DB US Airlines PDF

26 June 2018
Airlines
Deutsche Bank
US Airlines
Research
North America Industry Date

United States
Industrials
US Airlines 26 June 2018
Airlines Special Report
Value Creation Through the Cycle

Michael Linenberg
Research Analyst
+1-212-250-9254
Matt Fallon
Research Associate
+1-212-250-7161
Doug Runte, CFA

Research Analyst
+1-212-250-9319
Value creation through the cycle

Last year marked the sixth consecutive year that US airlines produced returns
(ROIC) that exceeded their cost of capital (WACC). While debt investors have
historically been well compensated for their capital invested in the sector,
commensurate returns for US airline equity investors is a relatively recent
phenomenon. As the US economy enters its 10th year of expansion and industry
peak profits and returns (which occurred in 2015) grow distant in the rearview
mirror, investors are questioning whether airline management are up to the task
of creating value through the cycle. Although 9 of 10 US airlines on our coverage
list experienced a narrowing of their ROIC - WACC spreads in 2017, most were
able to maintain an ample cushion (average 2017 ROIC - WACC spread was 5.4
points), despite incurring higher costs tied to labor, fuel, airports and financing.
We continue to subscribe to the view that the US airline industry is well positioned
structurally and financially to endure a period of earnings volatility regardless of
the cause (e.g., economic, geopolitical and natural disaster-related events, among
others).
Deutsche Bank Securities Inc. Distributed on: 27/06/2018 02:33:11 GMT

Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be
aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider
this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS
ARE LOCATED IN APPENDIX 1. MCI (P) 091/04/2018.
7T2se3r0Ot6kwoPa
US Airlines
Deutsche Bank
Research
North America Industry Date

United States
Industrials
US Airlines 26 June 2018
Airlines Special Report
Value Creation Through the Cycle

Michael Linenberg
Value creation through the cycle
Research Analyst
Last year marked the sixth consecutive year that US airlines produced returns
+1-212-250-9254
(ROIC) that exceeded their cost of capital (WACC). While debt investors have
historically been well compensated for their capital invested in the sector, Matt Fallon
commensurate returns for US airline equity investors is a relatively recent
Research Associate
phenomenon. For 2017, the US airline industry (which we define as the 10
+1-212-250-7161
publicly-traded airlines) produced $20.8 billion of value for equity investors
against $151.0 billion of invested capital resulting in a return on invested capital of Doug Runte, CFA
13.7% (which compares favorably with an estimated industry weighted average Research Analyst
cost of capital of 8.3%). While 2017's returns and value created were nothing +1-212-250-9319
to be ashamed of, they nonetheless reflected the continuation of a downward
trend since the industry peaked in 2015. As the US economy enters its 10th year
of expansion and industry peak profits and returns grow distant in the rearview
mirror, investors are questioning whether airline management are up to the task
of creating value through the cycle. Although 9 of 10 US airlines we follow
experienced a narrowing of their ROIC - WACC spreads in 2017, most were
able to maintain an ample cushion (average 2017 ROIC - WACC spread was 5.4
points), despite incurring higher costs tied to labor, fuel, airports and financing. We use P/E and EV/EBITDAR multiples
as our primary valuation methods. Fuel
We continue to subscribe to the view that the US airline industry is well positioned
volatility is a key risk. For company-specific
structurally and financially to endure a period of earnings volatility regardless of valuation and risks please see Pages 51 – 53.
the cause (e.g., economic, geopolitical and natural disaster-related events, among
others).
Prudent investment critical to achieving required returns
It goes without saying that an airline's financial success is predicated on
making prudent investments. In previous reports, we have indicated that sensible
aircraft capacity management (i.e., the procurement, financing, deployment and
maintenance of these "big ticket" assets) arguably offers one of the greatest
opportunities for airline management to improve their ROIC. However, as US
airlines have become much more adept at generating higher returns from the
capital invested in their fleets (which has been helped by the advent of next-
generation aircraft that are tailor made for the various missions), we believe
investments in other areas such as technology, ancillary businesses as well as
other airlines have the potential to improve airline ROIC as much as judicious
aircraft procurement.
Majority of airline management incentivized to maximize margins/returns

Most US airline boards of directors have embraced the business adage of “what
gets measured gets managed” by linking management compensation to margins
Deutsche Bank Securities Inc.

Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be
aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider
this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS
ARE LOCATED IN APPENDIX 1. MCI (P) 091/04/2018.
26 June 2018
Airlines
US Airlines
and ROIC. This differs from a decade ago when US airline managers deployed
capital (e.g., aircraft and non-aircraft CAPEX, M&A, other investments, etc.)
without a clear sense of its contribution to margins and ROIC. We think it is
incumbent on investors to be aware of the various executive compensation plans;
those where incentives and objectives are appropriately aligned may not only
drive financial outperformance, but share price outperformance as well.
Maintaining a value creation mindset necessary for airlines to re-rate

Following years of restructuring and consolidation, major US airlines have
demonstrated their ability to generate significant profits and free cash flow,
particularly during years of economic expansion. The debt markets and credit
agencies have taken notice with several airline credits now rated at or near
investment grade. However, the equity markets continue to exhibit a great deal
of skepticism toward the sector as evidenced by major US airline P/E valuations
that reflect a 50% discount to the S&P 500 (and consistently profitable, growth-
oriented, low cost carriers currently trading at a 35% discount to the overall
market). We think the sector's steep discount to the broader market is largely a
function of how early-cycle stocks trade during the latter stages of an economic
expansion (i.e., one can't disregard the fact that the current expansion will hit
108 months at the end of June, the second longest on record). Although 2018 is
likely to rank among the top 5 most profitable years for the sector (on an absolute
basis) with projected margins and returns that could be as good (or even better)
than high-quality industrials, the stocks have yet to “shake off” their tumultuous
past with investors. We are of the opinion that in order for airlines to attract
and retain core, long-term investors, the industry must prove its durability and
financial prowess through the cycle. Only then, in our view, will airline investors
be willing to ascribe a higher valuation multiple to future earnings and cash flow.
Page 2 Deutsche Bank Securities Inc.

26 June 2018
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Table Of Contents
Executive Summary............................................................ 4
The purpose of this report................................................................................. 4
The 2017 ROIC – WACC scorecard....................................................................5
ROIC – WACC analysis: global airline perspective...........................................11
A value-creation mindset is necessary for airlines to re-rate........................... 12
How Do You Measure Financial Success?........................18

What gets measured, matters..........................................................................18
ROE vs. ROA vs. ROIC..................................................................................... 19
Comparing ROAs.............................................................................................. 22
Drawbacks of using ROE to measure financial performance...........................22
Comparing ROICs............................................................. 24
How we define ROIC........................................................................................24
Which carriers have the highest ROIC?........................................................... 24
What is an appropriate ROIC?......................................................................... 26
How have US airlines managed to achieve industry-leading ROICs?...............28
Calculating Airline WACCs............................................... 35

Estimating an airline’s cost of capital.............................................................. 35
A Recent History of Shareholder Returns.........................37

What %-age of FCF should be shared with stockholders?.............................. 37
Valuation and Risks.......................................................... 51

Appendix: US Airline 2017 ROIC Analysis........................ 54
Notes.................................................................................................................56
Deutsche Bank Securities Inc. Page 3

26 June 2018
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Executive Summary
The purpose of this report
This report is the sixth in a series focusing on value creation in the US airline
industry. The primary objective of this report is to compare financial returns of
US airlines using an appropriate framework to ascertain which companies are
value creators and those which are not. We posit the thesis that the equities of
airlines that are value creators should enjoy above-average returns. Conversely,
the equities of airlines that fail to achieve adequate returns should underperform
over time. Furthermore, airlines that consistently create value should see their
equities rewarded by the market with better valuations (our valuation matrix is
shown in Figures 12 – 15).
In this year’s report “Value Creation Through the Cycle”, we analyze the
financial results of US air carriers and track airline managements’ value-
enhancing initiatives over the past few years. These include, among others, share
repurchases, dividend payouts, convertible debt repurchases and balance sheet
deleveraging; they would not be possible if management were not constantly
focused on seeking more revenue and cost-efficient ways to run the business
(e.g., conservative aircraft procurement, seat density modification, ancillary
revenue opportunities, etc.).
The net benefit to the industry of the aforementioned actions has been margin
expansion accompanied by a positive spread between return on invested capital
(ROIC) and weighted average cost of capital (WACC) and a significant increase in
free cash flow (FCF). In fact, the majority of US airlines – 9 of 10 airlines in our
coverage universe – produced returns that exceeded their cost of capital for 2017,
which, was similar to a year ago (i.e., 9 of 10 airlines). Although ROIC – WACC
spreads narrowed for almost every airline in our universe (with the exception
of Hawaiian) as industry ROIC declined from 17.1% in 2016 to 13.7% in 2017,
we think it is worth highlighting the fact that current industry returns are a vast
improvement from several years ago when most US airlines failed to achieve a
positive ROIC – WACC spread. Furthermore, the magnitude and consistency of
positive FCF generation has allowed US airlines to fund a number of “shareholder
enhancement initiatives” that, in aggregate dollar amounts, are unprecedented
for the industry and lead all other global regions. In that regard, the International
Air Transport Association (IATA) projects that North American airlines will account
for ~45% of the global airline industry's estimated net profits of $33.8 billion for
2018.
Similar to our previous editions, major topics covered in this report include how
to best measure financial returns, considerations/drawbacks of using traditional
metrics, a comparison of airline returns, and how airline returns compare with
their cost of capital.

