relative to output; in the airline industry, this translates into RPMs per
worker. Labor productivity averages about 1.4 million RPMs annually per worker, with major carriers
recording between 1.1 million and 1.6 million RPMs per worker per year.
Fuel
Airlines are energy-intensive operations, but carriers have different levels of exposure to changes in fuel
prices. In the past, fuel costs at the major airlines averaged as little as 10% of their revenues. Rising oil prices
have hit all the major carriers, however. In 2012, fuel costs averaged 32.1% of total revenues among the 10
largest US airlines versus 31.6% of revenues in 2011. Costs in 2012 ranged from a low of 25.2% (US
Airways) to a high of 36.3% (JetBlue) of revenues. Along with the number of engines, the age of a carriers
aircraft greatly influences fuel consumption rates, as newer planes are more fuel-efficient than older models.
Carriers specializing in short hauls, which involve frequent departures, consume more fuel than do longhaul airlines, because a disproportionate amount of fuel is burned during takeoff and landing. However,
short-haul carriers operating turboprop aircraft consume less fuel than those employing jets. Meanwhile,
carriers based in the western United States typically pay more per gallon than do other US airlines.
Most airline managers now see the value of using futures and swaps to hedge a majority of their fuel price
exposure. Thus, under normal conditions, the average price per gallon of jet fuel may vary by 10% to 15%
from carrier to carrier, as airlines engage in fuel hedging to varying degrees. Given the recent weakness in
many airlines balance sheets, however, many carriers have been unable to hedge against rising oil prices to
the extent that they would like. In addition, with oil prices recently near record highs, many carriers have
been unwilling to enter into new hedge positions as older ones expire; they are afraid to lock in high oil
prices, which could lead to hedging losses if oil prices recede.
Maintenance
The average carrier spent about 5.5% of its revenues on maintenance in 2012, up from 5.2% in 2011; the
industrys range in 2012 was 4.7% to 10.5% Maintenance spending per carrier varies materially with the
amount of work outsourced.
Aircraft age greatly influences the level of maintenance required. Just as important, however, is the spacing
of fleet ages. Every six to eight years (or 20,000 flight hours), each aircraft must undergo an intensive
maintenance program known as the D-check. Airlines that fail to space orders evenly, or that buy
secondhand aircraft of the same age, will face a bunched-up maintenance program at some point. If this
happens, it will distort the results of a comparative analysis.
INDUSTRY SURVEYS
37
Financing aircraft purchases

For the major airlines, interest expense (net of interest income and capitalized interest) averaged about 2.1%
of revenues in 2012, versus 2.6% in 2011. The revenues consumed by interest expense in 2011 ranged from
0.6% (Southwest) to 4.5% (Republic Airways).
Many airlines lease some portion of their fleets from equipment lessors. Aircraft rental costs averaged about
2.4% of revenues in 2012, versus 3.0% in 2011; the costs in 2012 ranged from a low of 0.7% at Delta Air
Lines to a high of 8.7% at Republic.
PROFITABILITY AND LOAD FACTOR

A key determinant of profitability is capacity utilization, as measured by load factor: a carriers RPMs divided
by its available seat-miles (ASMs). ASMs are calculated as aircraft miles flown, multiplied by the number of
seats available for revenue passenger use. Given airlines high fixed costs, the more passengers that can be
boarded before each departure, the more profitable the flight will be, provided variable costs are covered.
Immediately after September 11, 2001, load factors dropped sharplyto well below 50%but they have
since risen above historical averages as low fares have spurred demand, albeit at the cost of lower industry
yields. It is important to realize, however, that rising load factors show only that capacity utilization is
increasing, not necessarily that passenger volumes or profitability are improving.
Carriers load factors are always highest during the peak summer travel season, as approaching or exceeding
80.0%. (In July 2010, mainline passenger load factor averaged 87.9%, which we believe is a record for any
month.) During the off-season, load factors may be closer to 75%. Short-haul commuter airlines, which
typically operate small turboprop aircraft, often sustain load factors well below those of the majors, but can
operate profitably at load factors of 50% or less, because they turn their planes around more frequently.
For longer-haul flights, break-even load factors would likely be above 70% under normal conditions. For
the legacy majors, they have been much higher in recent periods due to reductions in capacity and sharp
discounting, which has filled planes but at below break-even revenue levels. A carriers break-even load
factor depends on its revenue per passenger-mile and the cost of providing each available seat-mile.
RASM versus CASM
Comparing passenger revenues per available seat-mile (RASM) with costs per ASM (CASM) is a common way
of measuring airline profitability. RASM is the indicator most closely watched by financial analysts, but both
measures are crucial. In the past, United Airlines and American Airlines demonstrated that simply removing
seats could increase RASM. This increase, however, clearly was not enough to make them profitable.
Since airlines often earn an additional 10% of their income from other sources, S&P also likes to consider a
total RASM measure that includes cargo operations, sales of frequent-flyer miles, in-flight liquor,
entertainment, or telephone services and other amenities. These non-passenger revenue sources can make
the difference between an operating loss and a profit.
BALANCE SHEET STABILITY AND CASH BURN

Given the high debt levels carried by many airlines and the frequency of large operating losses, it is
important to assess the strength of an airlines balance sheet. Metrics such as debt-to-equity and debt-tototal-capitalization should be examined, as should cash on hand to cover interest payments and other
liquidity needs.
During times of industry losses, it is important to determine how quickly an airline may be using its
available cash (its cash burn rate). For example, UAL Corp. (before its bankruptcy filing in December 2002)
and Delta Air Lines (which was in a precarious financial state in late September 2004 and again in March
2005) burned through millions of dollars in cash each day. In such cases, it is important to gauge how long
an airline can withstand a downturn and remain solvent.
38
INDUSTRY SURVEYS
SERVICE AND SAFETY RECORD

One way to measure an airlines service performance is by the percentage of its flights that arrive on time, as
published in the DOTs Air Travel Consumer Report. Typically, 75%80% of all flights arrive within 15
minutes of their scheduled time. Carriers that route passengers through hubs into connecting flights are
more likely to have a lower on-time performance than those offering direct point-to-point flights.
On-time performance is generally worse during the winter, when weather can wreak havoc with schedules.
This is especially vexing for carriers that serve more northern than southern states in the United States. In
addition, airlines serving congested metropolitan markets often suffer from poor on-time performance
caused by air traffic controlrelated delays. The on-time numbers are not an infallible measure, though,
because some airlines lengthen their estimated flight times to allow for delays.
The DOT collects and disseminates information about consumer complaints, which is usually a relatively
reliable indicator of service levels. Sometimes a poor service performance reflects low employee morale,
particularly if a carriers labor talks have reached a stalemate.
Another way to assess service is to look at the bumping ratiothe percentage of passengers denied
boarding. Airlines that overbook flights will have high bumping ratios. Some 0.2% of all passengers are
bumped; of that total, however, only 5% are bumped involuntarilythe rest take an offer from the airline
to be voluntarily bumped. Bumped passengers are compensated for their inconvenience, often with as
much as $400 in cash, vouchers, or frequent-flyer credits. Consequently, airlines with high levels of
overbooking still may have high levels of consumer satisfaction. A case could even be made that high bumping
ratios coincide with wider profit margins, because it indicates that flights are fully loaded with passengers.
A carriers safety performance can sometimes play an important role in determining consumers choice of
airline. The Federal Aviation Administration measures carriers accident rates per 100,000 departures. Most
carriers have low accident rates, and their safety records tend not to vary significantly. In general, airline
safety has been on the rise. In 2004, the National Transportation Safety Board reported one fatal accident in
more than 10 million scheduled departures, according to Airlines for America (A4A), a trade group that
represents the larger passenger airlines and leading air cargo companies. Between 2002 and 2009, airlines in
the US provided 85.4 million scheduled commercial flights, while recording 164 fatalities. There were two
fatal accidents in 2009, leading to 52 fatalities among the 10.3 million scheduled flights.
Fleet planning and management
An analysis of an airlines asset performance determines how well it manages its fleet. The faster a carrier
can get its aircraft back into revenue service, the more profitable it will be. Jet utilization is measured by the
number of hours the average aircraft is in service. The most efficient (and usually the most profitable)
carriers tend to have their aircraft in service for 11 to 12 hours per day.
Fleet age is an important statistic because it provides an early warning of when a carriers capital spending
may have to be ramped up to replace equipment. The age of an aircraft is less important than the number of
takeoff and landing cycles, which puts stress on the fuselage. In addition, the age of the aircrafts engines
and number of hours flown is a better gauge for the condition of the aircraft. While many start-up airlines
operate with older planes, established regional and commuter airlines, even those operating primarily with
turboprops, tend to own fairly new fleets.
EQUITY VALUATION
Airline stocks are among the most volatile shares on the market: investors tend to bid up shares of airlines
when they are incurring substantial losses and things look bleakest. Once profits are fat, investors normally
move on, racing to lighten their airline holdings before the next downturn. However, the industry downturn
that began after September 11, 2001, and persisted through 2005 seems to have shaken that historical
pattern due to the sheer size of the losses and the extreme difficulties the carriers were facing. In light of this
volatility, many airline stocks have historically been viewed as trading vehicles.
INDUSTRY SURVEYS
39
Speculators tend to trade airlines as plays on falling oil prices or the expectation of falling prices. The stock