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The 2017 ROIC – WACC scorecard

The majority of US airlines – 9 out of our coverage universe of 10 – produced
returns that exceeded their cost of capital for 2017 (see Figure 1), which was
similar to a year ago. Also, almost every US airline experienced a narrowing of its
ROIC – WACC spread (save for Hawaiian) with three airlines (i.e. JetBlue, Spirit and
SkyWest) falling below the three point "cushion" we have historically advocated
for as a means to ensure value creation throughout the economic cycle.
Figure 1: 2017 ROIC - WACC spread for selected US airlines

2017 ROIC 2017 2017 ROIC-WACC 2016 ROIC-WACC
after tax (%) WACC (%) Spread Spread
1 Southwest 16.5 8.9 7.5 11.5

2 Delta 16.2 9.0 7.2 10.8
3 Hawaiian 15.5 8.6 6.9 6.9
4 United Continental 13.8 8.1 5.7 11.4
5 American 13.2 7.7 5.5 8.2
6 Alaska 12.3 7.3 5.0 11.2
7 Allegiant 12.1 7.5 4.6 14.5
8 JetBlue 9.8 8.1 1.7 5.4
9 Spirit 8.1 7.3 0.8 3.5
10 SkyWest 5.9 7.6 (1.7) (0.8)
Source: Company filings and Deutsche Bank Airline Research
Of the 9 publicly-traded US airlines that generated a positive ROIC – WACC gap,

Southwest generated the highest absolute after-tax ROIC (16.5%) and the highest
spread (ROIC – WACC of 7.5 points). Allegiant, which had been the industry leader
(after-tax ROIC of 21.5% and ROIC – WACC spread of 14.5 points in 2016) has
seen sizeable declines in its ROIC metrics as it undergoes a major fleet investment
program (i.e., transitioning away from older MD-80 aircraft to new or almost-new
Airbus narrowbodies).
While lower returns have contributed to contracting ROIC – WACC spreads, it is

also worth noting that most airlines have seen their WACCs increase over the
past several years for three reasons: 1) balance sheet deleveraging has shifted the
debt/equity mix of the capital structure (cost of equity is much higher than cost of
debt, which is still at relatively low levels); 2) a higher risk-free rate; our benchmark
is the 5-year Treasury Note, which was recently yielding 2.75%, 100 basis points
higher than a year ago; and 3) higher after-tax borrowing costs as benchmark
rates have risen. Partially mitigating the higher WACC and more specifically, the
industry's cost of equity, is the fact that airline share prices have become less
volatile over the past year (as evidenced by lower equity betas in 2017). Overall,
the industry's average cost of equity in 2017 was 10.5% versus 10.0% in 2016 and
9.0% in 2015. The trend in the industry's after-tax cost of debt has been mixed:
4.7% in 2017 versus 3.4% in 2016 and 3.7% in 2015.
Not surprisingly, the airlines that incurred the least amount of contraction in their
ROIC – WACC spread in 2017 compared with 2016 were Hawaiian (spread was
flat year-over-year) and SkyWest (spread worsened by less than one point), the
two air carriers whose margins held up the best over the past year (see Figures
2 and 3 below). In fact, SkyWest was the only airline in 2017 that benefited from
operating and pre-tax margin expansion.

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Figure 2: 2017 Operating margin

FY 2017 FY 2016
30%
27%
25% 24%
21%
20%
19% 20%
20% 19%
18% 17%
16%
16%
15% 15%
15% 14% 14% 14%
12%
12%
10% 10%
10%
5%
0%
Figure 3: 2017 Pre-tax margin

FY 2017 FY 2016
30%
25%
25% 24%
20%
20%
18% 18% 18%
18%
16%
16% 16% 15%
15% 14%
13% 13% 13% 12%
10%
10% 9%
8%
7%
5%
0%
Delta, Hawaiian, United and American ranked behind Southwest (in that order on
a ROIC – WACC basis) and all four had ROIC – WACC spreads that ranged between
5.5 and 7.2 points. As alluded to earlier, Allegiant had the largest decline in its
ROIC – WACC spread (from 14.5 points in 2016 to 4.6 points in 2017) primarily
due to a major fleet investment program, which has increased its invested capital
by ~30% to $1.4 billion. We are of the view that an airline should aim for a
ROIC – WACC spread of at least 3 percentage points (based on the industry’s
historical WACC) so that it has sufficient flexibility to pay down debt, reinvest in
the business, and pursue pro-shareholder initiatives. In that regard, 7 of 10 US
airlines “comfortably” exceeded their respective WACCs last year (see Figure 1).
SkyWest is the only airline in our coverage universe that had a negative ROIC
– WACC spread for 2017, which was also the case in 2016. Although SkyWest
has demonstrated strong earnings growth over the past several years driven by a
major fleet restructuring (note margin expansion in Figures 2 and 3 for 2017), the
company’s WACC jumped 120 bps to 7.6% driven by higher cost of debt (4.6%
after tax versus 4.1% a year ago) and higher cost of equity (12.0% versus 11.7%
a year ago). As the company is finishing up a major CAPEX program in 2018, we

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are expecting a major reduction in its debt load over the next several years (net
debt is projected to decline by $1 billion by year-end 2020). As such, we think
SkyWest is still on track to produce a positive ROIC – WACC spread later this
decade. Furthermore, given that the stock was the best performer in the group
in 2017 (see Figure 7 - SKYW shares up 46%) and one of the leading performers
in 2018 thus far (see Figure 4), it appears that the market is more focused on
SkyWest's rate of improvement rather than its absolute results.
Figure 4: Price performance (2018 year-to-date)
WTI 13%
Brent 12%
JETIGCPR 8%
UAL 6%
SPX 2%
SKYW 1%
TRAN -1%
HA -6%
ALGT -8%
DAL -8%
XAL -13%
DJUSAR -14%
JBLU -16%
ALK -16%
SAVE -19%
LUV -22%
AAL -24%
Prices as of June 25, 2018

Note: Non-airline tickers include: XAL = NYSE Arca Airline Index, SPX = S&P 500, JETIGCPR = Gulf Coast jet fuel, WTI = West Texas
Intermediate crude oil, Brent = Brent crude oil, DJUSAR = Dow Jones US Airlines Index, TRAN = Dow Jones Transportation Average
Source: Bloomberg Finance LP, Factset, and Deutsche Bank Airline Research
2017 vs. 2016 ROIC comparison

One of 10 airlines (SkyWest) produced a higher pre-tax ROIC in 2017 compared
with 2016 (see Figure 5).

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Figure 5: Pre-tax return on invested capital for selected US airlines

Change Change Change Change
Company Ticker 2017 (y-o-y) 2016 (y-o-y) 2015 (y-o-y) 2014 (y-o-y) 2013 5 yr avg
SkyWest SKYW 9.3% 0.8 8.5% 0.9 7.6% 2.3 5.3% (1.4) 6.7% 7.5%
Hawaiian HA 23.8% (0.8) 24.6% 6.1 18.5% 7.2 11.3% 1.0 10.3% 17.7%
American AAL 13.3% (2.2) 15.6% (4.6) 20.1% 3.9 16.2% 3.3 13.0% 15.7%
Delta DAL 16.2% (3.5) 19.7% 0.8 18.8% 3.4 15.5% 2.7 12.8% 16.6%
Spirit SAVE 12.9% (4.4) 17.3% (3.2) 20.5% (0.9) 21.4% 0.7 20.7% 18.5%
JetBlue JBLU 15.9% (5.2) 21.0% 0.4 20.6% 10.9 9.7% 1.5 8.2% 15.1%
United Continental UAL 13.9% (5.5) 19.4% (1.7) 21.0% 8.1 12.9% 3.1 9.8% 15.4%
Southwest LUV 25.7% (5.5) 31.3% (3.1) 34.3% 13.9 20.5% 8.0 12.5% 24.9%
Alaska ALK 19.5% (11.3) 30.9% (5.2) 36.1% 9.9 26.2% 7.0 19.2% 26.4%
Allegiant ALGT 19.3% (14.6) 33.9% (4.0) 37.9% 14.2 23.7% (2.7) 26.4% 28.2%
Comparing ROIC on an after-tax basis, Hawaiian and SkyWest produced a higher

ROIC in 2017 compared with 2016 (see Figure 6).
Figure 6: After-tax return on invested capital for selected US airlines

Change Change Change Change
Company Ticker 2017 (y-o-y) 2016 (y-o-y) 2015 (y-o-y) 2014 (y-o-y) 2013 5 yr avg
SkyWest SKYW 5.9% 0.4 5.5% 0.8 4.7% 1.4 3.3% (0.7) 4.0% 4.7%
Hawaiian HA 15.5% 0.2 15.2% 3.8 11.4% 4.5 6.9% 0.7 6.2% 11.0%
American AAL 13.2% (2.3) 15.5% (4.6) 20.1% 3.9 16.2% 3.3 13.0% 15.6%
Spirit SAVE 8.1% (2.8) 10.9% (2.0) 12.9% (0.7) 13.6% 0.7 13.0% 11.7%
Delta DAL 16.2% (3.5) 19.7% 1.0 18.6% 3.3 15.3% 2.6 12.7% 16.5%
Southwest LUV 16.5% (3.3) 19.8% (1.7) 21.5% 8.7 12.8% 5.0 7.8% 15.7%
JetBlue JBLU 9.8% (3.3) 13.1% 0.3 12.8% 6.6 6.2% 1.3 4.9% 9.4%
United Continental UAL 13.8% (5.5) 19.3% (1.6) 21.0% 8.1 12.9% 2.9 10.0% 15.4%
Alaska ALK 12.3% (6.4) 18.7% (4.6) 23.3% 7.0 16.3% 4.3 12.0% 16.5%
Allegiant ALGT 12.1% (9.4) 21.5% (2.5) 24.0% 9.2 14.9% (1.6) 16.5% 17.8%
Not surprisingly, SkyWest was the industry’s best stock in 2017 (as mentioned
above); surprisingly, Hawaiian was the sector’s worst stock in 2017 (see Figure 7).
Our take on that is that one year does not a trend make. In fact, we are of the view
that the equities of airlines that are consistent value creators should enjoy above-
average returns over the long-term. In Figure 8, we compare the 5-year returns
(share price appreciation only) of US airline stocks with the change in their ROIC
– WACC spread over a 5-year period (comparison of 2017 ROIC – WACC spread
to 2013 ROIC – WACC spread).

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Figure 7: Price performance (full-year 2017)
SKYW 46%
LUV 31%
JETIGCPR 29%
SPX 19%
Brent 18%
TRAN 17%
DAL 14%
AAL 11%
WTI 10%
DJUSAR 9%
XAL 5%
JBLU 0%
ALGT -7%
UAL -8%
ALK -17%
SAVE -22%
HA -30%
Note: Non-airline tickers include: XAL = NYSE Arca Airline Index, SPX = S&P 500, JETIGCPR = Gulf Coast jet fuel, WTI = West Texas
Intermediate crude oil, Brent = Brent crude oil, DJUSAR = Dow Jones US Airlines Index, TRAN = Dow Jones Transportation Average
Source: Bloomberg Finance LP, Factset, and Deutsche Bank Airline Research
What the analysis indicates is that airlines that materially improve their ROIC –
WACC spread over time are rewarded via significant share price appreciation.
For example, Southwest Airlines’ ROIC – WACC spread was 0.6 point in 2013; in
2017, it was 7.5 points representing an improvement of 6.9 points over the 2013
– 2017 timeframe (see Figure 9).