movements can exaggerate the effect that changes in fuel costs have on an airline companys bottom line.
For example, while a 10% jump in crude oil may increase airline fuel costs 10%, total costs might rise only
3%, affecting profits somewhere in between. Yet, driven by speculators response to the change in oil prices,
an airlines shares may rise or fall 40% or more.
Furthermore, the best airlines may not have the richest valuations. A strong service performance and a
young fleet are of secondary consideration in this regard; investors tend to favor growth airlines with wide
profit margins. During a rally in airline equities, however, the biggest percentage gain in stock price may go
to the worst airline, because investors anticipate a greater gain (off a depressed base) in that carriers
bottom line. Thus, in the perverse logic of Wall Street, an airlines quality may have an inverse relationship
with its stock performanceat least during a bull market. In a bear market, however, quality usually shines
through.
S&P typically focuses on Enterprise Valueto-EBITDAR (earnings before interest, taxes, depreciation,
amortization, and aircraft rent) as a way to compare airlines on an apples-to-apples basis. Since so many
airlines have lost money over the last 10 years, its hard to use P/E as a valuation metric when there are no
earnings. In addition, since some airlines choose to mortgage their planes, while some choose to lease them,
its hard to use Enterprise Valueto-EBITDA, which would skew the results of those who lease planes and
have high aircraft rent. EV/EBITDAR adds back aircraft rent as well as interest, taxes, depreciation and
amortization, which allows you to compare those airlines that mortgage planes and have high interest
expense and depreciation, with those that lease them and have high aircraft rent and low depreciation.
US airlines over the past 10 years have tended to trade at an EV/EBITDAR multiple of anywhere from 3X
8X trailing EBITDAR, depending on investor interest and where in the industry cycle the airlines were.
Standard & Poors feels that the better-run airlines, in our highly qualitative view, can enjoy a multiple on
the higher end of the EV/EBITDAR spectrum, while those with high debt levels and uncertain future
prospects tend to trade at the lower end.
40
INDUSTRY SURVEYS
GLOSSARY
Available seat-miles (ASMs)A measure of airline capacity; calculated as aircraft miles flown multiplied by the number of
seats available for revenue passenger use.
Blended wingletsModified wings that are intended to lessen drag and, therefore, increase fuel efficiency. They can be
factory installed or added to planes through wing modification kits.
BumpingThe practice of denying ticketed passengers the right to board an overbooked flight. Bumped passengers may
receive compensation of up to $400.
CabotageThe transport of passengers by a foreign carrier for purely domestic flights; illegal in all nations.
CharterNonscheduled service in which all seats are booked by a single entity such as a tour operator.
Code sharingAn agreement in which one carriers flight schedules are listed under another airlines code on a computer
reservation system.
Commercial air carrierAn air carrier that is certified to carry passengers for a fee.
Commuter airlineAn airline that operates short-haul flights using small-capacity aircraft, typically turboprop planes.
Computer reservation system (CRS)One of a number of centralized databases listing fare and flight information used to
book flights.
Cost per available seat-mile (CASM)A commonly used measure of unit operating costs, calculated as total operating costs
divided by available seat-miles.
EnplanementsThe total number of passengers, both originating and connecting, who board an aircraft.
Hub-and-spoke systemAn air carrier route structure providing broad coverage across the United States, though not point-topoint service between every small airport. Feeder flights connect passengers from outlying cities with a hub airport, where
they may continue on the same plane or transfer to another flight to reach their destination.
Hush kitA device used to modify an aircraft engine to reduce noise levels.
InterliningThe process of transferring passengers between two carriers flights, typically through a code-sharing
arrangement.
JetAn engine that creates propulsive thrust by expelling air at a much higher velocity than it has taken it in; introduced to US
passenger aircraft in 1958.
Load factorA measurement of the total aircraft seating capacity sold; it is calculated as revenue passenger-miles divided by
available seat-miles on flights offering revenue passenger services.
Major airlineAn air carrier with annual operating revenues greater than $1 billion.
National airlineAn air carrier with annual operating revenues between $100 million and $1 billion.
Open skies pactAn aviation accord between two nations giving their respective air carriers greater access to each others
markets and the freedom to set fares.
OutsourcingContracting certain tasks, such as maintenance, to an outside vendor to reduce operating costs.
OverridesBonus commission paid by airlines to travel agents for exceeding a sales target.
INDUSTRY SURVEYS
41
OversalesPractice of booking more passengers than available seats; results in bumping.