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Figure 8: ROIC – WACC 5-year spread vs. 5-year return (2013 - 2017)
700%
600% R² = 0.6849
5 year stock price appreciation
LUV
500% HA
400%
DAL
SKYW
300% JBLU
AAL
ALK
200% UAL
SAVE
100% ALGT
0%
-8 -6 -4 -2 0 2 4 6 8
ROIC-WACC 5 year spread (percentage points)
*AAL starting price is that of predecessor company US Airways on January 1, 2013
From Figure 8 above, it appears there is indeed a meaningful positive correlation

(R-squared of 0.68) between the change in an airline’s ROIC – WACC spread and
the change in its share price over a multi-year period.

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Figure 9: ROIC – WACC spread (2013 – 2017)

Change 5 Year
ROIC-WACC spread (pp.) 2017 - 2013 2017 2016 2015 2014 2013 Avg.
Southwest 6.9 7.5 11.5 14.0 5.2 0.6 7.8
Hawaiian 6.2 6.9 6.9 4.3 0.9 0.7 3.9
United Continental 3.4 5.7 11.4 14.0 5.6 2.3 7.8
JetBlue 3.4 1.7 5.4 5.5 (1.5) (1.6) 1.9
Delta 2.5 7.2 10.8 10.9 7.5 4.7 8.2
American 1.4 5.5 8.2 12.7 7.2 4.1 7.5
Alaska 0.6 5.0 11.2 15.6 8.5 4.4 8.9
SkyWest (0.8) (1.7) (0.8) (0.3) (1.9) (0.9) (1.1)
Spirit (4.3) 0.8 3.5 6.0 5.1 5.1 4.1
Allegiant (5.7) 4.6 14.5 17.9 9.4 10.3 11.3
ROIC – WACC analysis: global airline perspective

A ROIC – WACC analysis of the US airline industry would not be complete without
considering non-US competitors, many of which are being managed with very
little regard to producing returns that exceed their cost of capital (see Figure 10).
More recently, we have seen an improvement in value creation among the world's
airlines; however, it should be noted that the US airline industry is a meaningful
driver of this improvement (e.g., as stated earlier, North American carriers are
projected to produce ~45% of global airline net profits for 2018). Prior to 2015,
the global airline industry, in aggregate, had not earned a ROIC greater than its
WACC in decades. In 2015, the global airline produced a ROIC – WACC spread
of 3.0 points, in 2016 it was 3.0 points, 2.9 points in 2017 and projected to be
0.9 points in 2018. While a positive spread is an accomplishment given the global
airline industry's history of subpar returns, it is nonetheless, at best on the cusp
of the level of returns typically required by investors in order to be adequately
compensated for risk incurred.
Figure 10: Global airlines ROIC vs. WACC

12%
Forecast
Cost of Capital
10%
(WACC)
8%
6%
Return on Capital
(ROIC)
4%
2%
0%
Source: IATA and Deutsche Bank Airline Research

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Part of the problem, as we see it, is that of the 290 airlines (comprising 82%
of global airline traffic) that are represented by the International Air Transport
Association (IATA – the global airline industry’s trade association), approximately
70 or about one-quarter are publicly-traded companies with management teams
beholden to a Board of Directors that represent the fiduciary interests of their
public shareholders. As such, the majority of the air carriers that make up the IATA
universe are private, government-owned/sponsored/subsidized enterprises that
are mandated to "fly the flag" rather than produce profits and returns in excess
of the company's cost of capital. In other words, the management running these
airlines have one primary objective (as evidenced by their actions), which is to link
their country or region to the rest of the world with little or no regard to sustainable
profitability let alone being good stewards of owners’ capital (n.b., a 2015 IATA
analysis identified 48 global airlines with a positive ROIC – WACC spread; 44%
were North America-based airlines, 25% were Asia-based, and 19% were Europe-
based). As a consequence, these state-sponsored airlines tend to be a source of
excess capacity that can, at times, also come in the form of other private airlines
that are financially supported by these carriers.
Notwithstanding the concerns highlighted above, the global industry is

performing better than it has in years as evidenced by three consecutive years
of airlines producing returns that exceed their cost of capital accompanied by
record net profits: $36.0 billion in 2015, $34.2 billion in 2016, $38.0 billion in 2017
and projected to earn $33.8 billion in 2018. But even in the context of four years
of record results, IATA is clear in its latest forecast with a warning that "...$33.8
billion net profit, while exceptional for the airline industry, is only a little higher
than a 'normal' return for [investors] risking their capital."
A value-creation mindset is necessary for airlines to re-rate

Following years of restructuring and consolidation, major US airlines have
demonstrated their ability to generate significant profits and free cash flow,
particularly during years of economic expansion. The debt markets and credit
agencies have taken notice with several airline credits now rated at or near
investment grade. However, the equity markets continue to exhibit a great deal
of skepticism toward the sector as evidenced by major US airline P/E valuations
that reflect a 50% discount to the S&P 500 (and consistently profitable, growth-
oriented, low-cost carriers currently trading at a 35% discount to the overall
market). We think the sector's steep discount to the broader market is largely a
function of how early-cycle stocks trade during the latter stages of an economic
expansion (i.e., one can't disregard the fact that the current expansion will hit
108 months at the end of June, the second longest on record). Although 2018 is
likely to rank among the top 5 most profitable years for the sector (on an absolute
basis) with projected margins and returns that could be as good (or even better)
than high-quality industrials, the stocks have yet to “shake off” their tumultuous
past with investors.
As shown in Figure 11 below, which highlights the operating margin history of

Delta and Southwest, recessions typically meant negative operating margins for
Delta, whereas Southwest managed to remain “in the black” (that has been the
case since the industry was deregulated in 1978). However, over the past eight
years, Delta and Southwest’s margin performance have been in lockstep. What
investors are now pondering is how Delta’s (as well as other major airlines’)
margins will fare in the next recession. If airline management teams continue to
maintain a value-creation mindset, then we believe Delta’s operating margins in

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a recession could look more like Southwest’s rather than what we have observed
in prior economic downturns.
Figure 11: Operating Margin History - 1960-2022E

30%
Delta Southwest
25%
20%
15%
10%
5%
0%
-5%
-10%
-15%
Note: Underlying operating profit for Delta and Southwest exclude special items
Source: Company annual reports and Deutsche Bank Airline Research
We are of the opinion that in order for airlines to attract and retain core, long-term
investors, the industry must prove its durability and financial prowess through the
cycle. Only then, in our view, will airline investors be willing to ascribe a higher
valuation multiple to future earnings and cash flow as they will be perceived as
being less volatile and more certain.

Page 14
Figure 12: Airline Stock Price Valuation Matrix
US Airlines
Airlines
26 June 2018
12 Month Shares Market Div. Price/ EV/ 5-Year P/E to Debt/
Price Price Implied Out. Value YTD 52 Week Yield Price/Earnings (1) Price/Cash Flow Price/ EV/EBITDAR Sales Sales EPS Growth Cap (3)
Company Ticker 6/25/18 Target Return (mm) (mm) Change High Low 2017 2017 2018E 2019E 2017 2018E 2019E Book 2017 2018E 2019E 2018E 2018E Growth "PEG" 12/31/2017*
LEGACY AIRLINES
Major Networks
Alaska ALK-US $61.74 $80.00 30% 123.1 $7,598 -16% $95.75 $57.53 2.1% 9.4x 13.4x 9.3x 6.4x 7.1x 5.4x 2.0x 5.4x 6.9x 5.8x 0.92x 1.33x --- --- 64.9%
American AAL-US 39.68 60.00 51% 475.5 18,868 -24% $59.08 $39.29 1.0% 7.5x 7.2x 6.5x 3.1x 3.7x 3.4x NM 5.9x 6.4x 6.1x 0.42x 1.18x --- --- 91.2%
Delta DAL-US 51.31 64.00 25% 707.2 36,286 -8% $60.79 $44.59 2.4% 12.2x 8.9x 7.9x 4.9x 4.8x 4.4x 2.6x 5.6x 5.6x 5.2x 0.83x 1.17x --- --- 56.5%
Hawaiian HA-US 37.35 45.00 20% 51.2 1,911 -6% $48.65 $32.40 1.3% 6.7x 8.0x 7.5x 4.9x 5.3x 5.0x 2.0x 4.3x 5.1x 4.9x 0.67x 1.18x 5% 1.6x 68.2%
United Continental UAL-US 71.33 81.00 14% 287.0 20,470 6% $81.39 $56.51 --- 10.4x 8.8x 8.0x 4.3x 4.0x 3.7x NM 5.7x 6.4x 5.7x 0.50x 1.13x --- --- 76.8%
Average 28% -10% 9.2x 9.3x 7.8x 4.7x 5.0x 4.4x 2.2x 5.4x 6.1x 5.5x 0.67x 1.20x 1.0% 1.6x 71.5%
GROWTH AIRLINES
Low Cost Carriers
Allegiant ALGT-US $141.85 $180.00 27% 16.1 $2,279 -8% $181.45 $111.54 2.0% 14.6x 12.9x 10.5x 8.2x 7.7x 6.5x 4.2x 7.6x 7.6x 6.4x 1.34x 1.83x 10% 1.3x 70.3%
JetBlue JBLU-US 18.79 25.00 33% 321.0 6,032 -16% $24.13 $18.05 --- 11.1x 10.2x 7.8x 6.2x 5.5x 4.7x 1.2x 5.2x 5.5x 4.8x 0.78x 1.17x 8% 1.3x 44.3%
Southwest LUV-US 51.28 66.00 29% 588.6 30,181 -22% $66.99 $49.76 1.2% 14.6x 11.7x 9.9x 9.0x 7.2x 6.2x 2.9x 6.7x 6.6x 5.9x 1.36x 1.68x 6% 1.9x 49.9%
Spirit SAVE-US 36.33 54.00 49% 68.2 2,478 -19% $54.10 $30.32 --- 11.1x 10.7x 9.3x 6.9x 6.1x 5.3x 1.4x 6.1x 6.0x 5.7x 0.77x 1.58x 10% 1.1x 66.7%
Average 34% -16% 12.9x 11.4x 9.4x 7.6x 6.6x 5.7x 2.4x 6.4x 6.4x 5.7x 1.06x 1.57x 9% 1.4x 57.8%
Regional Airlines
SkyWest SKYW-US $53.85 $71.00 32% 51.8 2,789 1% $60.65 $31.75 0.7% 15.7x 11.7x 11.0x 8.5x 4.6x 4.3x 1.6x 7.0x 6.7x 6.3x 0.86x 2.01x 5% 2.3x 70.5%
Average 1% 15.7x 11.7x 11.0x 8.5x 4.6x 4.3x 1.6x 7.0x 6.7x 6.3x 0.86x 2.01x 5% 2.3x 70.5%
Emerging Market
Aeromexico AEROMEX-MX Ps$25.00 Ps$29.00 16% 660.2 Ps$16,504 -13% $38.30 $22.80 --- NM 17.3x 6.7x 5.0x 3.1x 2.3x 1.3x 7.0x 5.9x 5.4x 0.24x 1.31x 10% NM 87.0%
Avianca AVH-US $6.86 $11.00 60% 125.2 $859 -15% $9.76 $6.40 2.8% 3.5x 5.3x 3.6x 1.5x 1.8x 1.5x 0.6x 5.7x 6.5x 5.5x 0.18x 1.28x 10% 0.5x 80.6%
Azul (1) AZUL-US 17.54 37.00 111% 109.3 1,917 -26% $35.05 $17.04 --- 11.9x 11.0x 9.0x 22.5x 21.9x 17.5x 2.2x 6.2x 8.6x 5.6x 0.69x 1.72x 10% NM 80.8%
Copa CPA-US 95.30 150.00 57% 53.4 5,086 -29% $141.34 $94.65 2.6% 11.0x 9.5x 9.1x 7.6x 6.8x 6.2x 2.4x 8.4x 7.6x 7.1x 1.77x 2.20x 10% 1.0x 50.6%
GOL (2) GOL-US 5.62 14.00 149% 173.9 977 -36% $14.49 $4.42 1.0% NM 12.6x 6.6x 2.3x 1.6x 1.2x NM 7.9x 8.0x 5.4x 0.29x 1.37x 10% 1.3x 128.6%
LATAM LTM-US 10.50 17.00 62% 606.4 6,367 -24% $17.39 $10.37 2.4% 41.0x 12.3x 7.5x 4.9x 3.6x 2.8x 1.5x 7.6x 7.7x 5.3x 0.58x 1.65x 10% 1.2x 76.4%
Volaris VLRS-US 5.31 8.00 51% 101.2 537 -34% $16.00 $5.07 --- NM NM 6.6x NM NM 4.4x 1.0x 8.0x 8.1x 5.5x 0.37x 1.45x 10% NM 81.1%
Average 72% -25% 16.8x 11.3x 7.0x 7.3x 6.5x 5.2x 1.5x 7.3x 7.5x 5.7x 0.59x 1.57x 10% 1.1x 83.6%
Source: Company filings, Factset, and Deutsche Bank Airline Research