PitchPassenger legroom; the distance between seats in an airline cabin. Recently, carriers eager to differentiate their service
have touted expanded pitch as a selling strategy.
Regional airlineAn air carrier with annual operating revenues less than $100 million.
Revenue passenger-mile (RPM)A measurement representing one passenger transported one mile in revenue service.
Revenue per available seat-mile (RASM)A measure of unit operating revenue, computed by dividing total passenger
revenues by available seat-miles.
SlotA rationed position in an airports schedule for takeoff or landing. Only a handful of airportsthose that are at designed
capacityuse a slot system.
Stage lengthThe distance of a flight in miles. It is frequently shorter than trip length, since a flight may consist of more than
one stage (or leg).
TurbopropAn engine that uses propellers to develop its thrust; generally found in smaller regional or commuter aircraft.
YieldA measure of unit revenues, computed by dividing passenger revenues by revenue passenger-miles.
42
INDUSTRY SURVEYS
INDUSTRY REFERENCES
PERIODICALS
CONSULTING FIRMS
Air Carrier Financial Statistics

Air Carrier Traffic Statistics
http://www.bts.gov
Cover Form 41 carriers; the first has quarterly financial
statistics; the second, monthly traffic statistics.
OAG Aviation
http://www.oagaviation.com
Independent provider of consulting and data information
services to the aviation industry.
TRADE ASSOCIATIONS
Air Transport World

http://www.atwonline.com
Monthly; articles on all aspects of the airline industry.
Annual Report of the Regional Airline Association
http://www.raa.org
A comprehensive annual review of issues concerning
regional airlines; contains a statistical summary of carriers
operating performance.
Aviation Daily
Aviation Week & Space Technology
http://www.aviationweek.com
The first is a daily, with current news on the air transport
industry and useful statistics; the second is a weekly, with
complete coverage of the aviation and space industries.
Airlines for America (A4A)

http://www.airlines.org
Primarily represents larger passenger airlines and leading
air cargo companies; produces the Air Transport Annual
Report, a detailed annual summary of operating and
financial statistics of leading carriers and the monthly
Scheduled Passenger Traffic Statistics. Formerly the Air
Transport Association of America Inc. (ATA).
International Air Transport Association (IATA)
http://iata.org
Global trade organization; its members (some 230 airlines
throughout the world) account for approximately 93% of
scheduled international air travel.
Regional Airline Association (RAA)
http://www.raa.org
Trade group representing smaller airlines.
FAA Aerospace Forecasts

http://www.faa.gov/data_research/aviation
Annual forecasts of aviation activity at FAA facilities.
US Travel Association
http://www.ustravel.org
Representing all components of the US travel industry;
promotes US travel and tourism and is an authoritative
source for travel industry research, analysis, and forecasts.
Travel Weekly
http://www.twcrossroads.com
Semiweekly; news about travel and tourism.
BOOKS
REGULATORY AGENCIES
Handbook of Airline Economics
Darryl Jenkins, Editor
Essays providing a thorough review of all major aviationrelated financial, operational, and regulatory issues, with
contributions from leading industry executives.
ONLINE RESOURCES
Aviation Safety Network
http://aviation-safety.net
Comprehensive statistics related to airliner accidents and
safety records.
Plane Business
http://www.planebusiness.com
Airline news; site contains free sections and parts
restricted to paid subscribers.
INDUSTRY SURVEYS
Energy Information Administration (EIA)

http://www.eia.gov
A statistical agency of the US Department of Energy;
provides independent data, forecasts, and analysis
regarding energy and its interaction with the economy and
the environment.
Federal Aviation Administration (FAA)
http://www.faa.gov
Agency within the DOT that monitors commercial and
general aviation safety, records and investigates
complaints filed against airlines, certifies carriers, compiles
statistics, promotes aviation education, and crafts
regulations governing aviation safety.
43
National Transportation Safety Board (NTSB)

http://www.ntsb.gov
Independent federal agency (not part of the DOT) charged
with investigating accidents involving all transportation
modes; it makes recommendations, but cannot write
regulations.
Transportation Security Administration (TSA)
http://www.tsa.gov
Agency within the DOT formed on November 19, 2001, in
the aftermath of the attacks of 9/11. The TSA is charged
with protecting the US transportation system and ensuring
free movement of people and commerce.
US Department of Transportation (DOT)
http://www.dot.gov
Federal agency responsible for regulation of all transport
modes, including airlines. The DOT produces various
performance, budget, and planning reports that summarize
the agencys activities during the past fiscal year.
44
INDUSTRY SURVEYS
COMPARATIVE COMPANY ANALYSIS