Figure 13: Airline Stock Price Drivers
US Airlines
Airlines
26 June 2018
Book
Cash Flow CF per Share EBITDAR Sales Value
Price 2018 EPS (1) EPS Growth per Share Growth EBITDAR Growth Sales Growth per Share
Company Ticker Rating 6/25/18 Exchange FYE Div. 2017 2018E 2019E 2018E 2019E 2017 2018E 2019E 2018E 2019E 2017 2018E 2019E 2018E 2019E 2017 2018E 2019E 2018E 2019E 12/31/2017*
LEGACY AIRLINES
Major Networks
ALK.N Alaska ALK-US Buy $61.74 NYSE Dec 1.28 $6.58 $4.60 $6.65 -30% 45% $9.58 $8.70 $11.40 -9% 31% $2,381 $1,928 $2,306 -19% 20% $7,924 $8,294 $8,906 5% 7% $30.24
AMR.NAmerican AAL-US Buy 39.68 OTC Dec 0.40 5.28 5.50 6.15 4% 12% 12.82 10.80 11.70 -16% 8% 9,145 8,812 9,325 -4% 6% 42,623 45,352 46,767 6% 3% 8.26
DAL.NDelta DAL-US Buy 51.31 NYSE Dec 1.22 4.21 5.75 6.50 36% 13% 10.40 10.60 11.60 2% 9% 9,185 9,350 9,984 2% 7% 41,138 43,867 45,213 7% 3% 19.67
HA.OQHawaiian HA-US Hold 37.35 OTC Dec 0.48 5.58 4.65 5.00 -17% 7% 7.70 7.05 7.40 -8% 5% 820 722 764 -12% 6% 2,688 2,856 3,004 6% 5% 18.88
UAL.NUnited Continental UAL-US Buy 71.33 NYSE Dec --- 6.84 8.10 8.90 18% 10% 16.48 18.00 19.50 9% 8% 8,015 7,715 8,185 -4% 6% 37,742 40,721 43,078 8% 6% 30.69
Total/Average 3% 17% -4% 12% $29,546 $28,527 $30,564 -3% 7% $132,114 $141,090 $146,968 7% 4%
GROWTH AIRLINES
Low Cost Carriers
ALGT.OAllegiant ALGT-US Buy $141.85 OTC Dec 2.80 $9.71 $11.00 $13.50 13% 23% $17.31 $18.50 $21.75 7% 18% $414 $415 $492 0% 18% $1,511 $1,703 $1,907 13% 12% $34.11
JBLU.OJetBlue JBLU-US Buy 18.79 OTC Dec --- 1.69 1.85 2.40 9% 30% 3.04 3.40 4.00 12% 18% 1,762 1,696 1,999 -4% 18% 7,012 7,724 8,460 10% 10% 15.06
LUV.NSouthwest LUV-US Buy 51.28 NYSE Dec 0.64 3.51 4.40 5.20 25% 18% 5.68 7.15 8.25 26% 15% 5,553 5,632 6,422 1% 14% 21,146 22,113 23,930 5% 8% 17.72
Spirit SAVE-US Buy 36.33 NYSE Dec --- 3.26 3.40 3.90 4% 15% 5.28 6.00 6.90 14% 15% 857 838 907 -2% 8% 2,644 3,199 3,641 21% 14% 26.06
Total/Average 13% 21% 15% 16% $8,586 $8,581 $9,820 0% 14% $32,313 $34,739 $37,938 8% 9%
Regional Airlines
SKYW SkyWest SKYW-US Buy $53.85 OTC Dec 0.40 $3.43 $4.60 $4.90 34% 7% $6.35 $11.80 $12.60 NM 7% $902 $905 $969 0% 7% $3,186 $3,243 $3,442 2% 6% $33.88
Total/Average 34% 7% NM 7% $902 $905 $969 0% 7% $3,186 $3,243 $3,442 2% 6%
Emerging Market
Aeromexico AEROMEX-MX Hold Ps$25.00 BOLSA Dec --- (Ps$0.87) Ps$1.45 Ps$3.75 NM NM Ps$5.00 Ps$8.00 Ps$10.90 60% 36% Ps$13,426 Ps$16,018 Ps$19,341 19% 21% Ps$61,429 Ps$69,329 Ps$76,816 13% 11% Ps$19.68
Avianca AVH-US Buy $6.86 NYSE Dec 0.20 $1.96 $1.30 $1.90 -33% 46% $4.46 $3.80 $4.50 -15% 18% $1,019 $1,019 $1,169 0% 15% $4,442 $4,869 $5,353 10% 10% $10.70
Azul AZUL-US Buy 17.54 NYSE Dec --- 1.48 1.60 1.95 8% 22% 0.78 0.80 1.00 3% 25% 810 864 1,019 7% 18% 2,434 2,771 3,290 14% 19% 7.98
Copa CPA-US Buy 95.30 NYSE Dec 2.52 8.69 10.00 10.50 15% 5% 12.56 14.10 15.25 12% 8% 748 830 909 11% 10% 2,526 2,878 3,193 14% 11% 39.56
GOL.NGOL (1) GOL-US Buy 5.62 NYSE Dec 0.06 0.07 0.45 0.85 NM NM 2.44 3.50 4.70 43% 34% 596 768 895 29% 17% 3,295 3,415 3,782 4% 11% (5.44)
LFL.N LATAM LTM-US Buy 10.50 NYSE Dec 0.26 0.26 0.85 1.40 NM 64% 2.14 2.90 3.70 36% 28% 2,420 2,875 3,433 19% 19% 10,164 11,034 11,725 9% 6% 6.90
Volaris VLRS-US Hold 5.31 NYSE Dec --- (0.34) (0.40) 0.80 17% NM (0.05) (0.10) 1.20 NM NM 300 327 547 9% 67% 1,261 1,465 1,835 16% 25% 5.11
Total/Average 2% 34% 23% 25% $6,739 $7,533 $9,026 12% 20% $27,470 $30,212 $33,365 10% 10%

Page 15
Page 16
Figure 14: Airline Enterprise Value to 2018E EBITDAR
US Airlines
Airlines
26 June 2018
Equity Capitalized Cash &
Price Shares Market Preferred Minority Long-Term Short-Term Operating Marketable Enterprise Pretax Interest Aircraft Other 2018E EV/
Company Ticker 6/25/2018 Out. Value Equity Interest Debt Debt Leases Securities Value Income Expense D&A Rentals Rentals EBITDAR EBITDAR
LEGACY AIRLINES
Major Networks
Alaska ALK-US $61.74 x 123.1 = $7,598 + $0 + $0 + $2,262 + $307 + $4,740 - $1,621 = $13,286 $758 + $92 + $401 + $298 + $379 = $1,928 6.89x
American AAL-US 39.68 x 475.5 = 18,868 + 0 + 0 + 22,511 + 2,554 + 17,588 - 5,384 = 56,137 3,469 + 1,073 + 1,758 + 1,245 + 1,268 = 8,812 6.37x
Delta DAL-US 51.31 x 707.2 = 36,286 + 0 + 0 + 6,592 + 2,242 + 9,465 - 2,639 = 51,946 5,270 + 405 + 2,324 + 396 + 956 = 9,350 5.56x
Hawaiian HA-US 37.35 x 51.2 = 1,911 + 0 + 0 + 511 + 59 + 1,651 - 461 = 3,672 331 + 25 + 129 + 148 + 88 = 722 5.09x
United Continental UAL-US 84.00 x 287.0 = 24,106 + 0 + 0 + 12,699 + 1,693 + 14,736 - 3,907 = 49,327 2,845 + 557 + 2,208 + 569 + 1,536 = 7,715 6.39x
Average 6.06x
GROWTH AIRLINES
Low Cost Carriers
Allegiant ALGT-US $141.85 x 16.1 = $2,279 + $0 + $0 + $950 + $215 + $126 - $423 = $3,147 $223 + $55 + $119 + $1 + $17 = $415 7.58x
JetBlue JBLU-US 18.79 x 321.0 = 6,032 + 0 + 0 + 1,444 + 196 + 2,350 - 693 = 9,329 779 + 95 + 486 + 106 + 230 = 1,696 5.50x
Southwest LUV-US 51.28 x 588.6 = 30,181 + 0 + 0 + 3,320 + 348 + 6,699 - 3,273 = 37,275 3,368 + 89 + 1,218 + 160 + 797 = 5,632 6.62x
Spirit SAVE-US 36.33 x 68.2 = 2,478 + 0 + 0 + 1,387 + 0 + 1,976 - 801 = 5,040 305 + 70 + 180 + 182 + 100 = 838 6.01x
Average 6.43x
Regional Airlines
SkyWest SKYW-US $53.85 x 51.8 = $2,789 + $0 + $0 + $2,377 + $310 + $1,260 - $685 = $6,050 $320 + $100 + $305 + $180 + $0 = $905 6.69x
Average 6.69x
Emerging Market
Aeromexico AEROMEX-MX Ps$25.00 x 660.2 = Ps$16,504 + Ps$0 + Ps$0 + Ps$26,988 + Ps$7,377 + Ps$53,959 - Ps$9,829 = Ps$94,999 Ps$1,487 + Ps$2,538 + Ps$4,284 + Ps$7,708 + Ps$0 = Ps$16,018 5.93x
Avianca AVH-US $11.00 x 125.2 = $1,377 + $0 + ($76) + $3,180 + $572 + $2,129 - $514 = $6,667 $200 + $200 + $315 + $304 + $0 = $1,019 6.54x
Azul (1) AZUL-US $37.00 x 109.3 = 4,045 + 0 + 0 + 915 + 178 + 2,834 - 563 = 7,408 241 + 116 + 102 + 405 + 0 = 864 8.57x
Copa CPA-US 95.30 x 53.4 = 5,086 + 0 + 0 + 927 + 298 + 956 - 944 = 6,324 475 + 44 + 174 + 137 + 0 = 830 7.62x
GOL GOL-US 14.00 x 173.9 = 2,434 + 0 + 111 + 1,830 + 358 + 1,989 - 610 = 6,111 108 + 212 + 163 + 284 + 0 = 768 7.96x
LATAM LTM-US 17.00 x 606.4 = 10,309 + 0 + 89 + 6,797 + 1,840 + 4,793 - 1,662 = 22,164 792 + 391 + 1,008 + 566 + 119 = 2,875 7.71x
Volaris VLRS-US 5.31 x 101.2 = 537 + 0 + 0 + 55 + 0 + 2,410 - 354 = 2,649 (59) + 7 + 34 + 344 + 0 = 327 8.10x
Average 7.49x

Figure 15: Airline Enterprise Value to 2019E EBITDAR
US Airlines
Airlines
26 June 2018
Equity Capitalized Cash &
Price Shares Market Preferred Minority Long-Term Short-Term Operating Marketable Enterprise Pretax Interest Aircraft Other 2019E EV/
Company Ticker 6/25/2018 Out. Value Equity Interest Debt Debt Leases Securities Value Income Expense D&A Rentals Rentals EBITDAR EBITDAR
LEGACY AIRLINES
Major Networks
Alaska ALK-US $61.74 x 123.1 = $7,598 + $0 + $0 + $2,262 + $307 + $4,912 - $1,621 = $13,457 $1,097 + $89 + $419 + $309 + $393 = $2,306 5.84x
American AAL-US 39.68 x 475.5 = 18,868 + 0 + 0 + 22,511 + 2,554 + 18,488 - 5,384 = 57,038 3,810 + 1,090 + 1,784 + 1,303 + 1,338 = 9,325 6.12x
Delta DAL-US 51.31 x 707.2 = 36,286 + 0 + 0 + 6,592 + 2,242 + 9,218 - 2,639 = 51,699 5,964 + 365 + 2,339 + 372 + 945 = 9,984 5.18x
Hawaiian HA-US 37.35 x 51.2 = 1,911 + 0 + 0 + 511 + 59 + 1,730 - 461 = 3,751 356 + 30 + 130 + 159 + 88 = 764 4.91x
United Continental UAL-US 71.33 x 287.0 = 20,470 + 0 + 0 + 12,699 + 1,693 + 15,434 - 3,907 = 46,389 3,172 + 530 + 2,278 + 600 + 1,605 = 8,185 5.67x
Average 5.54x
GROWTH AIRLINES
Low Cost Carriers
Allegiant ALGT-US $141.85 x 16.1 = $2,279 + $0 + $0 + $950 + $215 + $137 - $423 = $3,157 $281 + $60 + $131 + $0 + $19 = $492 6.42x
JetBlue JBLU-US 18.79 x 321.0 = 6,032 + 0 + 0 + 1,444 + 196 + 2,554 - 693 = 9,533 1,024 + 100 + 510 + 112 + 253 = 1,999 4.77x
Southwest LUV-US 51.28 x 588.6 = 30,181 + 0 + 0 + 3,320 + 348 + 7,089 - 3,273 = 37,665 3,981 + 90 + 1,338 + 167 + 845 = 6,422 5.87x
Spirit SAVE-US 36.33 x 68.2 = 2,478 + 0 + 0 + 1,387 + 0 + 2,127 - 801 = 5,192 350 + 48 + 205 + 205 + 99 = 907 5.72x
Average 5.69x
Regional Airlines
SkyWest SKYW-US $53.85 x 51.8 = $2,789 + $0 + $0 + $2,377 + $310 + $1,339 - $685 = $6,130 $346 + $108 + $323 + $191 + $0 = $969 6.32x
Average 6.32x
Emerging Market
Aeromexico AEROMEX-MX Ps$25.00 x 660.2 = Ps$16,504 + Ps$0 + Ps$0 + Ps$26,988 + Ps$7,377 + Ps$63,679 - Ps$9,829 = Ps$104,719 Ps$3,485 + Ps$2,225 + Ps$4,534 + Ps$9,097 + Ps$0 = Ps$19,341 5.41x
Avianca AVH-US $6.86 x 125.2 = $859 + $0 + ($76) + $3,180 + $572 + $2,417 - $514 = $6,437 $290 + $205 + $329 + $345 + $0 = $1,169 5.51x
Azul (1) AZUL-US $17.54 x 109.3 = 1,917 + 0 + 0 + 915 + 178 + 3,258 - 563 = 5,706 302 + 132 + 119 + 465 + 0 = 1,019 5.60x
Copa CPA-US 95.30 x 53.4 = 5,086 + 0 + 0 + 927 + 298 + 1,094 - 944 = 6,461 501 + 50 + 202 + 156 + 0 = 909 7.11x
GOL GOL-US 5.62 x 173.9 = 977 + 0 + 111 + 1,830 + 358 + 2,140 - 610 = 4,805 204 + 206 + 179 + 306 + 0 = 895 5.37x
LATAM LTM-US 10.50 x 606.4 = 6,367 + 0 + 89 + 6,797 + 1,840 + 4,926 - 1,662 = 18,356 1,304 + 405 + 1,021 + 586 + 117 = 3,433 5.35x
Volaris VLRS-US 5.31 x 101.2 = 537 + 0 + 0 + 55 + 0 + 2,745 - 354 = 2,983 115 + 3 + 38 + 392 + 0 = 547 5.45x
Average 5.69x

Page 17
26 June 2018
Airlines
US Airlines
How Do You Measure

Financial Success?
What gets measured, matters
The tried-and-true business adage “What gets measured gets managed”
promulgated by the late Peter Drucker, a leading scholar in the field of
management theory and practice, or more succinctly “What gets measured,
matters” has long been an integral aspect of airline operations. Airlines are large,
logistically complex networks manned by thousands (or even tens of thousands)
of employees that require sophisticated operation control centers that oversee a
vast number of aircraft and land-based assets with the objective to safely and
reliably service hundreds of thousands of passengers (and their bags) every day.
Because of all of the moving pieces and how critically important it is for an
airline to run smoothly, management monitor, track, sort, and tabulate reams of
operational data to ensure the utmost in reliability. This is such a critical part of
what makes an airline successful that we were not surprised to learn that most
publicly-traded airlines directly link a portion of management compensation to
operational reliability (e.g., on-time performance, completion factor, etc.). So with
respect to airline operations, what gets measured does matter not only for the
operational success (and to some extent, financial success) of an airline, but also
for determining year-end bonuses for senior airline management.
We believe that linking a portion of senior management compensation to

operational reliability is appropriate and can produce the desired operational
results. However, historically very few airline managers have been compensated
based on returns tied to the capital invested in their businesses. In the past,
the most prevalent financial metric used for determining upwards of 30% of
management compensation under many airlines’ short-term incentive plans
was pre-tax profit. As long as a certain level of pre-tax profit was achieved,
management would be taken care of at year-end. For an asset-intensive and
capital-intensive business that had suffered time and again from excess supply
and consistently failed to produce adequate returns (see Figure 10), it did not
make sense for only a few airline management teams to have compensation
schemes tied to commonly used return metrics such as ROIC or ROCE (return
on capital employed) or CROCI (cash return on capital invested). While pre-tax
and net profits are important financial indicators, we have observed in previous
cycles that profitability does not necessarily translate into growing shareholder
wealth as some airlines’ ROICs failed to keep pace with their WACCs (i.e., a
negative ROIC – WACC spread). Positive pre-tax and net margins may boost share
price performance in the near-term, but ultimately they are overwhelmed by the
gravitational pull of a negative ROIC – WACC spread (see Figure 8). Over the past
few years, it appears that many US airline management teams and boards of
directors have evolved to fully appreciate this issue, and now most carriers have
aligned some portion of executive compensation to a ROIC-type metric.