Operating Revenues
Million $
Ticker
Company
AIRLINES
ALK
ALGT
DAL
[]
JBLU
SKYW
ALASKA AIR GROUP INC

ALLEGIANT TRAVEL CO
DELTA AIR LINES INC
JETBLUE AIRWAYS CORP
SKYWEST INC
2012
2011
DEC
DEC
DEC
DEC
DEC
4,657.0
908.7
36,670.0
4,982.0
3,534.4
4,317.8
779.1
35,115.0
4,504.0
3,654.9
3,832.3
663.6
31,755.0
3,779.0
2,747.9 A
3,399.8
557.9
28,063.0
3,292.0
2,609.6
3,620.3
504.0
22,697.0 A
3,388.0
3,496.2
[] SOUTHWEST AIRLINES
DEC
17,088.0
15,658.0 A
12,104.0
10,350.0
11,023.0
OTHER AIRLINE OPERATORS

AAMRQ
AMR CORP/DE
PNCLQ
PINNACLE AIRLINES CORP
RJET
REPUBLIC AIRWAYS HLDGS INC
LCC
US AIRWAYS GROUP INC
DEC
DEC
DEC
DEC
24,855.0
NA
2,801.1
13,831.0
24,022.0
1,235.6
2,876.2
13,055.0
22,170.0
1,020.8 A
2,653.7
11,908.0
19,917.0
845.5
1,642.2 A
10,458.0
23,766.0
864.8
1,479.8
12,118.0
LUV
2010
2009
CAGR (%)
Yr. End
2008
2007
3,506.0
360.6
18,966.0
2,842.0
3,374.3
9,861.0
22,896.0
787.4 A
1,292.7
11,700.0
2002
Index Basis (2002 = 100)
10-Yr.
5-Yr.
1-Yr.
2012
2011
2010
2009
2008
7.7
NA
10.7
22.9
16.4
5.8
20.3
14.1
11.9
0.9
7.9
16.6
4.4
10.6
(3.3)
209
**
276
784
456
194
**
264
709
472
172
**
239
595
355
153
**
211
518
337
163
NA
171
533
451
5,485.8
12.0
11.6
9.1
311
285
221
189
201
17,299.0
331.6
315.5
2,047.1
3.7
NA
24.4
21.1
1.7
NA
16.7
3.4
3.5
NA
(2.6)
5.9
144
NA
888
676
139
373
912
638
128
308
841
582
115
255
521
511
137
261
469
592
2,224.1 C
NA
13,305.0
635.2 A
774.4 C
Note: Data as originally reported. CAGR-Compound annual growth rate. S&P 1500 index group. []Company included in the S&P 500. Company included in the S&P MidCap 400. Company included in the S&P SmallCap 600. #Of the following calendar year.
**Not calculated; data for base year or end year not available. A - This year's data reflect an acquisition or merger. B - This year's data reflect a major merger resulting in the formation of a new company. C - This year's data reflect an accounting change.
D - Data exclude discontinued operations. E - Includes excise taxes. F - Includes other (nonoperating) income. G - Includes sale of leased depts. H - Some or all data are not available, due to a fiscal year change.
Net Income
Million $
Ticker
Company
AIRLINES
ALK
ALGT
DAL
[]
JBLU
SKYW

ALLEGIANT TRAVEL CO
DELTA AIR LINES INC
SKYWEST INC
Yr. End
2012
DEC
DEC
DEC
DEC
DEC
316.0
78.6
1,009.0
128.0
51.2
DEC
421.0

AAMRQ
AMR CORP/DE
PNCLQ
RJET
LCC
DEC
DEC
DEC
DEC
LUV
(1,876.0)
NA
51.3
637.0
2011
2010
244.5
49.4
854.0
86.0
(27.3)
251.1
65.7
593.0
97.0
96.3
178.0
459.0
(1,979.0)
(31.5)
(151.8)
71.0
(471.0)
12.8
(13.8)
502.0
CAGR (%)
2009
2008
121.6
76.3
(1,237.0)
61.0
83.7
(135.9)
35.4
(8,922.0)
(76.0)
112.9
99.0
(1,468.0)
41.9
39.7
(205.0)
178.0
(2,071.0)
(4.9)
84.6
(2,210.0)
2007
125.0
31.5
1,612.0
18.0
159.2
645.0
504.0
34.6
82.8
427.0
Index Basis (2002 = 100)
2002
10-Yr.
5-Yr.
1-Yr.
2012
2011
2010
2009
2008
(67.2)
NA
(1,272.0)
54.9
78.3
NM
NA
NM
8.8
(4.2)
20.4
20.1
(8.9)
48.0
(20.3)
29.2
59.1
18.1
48.8
NM
NM
**
NM
233
65
NM
**
NM
157
(35)
NM
**
NM
177
123
NM
**
NM
111
107
NM
NA
NM
(138)
144
5.7
(8.2)
136.5
175
74
190
41
74
NM
NA
11.7
NM
NM
NA
(9.1)
8.3
NM
NA
NM
797.2
NM
**
302
NM
NM
(102)
(893)
NM
NM
41
(81)
NM
NM
136
233
NM
NM
(16)
497
NM
241.0
(2,523.0)
30.8
17.0
(179.7)
Note: Data as originally reported. CAGR-Compound annual growth rate. S&P 1500 index group. []Company included in the S&P 500. Company included in the S&P MidCap 400. Company included in the S&P SmallCap 600.
#Of the following calendar year. **Not calculated; data for base year or end year not available.
INDUSTRY SURVEYS
45
Return on Revenues (%)

Ticker
Company
AIRLINES
ALK
ALGT
DAL
[]
JBLU
SKYW

ALLEGIANT TRAVEL CO
DELTA AIR LINES INC
SKYWEST INC
Return on Assets (%)
Return on Equity (%)
Yr. End
2012
2011
2010
2009
2008
2012
2011
2010
2009
2008
2012
2011
2010
2009
2008
DEC
DEC
DEC
DEC
DEC
6.8
8.6
2.8
2.6
1.4
5.7
6.3
2.4
1.9
NM
6.6
9.9
1.9
2.6
3.5
3.6
13.7
NM
1.9
3.2
NM
7.0
NM
NM
3.2
5.9
10.4
2.3
1.8
1.2
4.8
8.2
2.0
1.3
NM
5.0
13.1
1.4
1.5
2.2
2.5
16.5
NM
1.0
2.0
NM
8.5
NM
NM
2.8
24.4
20.9
NA
7.0
3.8
21.5
15.2
NA
5.0
NM
25.4
22.3
103.9
6.1
6.9
15.9
29.0
NM
4.3
6.4
NM
15.9
NM
NM
9.0
DEC
2.5
1.1
3.8
1.0
1.6
2.3
1.1
3.1
0.7
1.1
6.1
2.7
7.8
1.9
3.0

AAMRQ
AMR CORP/DE
PNCLQ
RJET
LCC
DEC
DEC
DEC
DEC
NM
NA
1.8
4.6
NM
NM
NM
0.5
NM
1.3
NM
4.2
NM
5.0
2.4
NM
NM
NM
5.7
NM
NM
NA
1.4
7.2
NM
NM
NM
0.9
NM
0.9
NM
6.6
NM
3.5
1.0
NM
NM
NM
2.8
NM
NA
NA
10.5
135.5
NA
NM
NM
60.7
NA
11.5
NM
NA
NA
55.5
8.0
NA
NA
NM
18.8
NM
LUV
Note: Data as originally reported. S&P 1500 index group. []Company included in the S&P 500. Company included in the S&P MidCap 400. Company included in the S&P SmallCap 600. #Of the following calendar year.
Current Ratio
Ticker
Company
AIRLINES
ALK
ALGT
DAL
[]
JBLU
SKYW

ALLEGIANT TRAVEL CO
DELTA AIR LINES INC
SKYWEST INC
Debt as a % of
Net Working Capital
Debt / Capital Ratio (%)
Yr. End
2012
2011
2010
2009
2008
2012
2011
2010
2009
2008
2012
2011
2010
2009
2008
DEC
DEC
DEC
DEC
DEC
1.2
2.0
0.6
0.7
2.4
1.1
2.1
0.6
1.2
2.1
1.2
1.3
0.6
1.3
2.4
1.3
1.8
0.8
1.3
2.8
1.1
1.6
0.8
0.9
3.2
31.8
23.7
100.8
50.9
41.8
41.7
26.1
94.9
57.0
45.8
48.7
3.5
82.4
59.0
46.6
62.4
6.6
89.1
61.8
49.0
69.6
13.4
84.4
66.5
48.5
369.1
68.0
NM
NM
174.5
NM
69.5
NM
NM
244.9
553.3
22.0
NM
NM
215.5
451.9
17.1
NM
774.5
225.8
NM
47.2
NM
NM
201.6
DEC
0.9
1.0
1.3
1.3
1.0
22.6
24.8
24.8
30.2
33.8
NM
NM
295.2
487.5
NM