26 June 2018
Airlines
US Airlines
ROE vs. ROA vs. ROIC

The ROICs of the 10 US airlines that are the subject of this report range from
a high of 16.5% to a low of 5.9% (on an after-tax basis). Why do some airlines
generate much better returns than others? Superficially, some opine that low-cost
carriers (LCCs) have superior returns due to their materially lower costs (after all,
isn’t the airline business the same as any other commodity business?). Others
may assume that more growth-oriented air carriers produce leading ROICs due
to their exposure to regions/passenger segments where airline travel is growing
by leaps and bounds. And others may believe that old line legacy carriers are
likely bringing up the rear when it comes to ROIC rankings. Unfortunately, it isn’t
that simple, and one of the objectives of this report is to dispel some of those
preconceived notions.
In order to better understand what drives each company’s ROIC, we thought it

made sense to analyze other commonly-used return metrics that to some extent
are the building blocks underlying return on invested capital. The two metrics
that we think are helpful for investors to better understand why some airlines are
better stewards of capital than others are return on equity (ROE) and return on
assets (ROA).
Return on equity (ROE) is one of the most commonly used financial metrics by
investors and management alike because it measures how efficiently a company
utilizes owners’ capital. Usually expressed as a percentage, ROE reflects a
company’s earnings per dollar of invested equity capital.
ROE can be restated in terms of its three underlying components as follows (this
exercise is also known as a DuPont analysis - see Figure 20): ROE = Profit Margin
x Asset Turnover x Financial Leverage where Profit Margin equals a company’s
earnings per dollar of sales; Asset Turnover equals the sales generated from each
dollar of assets utilized; and Financial Leverage equals the amount of debt used to
finance the assets. The elegance of this analysis is that it shows how ROE captures
a company’s income statement as well as the left and right sides of its balance
sheet. For the most part, increasing one or all of these ratios will result in a higher
ROE. If we were to exclude the Financial Leverage component from the equation,
the end result would be a company’s return on assets (ROA). Unlike ROE, which
measures profit as a percent of shareholders’ equity, ROA measures profit as a
percent of total assets. Another way to think about ROA is that it measures how
efficiently a company allocates and utilizes its assets.

26 June 2018
Airlines
US Airlines
Figure 16: 2017 ROE* for selected US airlines Figure 17: 2016 ROE* for select US airlines
70% 66.1% 90% 83.9%
60% 80%
70%
50%
60%
40%
50% 46.4%
30.8% 41.2%
28.9%
30% 40%
23.3% 22.0% 21.9%
33.0% 32.8% 31.1%
20.3% 28.1%
20% 30%
12.7% 20.9% 18.7%
11.5% 10.4% 20%
10% 10.6%
10%
0%
0%
*Net income used for calculation is pro forma to exclude special items *Net income used for calculation is pro forma to exclude special items
Source: Company filings and Deutsche Bank Airline Research Source: Company filings and Deutsche Bank Airline Research
In Figures 16 and 17 above, we compare the ROEs of all of the airlines. In Figure
20 on the following page, we have broken out the constituent parts of ROE for 10
of the US airlines that make up the Deutsche Bank coverage universe.
There were two issues that we addressed given the peculiarities of the airline
industry. First, in light of the industry’s track record of significant losses, some
airlines either do not have positive equity or very depressed shareholders’ equity.
Second, many airlines utilize leased aircraft (in addition to owned aircraft), which
are not accounted for as assets on the left side of the balance sheet nor is
there any underlying debt on the right side (n.b., this will change under the
new accounting rules IFRS 16, which will mandate that leases be visible on the
balance sheet effective January 1, 2019). This has the effect of boosting ROAs
and understating financial leverage. To adjust for the first issue, we calculated an
alternative ROE using market value of equity as a proxy for shareholders’ equity.
To address the second issue, we capitalized the aircraft rents at 7x and added
them to assets. Figures 18 and 19 below reflect ROE adjusted for equity market
value and aircraft leases.
Figure 18: Adjusted 2017 ROE* for selected US airlines Figure 19: Adjusted 2016 ROE* for selected US airlines
16% 14% 13.1%
14.0% 12.4%
14% 12% 11.1%
10.3%
12%
10.2% 10% 9.2%
10.0%
10% 8.3% 8.0%
9.0% 7.7% 7.7%
8% 7.3%
8% 7.6% 7.5% 7.3%
6.6% 6.4% 6%
6% 5.4%
4%
4%
2% 2%
0% 0%
*Net income used for calculation is pro forma to exclude special items *Net income used for calculation is pro forma to exclude special items
Source: Company filings and Deutsche Bank Airline Research Source: Company filings and Deutsche Bank Airline Research

Figure 20: Airline 2017 Return Analysis
US Airlines
Airlines
26 June 2018
Adjusted for Equity Market Value and Aircraft Leases
Equity Share- Assets Adj. Fin'l Leverage Fin'l Leverage
Price Market holders' Net 7x Aircraft for Aircraft Profit Asset Financial Debt/ Debt/ Profit Asset Financial Debt/ Debt/
Company Ticker 12/29/17 Value Equity Assets Sales Income* Rent Rent Margin Turnover Leverage ROE ROA Equity Capital Margin Turnover Leverage ROE ROA Equity Capital
United States
LEGACY AIRLINES
Alaska ALK-US $73.51 $9,080 $3,721 $10,740 $7,924 $817 $1,918 $12,658 10.3% x 0.74 x 2.89 = 22.0% 7.6% 189% 65% 10.3% x 0.63 x 1.39 = 9.0% 6.5% 39% 28%
American AAL-US 52.03 25,339 3,926 51,396 42,623 2,595 8,386 59,782 6.1% x 0.83 x 13.09 = 66.1% 5.0% 1209% 92% 6.1% x 0.71 x 2.36 = 10.2% 4.3% 136% 58%
Delta DAL-US 56.00 40,561 13,910 53,292 41,138 3,047 2,457 55,749 7.4% x 0.77 x 3.83 = 21.9% 5.7% 283% 74% 7.4% x 0.74 x 1.37 = 7.5% 5.5% 37% 27%
Hawaiian HA-US 39.85 2,134 966 2,860 2,688 298 969 3,828 11.1% x 0.94 x 2.96 = 30.8% 10.4% 196% 66% 11.1% x 0.70 x 1.79 = 14.0% 7.8% 79% 44%
United Continental UAL-US 67.40 20,505 8,806 42,326 37,742 2,055 4,347 46,673 5.4% x 0.89 x 4.81 = 23.3% 4.9% 381% 79% 5.4% x 0.81 x 2.28 = 10.0% 4.4% 128% 56%
Average 8.1% 0.83 5.52 32.8% 6.7% 452% 75% 8.1% 0.72 1.84 10.1% 5.7% 84% 43%
GROWTH AIRLINES
Allegiant ALGT-US $154.75 $2,487 $548 $2,180 $1,511 $158 $22 $2,202 10.5% x 0.69 x 3.98 = 28.9% 7.3% 298% 75% 10.5% x 0.69 x 0.89 = 6.4% 7.2% -11% -13%
JetBlue JBLU-US 22.34 7,348 4,834 9,781 7,012 555 707 10,488 7.9% x 0.72 x 2.02 = 11.5% 5.7% 102% 51% 7.9% x 0.67 x 1.43 = 7.6% 5.3% 43% 30%
Southwest LUV-US 65.45 39,176 10,430 25,110 21,146 2,115 1,386 26,496 10.0% x 0.84 x 2.41 = 20.3% 8.4% 141% 58% 10.0% x 0.80 x 0.68 = 5.4% 8.0% -32% -48%
Spirit SAVE-US 44.85 3,111 1,777 4,144 2,644 226 1,470 5,614 8.5% x 0.64 x 2.33 = 12.7% 5.5% 133% 57% 8.5% x 0.47 x 1.80 = 7.3% 4.0% 80% 45%
Average 9.2% 0.72 2.69 18.3% 6.7% 169% 60% 9.2% 0.66 1.20 6.6% 6.1% 20% 3%
SkyWest SKYW-US $53.10 $2,753 $1,754 $5,458 $3,186 $182 $1,511 $6,969 5.7% x 0.58 x 3.11 = 10.4% 3.3% 211% 68% 5.7% x 0.46 x 2.53 = 6.6% 2.6% 153% 60%
Average 5.7% 0.58 3.11 10.4% 3.3% 211% 68% 5.7% 0.46 2.53 6.6% 2.6% 153% 60%
*Net income is pro forma to exclude special items

Page 21
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Comparing ROAs
As previously highlighted, return on assets measures profit as a percent of total
assets and can be defined as follows: ROA = Profit Margin x Asset Turnover.
Compared with many other industries, airlines tend to have low ROAs given that
they are capital intensive (which results in low asset turnover, which is defined
as sales produced by each $1 of assets) and churn-out consistently low-profit
margins (e.g., for 2017, US airline profits drove a 7.2% net margin – down from
9.5% in 2016 – which still represents one of the industry’s better years, but
nonetheless a fairly thin margin).
In Figure 21 below, we rank our airline universe by ROA and similar to our
ROE analysis, we also adjusted airline ROAs for off-balance sheet aircraft by
capitalizing aircraft rents at 7x and adding them to assets.
Figure 21: Adjusted 2017/2016/2015 ROA* for selected US airlines

2017 2016 2015
18%
16%
16%
14% 13%
10% 12%
12%
10%
10% 8%
8.0% 8% 8% 8%
8% 7% 7%
8% 7% 7% 6% 7%
6% 6% 6%
5% 5% 6% 5%
6% 4% 4% 4%
4% 3%
2%
2% 2%
0%
*Net income used for calculation is pro forma to exclude special items
**Net income used for American and United calculation applies a 38% tax rate on pro-forma pre-tax income for 2015 figures
What we took away from our analysis of ROA is that airlines that were highly-
ranked were either very profitable or had relatively high asset turns (i.e., as close
to 1.00 as possible), but not both. However, there was one exception, Southwest
(and Allegiant previously scored well in this area prior to accelerating its fleet
transition program). Not only did Southwest have one of the highest adjusted
asset turnovers of any airline at 0.80 (i.e., producing $0.80 of sales for each
dollar invested in assets), but Southwest’s 10.0% net margin was also one of the
industry’s highest.
From examining each airline’s ROA more closely, one thing that stood out is that
those who are the most effective managers of their sizeable asset bases tend
to generate some of the industry’s best returns. Considering that aircraft fleets
typically represent the single largest collection of high-value assets at an airline,
it should come as no surprise that management who apply a much more rigorous
framework to aircraft procurement can really make a difference in whether or not
value is created.
Drawbacks of using ROE to measure financial performance

While return on equity is commonly used by management and investors to gauge
financial performance, there are three potential issues/drawbacks with using the

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metric: value, timing, and risk. The value issue is that ROE measures the return
on the book value of shareholders’ investments rather than the market value.
It’s not too often that a company’s share price and its book value per share are
equal. So in other words, a company with a high ROE may not necessarily result
in a high investment return for new shareholders, especially if the company’s
stock is trading at a premium to book value. (In our adjusted ROE analysis above,
we attempt to address this issue by using market value of equity, although the
underlying rationale for our adjustment was to “normalize” for airlines' book
values which historically were either very low or negative.)
The timing issue with ROE is that it only includes earnings for one year, and
therefore, fails to differentiate companies that may be in an investment phase
versus a “harvest” phase. We frequently observe this trade-off at airlines,
particularly new entrant airlines (or those operating in emerging markets) where
there are periods of higher growth, lower margin followed by periods of slower
growth, higher margin. We believe one way to address this is to monitor a
company’s ROEs over a cycle and observe how the metric trends.
The risk issue has to do with the fact that two very different companies with two
very different capital structures – one that is highly leveraged, and one that is not
– can both produce very similar ROEs. We see this as a major drawback with
the ROE calculation as it does not “penalize” a company for very high financial
leverage. In our view, the most effective way to get around this misrepresentation
of financial risk on ROE is to use ROIC, which is the subject of the next section.