AAMRQ
AMR CORP/DE
PNCLQ
RJET
LCC
DEC
DEC
DEC
DEC
0.8
NA
0.9
1.1
0.8
0.6
0.8
1.0
0.8
0.8
0.9
1.0
0.9
1.1
0.8
0.8
0.6
1.0
1.0
0.8
-817.0
NA
67.2
84.7
-1,638.6
86.9
71.8
96.5
174.3
81.8
68.9
97.9
149.2
82.0
72.8
109.7
148.4
93.5
74.6
116.1
NM
NA
NM
NM
NM
NM
NM
NM
NM
NM
NM
NM
NM
NM
NM
NM
NM
NM
NM
NM
LUV
46
INDUSTRY SURVEYS
Price / Earnings Ratio (High-Low)

Ticker
Company
AIRLINES
ALK
ALGT
DAL
[]
JBLU
SKYW

ALLEGIANT TRAVEL CO
DELTA AIR LINES INC
SKYWEST INC
Yr. End
2012
2011
DEC
DEC
DEC
DEC
DEC
10 19 10 14 14 -
7
12
7
9
6
DEC
19 -
14

AAMRQ
AMR CORP/DE
PNCLQ
RJET
LCC
DEC
DEC
DEC
DEC
LUV
NM - NM
NA - NA
63
41
2010
11 8
21 - 15
13 6
23 - 11
NM - NM
59 -
31
NM - NM
NM - NM
NM - NM
26 9
918 21 21 10 -
4
11
14
13
7
23 -
17
2010
2009
2008
0
49
0
0
16
0
0
0
0
NM
0
22
0
0
9
0
0
NM
0
11
NM
0
NM
NM
7
0.0 4.2 0.0 0.0 2.6 -
0.0
2.6
0.0
0.0
1.1
0.0 0.0 0.0 0.0 1.5 -
0.0
0.0
0.0
0.0
0.9
0.0 2.0 0.0 0.0 1.4 -
0.0
1.3
0.0
0.0
0.9
0.0 0.0 0.0 0.0 2.0 -
0.0
0.0
0.0
0.0
0.8
0.0 0.0 0.0 0.0 1.2 -
0.0
0.0
0.0
0.0
0.5
29
14
0.4 -
0.3
0.3 -
0.1
0.2 -
0.1
0.4 -
0.2
0.3 -
0.1
NM - NM
NM - NM
93
NM - NM
NM
NA
0
0
NM
NM
NM
0
NM
0
NM
0
NM
0
0
NM
NM
NM
0
NM
0.0 0.0 0.0 0.0 -
0.0
0.0
0.0
0.0
0.0 0.0 0.0 0.0 -
0.0
0.0
0.0
0.0
0.0 0.0 0.0 0.0 -
0.0
0.0
0.0
0.0
0.0 0.0 0.0 0.0 -
0.0
0.0
0.0
0.0
0.0 0.0 0.0 0.0 -
0.0
0.0
0.0
0.0
11 4
15 8
NM - NM
32 - 12
13 5
NM - NM
28 9
NM - NM
NM - NM
14 6
38
NM - NM
30
10 4
NM - NM
Dividend Yield (High-Low, %)
2011
2008
91 -
NM - NM
12 6
NM - NM
41
Dividend Payout Ratio (%)

2012
2009
70 -
2012
2011
2010
2009
2008
Earnings per Share ($)

Ticker
Company
AIRLINES
ALK
ALGT
DAL
[]
JBLU
SKYW

ALLEGIANT TRAVEL CO
DELTA AIR LINES INC
SKYWEST INC
Tangible Book Value per Share ($)
2012
2011
2010
2009
2008
2012
2011
2010
2009
2008
DEC
DEC
DEC
DEC
DEC
4.47
4.10
1.20
0.45
1.00
3.40
2.59
1.02
0.31
(0.52)
3.51
3.36
0.71
0.36
1.73
1.70
3.82
(1.50)
0.24
1.50
(1.87)
1.75
(19.08)
(0.34)
1.95
20.19
20.71
(19.50)
6.27
26.64
16.54
18.42
(18.86)
5.79
25.98
15.39
15.67
(16.35)
5.45
25.83
12.25
14.71
(18.33)
5.20
23.89
9.12
11.50
(19.85)
4.61
22.16
DEC
0.56
0.23
0.62
0.13
0.24
8.06
7.45

AAMRQ
AMR CORP/DE
PNCLQ
RJET
LCC
DEC
DEC
DEC
DEC
(5.60)
NA
1.06
3.92
(5.91)
(1.70)
(3.14)
0.44
(1.41)
0.70
(0.38)
3.11
(4.99)
2.33
1.15
(1.54)
(7.98)
(0.27)
2.43
(22.06)
(26.41)
NA
9.24
1.54
(23.88)
2.60
7.73
(2.42)
LUV
Yr. End
8.34 J
(14.63)
4.02
9.68
(2.43)
7.36 J
(13.46)
3.88
10.17
(5.33)
6.69 J
(14.50)
0.86
12.09
(9.20)
Share Price (High-Low, $)