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Comparing ROICs
How we define ROIC
“If there are 50 people in this room, there are at least 49 different ways to measure
return on invested capital in the airline industry.” -- J. Scott Kirby, President, US
Airways Group at an investor luncheon, February 14, 2013.
We have observed that no two airlines are similar in how they calculate ROIC.
One of our objectives with this report was to come up with a standard definition
that would capture the “essence” of what we are trying to measure and analyze.
In its simplest form, return on invested capital (ROIC) is defined as EBIT (1 –

tax rate)/(Debt + Equity). The numerator of the ratio reflects the earnings of a
company if it were all equity-financed. The denominator is the sum of all of the
company’s capital on which a return must be earned. Or in other words, ROIC is
the rate of return earned on all of the capital invested in a company regardless of
whether the capital is debt or equity.
Over the past decade, there has been a move by the leading airlines to provide
transparency around how they define and think about ROIC. Because airline
capital structures are notorious for their complexity and heavy reliance on off-
balance sheet financing, their ROIC calculations can be equally confusing. In fact,
some airlines use formulas that are just downright complicated and contain inputs
that are not typically provided (or hard to find) in their quarterly and/or annual
financial filings (e.g., American’s capitalized interest expense for 2017 can only
be found in one of the exhibits to its 10-K, sans page number, but page 291 in
PDF form).
For our analysis, we standardized industry returns using a ROIC formula that
included other post-employment benefits (OPEB) and pension liabilities as well
as off-balance sheet aircraft liabilities. We also chose not to reduce a company’s
capital base by “excess” or unrestricted cash; it is our view that cash on the
balance sheet and not in investors’ pockets is invested. The details underlying
each carrier’s ROIC calculation are provided in the Appendix to this report.
The definition used in our analyses: ROIC = Net Operating Profit After Tax/
Average Invested Capital. Net Operating Profit or NOPAT starts at the pre-tax
income level. We then adjust pre-tax income for any special items and then add
back interest expense, imputed operating lease interest, and net interest on the
pension (if applicable). We then adjust for taxes to arrive at NOPAT. Turning to the
denominator, we define Invested Capital simply as total assets plus capitalized
aircraft rent at 7x less all non-interest bearing liabilities. The advantage of using
this definition is that it excludes all liabilities that do not require a return (e.g.,
accounts payable, air traffic liability, etc.), but captures all of the liabilities that
many airlines leave out in their own calculations (such as pension and OPEB).
Lastly, we use a five quarter average for Invested Capital.
Which carriers have the highest ROIC?

In Figures 22 and 23 below, we compare ROICs on both a pre-tax and after-tax
basis. Low tax rates (and in some cases a zero tax rate) may have the effect of

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inflating the ROICs of some airlines. However, what we and what investors should
really care about is the ROIC – WACC spread, and so what boosts ROIC (i.e., a
low tax rate), will also similarly increase a company’s WACC.
Figure 22: 2017 pre-tax ROIC for selected US airlines

30%
25.7%
25% 23.8%
19.5% 19.3%
20%
16.2% 15.9%
15% 13.9% 13.3% 12.9%
9.3%
10%
5%
0%
In comparing airlines’ after-tax ROIC, there is some movement among the top
carriers compared with how they rank on a pre-tax basis. The stand-outs are
Southwest and Hawaiian, which are highly-ranked even though some of their
competitors benefit from a zero percent (or close to zero) cash tax rate.
Figure 23: 2017 after-tax ROIC for selected US airlines

18%
16.5% 16.2%
16% 15.5%
13.8%
14% 13.2%
12.3% 12.1%
12%
9.8%
10%
8.1%
8%
5.9%
6%
4%
2%
0%

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What is an appropriate ROIC?
For many management teams running the world's airlines, we suspect that they
don’t have a good idea of what is an appropriate ROIC for their companies
(remember, what gets measured gets managed). But then it may not matter as
the airline they work for is largely government-subsidized. In fact, if one were to
peruse the IATA membership list of approximately 290 airlines, we estimate less
than one-third of them are standalone, publicly-traded companies. And, while
publicly-traded companies tend to be more financially transparent than private
airlines, that in and of itself does not necessarily mean management are singularly
focused on maximizing ROIC.
In order to arrive at the appropriate ROIC, we think it makes sense to look to

history as a guide for how the concept has been applied to the airline industry.
Our starting point is in the US in the early to mid-1960s. Then interest rates were
at historically low levels (like they are now), and the Civil Aeronautics Board (CAB),
which regulated air fares at the time established a 10.5% domestic rate of return
on investment for major airlines, which it deemed "fair and reasonable". However,
as inflation started to pick up in the late 1960s/early 1970s, the CAB granted
several fare increases in both domestic and international markets and raised the
rate of return to 12%. This may have worked for many carriers during the 1970s,
but once the US airline industry was deregulated in 1978, the focus turned to
empire building and market share gains followed by mergers, restructurings, and
bankruptcies. As a result, what was once a great industry became a financial
“black hole” that only began to stabilize in the last decade.
Today, a suitable ROIC for any airline should not be one that is set by a regulator,
but rather one that exceeds a company’s weighted average cost of capital (WACC)
by a “comfortable margin”. (We discuss WACC calculation and analysis in the
following chapter.) In Figure 24 below, we highlight the ROIC – WACC spread of
our US airline coverage universe. Note the dispersion among carriers: interestingly
some low fare, low cost, growth-oriented airlines produce a much lower spread
than legacy airlines that are perceived to be high fare, high cost.

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Figure 24: 2017 ROIC – WACC spread for selected US airlines

8 7.5
7.2 6.9
6 5.7 5.5
5.0
4.6
2 1.7
0.8
-2
-1.7
-4
We previously alluded to the fact that an airline’s ROIC should exceed its WACC
by a “comfortable margin”. How should an investor or airline management define
“comfortable”? We think a good answer to this question can be found in the
Alaska Air playbook. Alaska has a goal of producing an after-tax ROIC of 10%
over a business cycle. On average, that would exceed Alaska’s WACC by about
2.5 – 3.0 percentage points (per Figure 24, we estimate Alaska’s current WACC
to be 7.3% and current spread to be 5.0 percentage points; Figure 25 is per the
company except for the 2017 ROIC, which is based on our definition). With a ROIC
– WACC spread of at least 2.5 – 3.0 percentage points (on an estimated WACC of
7.3%), we estimate that Alaska has ample cushion to pay down debt, return cash
to shareholders, and sustain operations at its current size (with the potential for
incremental CAPEX). And that is exactly what has occurred over the past several
years as Alaska has: 1) paid down debt (in some cases on an accelerated basis);
2) funded its pension; 3) invested in the airline (e.g., most of its new aircraft have
been purchased with cash); 4) been a fairly aggressive purchaser of its common
stock; and 5) reinstated its dividend in 2013 (which was subsequently raised
four times). Furthermore, Alaska is financially well-positioned to pursue a more
transformational initiative such as its merger with Virgin America, which was
primarily debt-financed. Overall, Alaska’s management have shown themselves
to be very good stewards of company capital and Alaska shareholders have fared
well as evidenced by the 615% increase in its share price over the past eight years.

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Figure 25: History of Alaska Air Group’s ROIC vs. WACC
After tax ROIC Pro Forma After tax ROIC WACC

30%
25.2%
25%
21.3%
20% 18.6%
WACC
15.0% estimated
15% 13.6% at 7.3%
13.0%
12.3%
11.7%
10.7%
10%
7.9%
6.1% 6.0%
5.3%
5% 3.5%
0%
Note: Alaska ROIC per company reports except for 2017; will differ slightly from Deutsche Bank ROIC for Alaska as we are using a standard
definition
Note: Pro-forma after-tax ROIC reflects Alaska’s merger with Virgin America, which closed December 14, 2016
How have US airlines managed to achieve industry-leading

ROICs?
In 2017, 9 of 10 US airlines produced a positive ROIC – WACC spread (see
Figures 1 and 24 above). That was not the case just a few years back when
achieving a positive ROIC - WACC spread was not all that common (e.g., note
Alaska's performance prior to 2010 in Figure 25; also see Figure 10 for a global
perspective).
How have the US airlines managed to achieve industry-leading ROICs? We think

there are two reasons for their outperformance.
First, is that after a decade of industry restructuring, the number of major US

airlines consolidated from nine to four with the closing of the American/US
Airways merger on December 9, 2013. As a result, we estimate that the top four
US airlines (and their affiliates) account for roughly 80% of industry domestic
traffic.
We have always been of the view that consolidation should ultimately result
in a more efficient allocation of capital, higher returns across the industry and
throughout the economic cycle, and much higher share prices. Not surprisingly,
we watched some of those themes play out over the past several years. One set
of data that we like to highlight as an example of how much better the US airline
industry is utilizing its asset base are domestic load factors. Over the past 12
years, we have seen industry load factors exceed what was once viewed as an
unachievable high reached in 1946, following the end of World War II, which was
inflated due to the fact that most of the US commercial airline fleet had been
“conscripted” into military service in support of the war (see Figure 26).