2012
2011
2010
2009
2008
45.15 77.97 12.25 6.32 14.32 -
31.29
47.32
7.83
4.06
6.25
38.57 55.36 13.21 7.13 17.28 -
25.55
38.95
6.41
3.40
10.47
29.80 59.04 14.94 7.60 17.45 -
15.62
37.05
9.60
4.64
11.38
18.24 57.52 12.65 7.74 19.25 -
6.80
32.07
3.51
2.81
8.17
14.87 49.06 18.99 7.33 27.19 -
5.05
15.89
4.00
3.04
10.84
10.61 -
7.76
13.59 -
7.15
14.32 -
10.42
11.78 -
4.95
16.77 -
7.05
0.99 1.85 6.33 14.51 -
0.24
0.01
3.39
4.97
8.89 8.68 7.79 11.56 -
0.20
0.80
2.47
3.96
10.50 8.72 9.58 12.26 -
5.86
4.32
4.48
4.47
12.48 7.74 10.94 9.70 -
2.40
0.97
4.10
1.88
16.49 16.09 22.64 16.44 -
4.00
1.60
6.37
1.45
J-This amount includes intangibles that cannot be identified.
The analysis and opinion set forth in this publication are provided by S&P Capital IQ Equity Research and are prepared separately from any other analytic activity of Standard & Poors.
In this regard, S&P Capital IQ Equity Research has no access to nonpublic information received by other units of Standard & Poors.
The accuracy and completeness of information obtained from third-party sources, and the opinions based on such information, are not guaranteed.
INDUSTRY SURVEYS
47
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Industry Surveys

Current Environment ............................................................................................ 1

Comparative Company Analysis ...................................................................... 45

INQUIRIES & CLIENT RELATIONS

This issue updates the one dated July 2013.

Please see General Disclaimers on the last page of this report.

Topics Covered by Industry Surveys

Financial Services: Diversified

Movies & Entertainment

Foods & Nonalcoholic Beverages

Natural Gas Distribution

Alcoholic Beverages & Tobacco

Oil & Gas: Equipment & Services

Apparel & Footwear:

Healthcare: Life Sciences

Oil & Gas: Production & Marketing

Autos & Auto Parts

Healthcare: Managed Care

Publishing & Advertising

Real Estate Investment Trusts

Broadcasting, Cable & Satellite

Heavy Equipment & Trucks

Computers: Commercial Services

Insurance: Life & Health

Lodging & Gaming

Foods & Beverages: Europe

Healthcare: Products & Supplies

Global Industry Surveys

Oil & Gas: Europe

Food Retail: Europe

S&P Capital IQ Industry Surveys

A SSOCIATE E DITOR : C HARLES M AC V EIGH

S TATISTICIAN : S ALLY K ATHRYN N UTTALL

C LIENT S UPPORT : 1-800-523-4534. ISSN 0196-4666.

AIRLINES / DECEMBER 2013

OIL PRICES HAVE COME DOWN

After peaking at a record high of $147.27 a

AIRLINES / DECEMBER 2013

AIRLINES / DECEMBER 2013

AIRLINES / DECEMBER 2013

AIRLINES ATTEMPTING MORE FARE INCREASES

Airfare hikes are aided by the

AIRLINES / DECEMBER 2013

CAPACITY INCREASES MUTED DUE TO VOLATILE OIL PRICES, ECONOMIC UNCERTAINTY

In 2012, airlines held back on their capacity

AIRLINES / DECEMBER 2013

AIRLINES HIGH CASH BALANCES PROTECT THEM FROM NEXT DOWNTURN

PASSENGER DEMAND STILL STRONG

NEW ANCILLARY FEES

AIRLINES / DECEMBER 2013

GREEN INITIATIVES UNDER WAY

Numerous times in the past few years, airlines

AIRLINES / DECEMBER 2013

NEW TAXES AHEAD

AIRLINES / DECEMBER 2013

IS NEXTGEN ATC ON ITS WAY?

INDUSTRY REVIEW AND OUTLOOK

AIRLINES / DECEMBER 2013

Airline stock performance

AIRLINES / DECEMBER 2013

AIRLINES / DECEMBER 2013

Revenue passenger-miles (bil.)

According to FAA estimates, the number of

Based on carrier revenues, the largest US