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Figure 26: US domestic load factors in the post-WW II era

90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Source: Airlines 4 America (A4A) and Deutsche Bank Airline Research
Another benefit of US airline consolidation (and subsequently higher asset

utilization as merged carriers rationalize) is that the newly formed airline quickly
realizes that it is not necessary to replace aircraft on a one-for-one basis in order
to maintain its share of revenue. In that regard, we have seen the US commercial
airline fleet decline by about 1,000 units to approximately 7,500 aircraft over the
past decade as carriers do more with less units (which has been facilitated by
upgauging across the industry).
As airlines have rationalized fleets, CAPEX budgets have been scaled back,
resulting in significantly less deliveries than prior cycles (as measured by CAPEX
relative to LTM sales); this has allowed the industry to more appropriately allocate
capital between its various constituents/partners.
The second reason for US airlines' ROIC outperformance is that the majority of
management teams now have as much as one-third of their compensation tied
to achieving a specific ROIC target (i.e., what gets measured, matters). We view
that as a sea change for an industry where as recently as a decade ago most
executives couldn't even define what their company's ROIC was let alone how it
compared with their WACC. And investors can keep tally as several US airlines
now publish their ROIC calculations.
The success of the US airlines over the past several years has not gone unnoticed
by both the equity and debt markets. Regarding the former, US airline stocks
generated very strong outperformance in 2012 – 2014 before hitting a late-cycle
plateau in 2015.
Turning to the debt markets, US airlines continue to benefit from some of the
lowest borrowing costs in years (interest costs bottomed in 2016). In fact, one
has to go back to the low interest rate environment of the early 1960s to find debt
deals with coupons as low as some of the recent issuance. The improved financial
performance also has not gone unnoticed by the rating agencies. Over the past
seven years, there have been 138 rating announcements involving US airline debt
issuers and all but eight have been affirmations or upgrades (see Figures 27, 28,
29 and 30 below). Ironically, two of the eight negative rating comments were

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tied to Delta and Southwest both announcing large programs to return capital to
shareholders and three were driven by Alaska’s merger with Virgin America.

Figure 27: Rating Agency Actions for US airlines: 2011 – May 2018 (page 1 of 4)
US Airlines
Airlines
26 June 2018
Date Name Rating Agency Action "+" or "=" or "-"
5/23/2018 Hawaiian Fitch Upgraded to BB-; Outlook STABLE +
5/4/2018 Delta Fitch Affirmed BBB-; Outlook STABLE =
4/16/2018 United S&P Upgraded to BB; Outlook STABLE +
3/12/2018 Spirit Fitch Affirm BB+; Outlook lowered to NEGATIVE -
2/22/2018 JetBlue Fitch Upgraded to BB; Outlook STABLE +
1/16/2018 Southwest Fitch Affirm BBB+; Outlook Revised to Positive =
12/5/2017 Alaska Fitch Affirmed BBB-; Outlook STABLE =
8/14/2017 Southwest S&P Upgraded to BBB+; Outlook STABLE +
6/19/2017 JetBlue Moody's Upgraded to Ba1; Outlook STABLE +
6/1/2017 Southwest Moody's Upgraded to A3; Outlook STABLE +
5/31/2017 Hawaiian Fitch Affirmed B+; Outlook raised to POSITIVE +
5/11/2017 Delta Fitch Affirmed Long-Term Issuer Default rating at BBB-; Outlook remains STABLE =
4/20/2017 United S&P Affirmed BB-; Outlook Remains POSITIVE =
3/9/2017 Delta Fitch Unsecured Notes BBB-; Outlook STABLE =
1/23/2017 United Moody's Upgraded CFR to Ba2; Outlook STABLE +
12/14/2016 Alaska S&P Downgraded rating to BB+ from BBB-' Outlook STABLE -
12/9/2016 Alaska Fitch Affirmed BBB-; raised Outlook to STABLE +
12/5/2016 American Fitch Affirmed BB-; Outlook STABLE =
10/25/2016 United Fitch Upgraded to 'BB'; Outlook STABLE +
9/16/2016 Allegiant Moody's Affirmed Senior Unsecured Rating of B1 =
9/14/2016 Allegiant S&P Downgraded rating to BB- from BB -
9/2/2016 Delta S&P Affirmed 'BB+'; raised Outlook to POSITIVE +
7/21/2016 American S&P Affirmed 'BB-'; Outlook STABLE =
6/24/2016 Hawaiian S&P Upgraded Corporate Credit Rating To BB-; Outlook STABLE +
5/31/2016 Delta Moody's Assigned Baa3 Issuer Rating =
5/19/2016 Delta Fitch Upgraded Long-Term Issuer Default Rating to BBB-; Outlook STABLE +
4/25/2016 Hawaiian Fitch Upgraded to 'B+'; Outlook STABLE +
4/25/2016 United S&P BB- Corporate Credit Rating Affirmed, Outlook Remains POSITIVE =
4/18/2016 American Moody's Affirmed Ba3 CFR of American Airlines; assigned Ba1 rating to new credit facility =
4/4/2016 Alaska Fitch Placed on Rating Watch Negative -
4/4/2016 Alaska S&P Corporate Credit Ratings Placed On Credit Watch Negative On Virgin America Acquisition -
3/18/2016 JetBlue Fitch Upgraded IDR To 'BB-'; Outlook STABLE +
2/11/2016 Delta Moody's Upgraded ratings, Senior unsecured to Baa3; STABLE outlook +
12/7/2015 American Fitch Upgraded American Airlines to 'BB-'; Outlook STABLE +
11/24/2015 JetBlue S&P Upgraded To 'BB-'; Outlook STABLE +
11/17/2015 Alaska S&P BBB- Corporate Credit Ratings AFFIRMED =
Source: Fitch, Moody’s, S&P research and Deutsche Bank Airline Research
Page 31
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10/30/2015 Southwest Fitch Upgraded to 'BBB+'; Outlook STABLE +
9/18/2015 United Fitch Upgraded IDR to 'BB-'; Outlook POSITIVE +
9/14/2015 Delta Fitch Upgraded to 'BB+'; Outlook POSITIVE +
7/24/2015 Hawaiian Moody's Upgraded CFR to B2; Outlook Stable +
7/23/2015 Delta S&P Upgraded To 'BB+'; Outlook STABLE +
7/21/2015 Spirit Fitch Published Rating on Spirit Airlines at 'BB+'; Outlook STABLE =
7/21/2015 Spirit S&P Initiates with a BB- Corporate Credit Rating; Outlook STABLE =
7/15/2015 JetBlue Moody's Upgraded Corporate Family Rating To Ba3; Outlook STABLE +
7/15/2015 United Moody's Upgraded CFR to Ba3; Outlook POSITIVE +
7/8/2015 Southwest Moody's Upgraded Senior Unsecured to Baa1; Outlook POSITIVE +
6/30/2015 Hawaiian S&P Upgraded To 'B+'; Outlook STABLE +
6/30/2015 American Moody's Upgraded CFR to Ba3; Outlook STABLE +
6/25/2015 Allegiant S&P Upgraded To 'BB' ; Outlook STABLE; Debt Rating Raised +
6/23/2015 Delta Moody's Upgraded Corporate Family Rating to Ba2 from Ba3 +
Senior Unsecured to Ba3 from B1 +
Rating Outlook POSITIVE +
6/15/2015 United Moody's Upgraded CFR to Ba3; Outlook POSITIVE +
6/12/2015 American S&P Raised Corporate Rating to BB- from B+; Outlook STABLE +
6/12/2015 United S&P Raised Corporate Rating to BB- from B+; Outlook POSITIVE +
6/11/2015 Alaska Fitch Affirmed Alaska Air Group's Ratings at 'BBB-'; Outlook STABLE =
5/19/2015 JetBlue S&P Upgraded To 'B+'; Outlook STABLE; Debt Ratings Raised +
5/2/2015 JetBlue S&P Corporate B Rating AFFIRMED; Raised Issue Rating on Convertible Notes to B from B- +
Outlook raised to POSITIVE from STABLE +
4/30/2015 Hawaiian Fitch Raised Rating on Unsecured Convertible Notes to B/RR4 from B-/RR5 +
Outlook Raised to POSITIVE from STABLE +
4/7/2015 United Fitch Upgraded Issuer Default Rating to B+ from B; Outlook POSITIVE +
2/27/2015 United S&P Raised Corporate Rating to B+ from B; Outlook POSITIVE +
2/24/2015 American Moody's Outlook Raised to POSITIVE from STABLE +
12/23/2014 United Moody's Upgraded Corporate Family Rating to B1 from B2 =
Downgraded Senior Unsecured Corporate Debt Rating to B3 from B2 (1) -
11/17/2014 Alaska S&P Raised Corporate Rating to BBB- from BB+; Outlook STABLE +
10/31/2014 Southwest S&P Raised Corporate Rating to BBB from BBB-; Outlook STABLE +
10/6/2014 Delta S&P Raised Corporate Rating to BB from BB-; Outlook POSITIVE +
9/22/2014 Southwest Fitch Affirms BBB Rating; Outlook raised to POSITIVE +
7/24/2014 United S&P Affirms B Rating; Outlook STABLE and Not Affected by $1 billion Share =
Repurchase Authorization
(1) Downgrade reflects higher expected loss for senior unsecured given senior secured obligations represent a much larger portion of funded debt and no subordinated debt that is junior to the unsecured claims.
US Airlines
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26 June 2018
7/2/2014 Delta Moody's Upgraded Corporate Family Rating to Ba3 from B1 +
Upgraded Senior Unsecured Rating to B1 from B2 +
Outlook POSITIVE +
6/16/2014 Alaska Fitch Initial Issuer Default Rating of BBB-; Outlook STABLE +
5/2/2014 JetBlue S&P Affirmed Corporate Rating B; Outlook raised to POSITIVE +
4/15/2014 JetBlue Moody's Upgraded Senior Unsecured Rating to Caa1 from Caa2 +
Corporate Family Rating to B2 from B3 +
Probability of Default to B2-PD from B3-PD +
Speculative Grade Liquidity to SGL-2 from SGL-3 +
Outlook Remains POSITIVE +
3/3/2014 Delta Fitch Raised Issuer Default Rating to BB-; Outlook POSITIVE +
2/3/2014 United Fitch Decision to Remove Cleveland as a Hub is Credit Positive +
12/18/2013 Delta S&P Raised Corporate Rating to BB- from B+; Raised Outlook to POSITIVE from STABLE +
12/17/2013 Alaska S&P Raised Corporate Rating to BB+ from BB; Outlook STABLE +
12/5/2013 Delta Moody's Raised Outlook to POSITIVE from STABLE +
12/5/2013 United Moody's Raised Outlook to POSITIVE from STABLE +
12/9/2013 US Airways/American Airlines Fitch Rates American Airlines Group 'B+'; Affirms US Airways' at 'B+'; Outlook STABLE =
11/12/2013 US Airways/American Airlines Moody's Settlement with DOJ is Credit Positive +
11/13/2013 Industry Fitch AMR/US Air Antitrust Settlement Positive for Industry +
11/12/2013 US Airways/American Airlines Moody's Settlement with DOJ is Credit Positive +
9/25/2013 Southwest Fitch Affirms BBB Rating; Outlook STABLE =
9/23/2013 US Airways S&P Raised Corporate Rating to B from B-; Outlook STABLE +
9/13/2013 JetBlue S&P Raised Corporate Rating to B from B-; Outlook STABLE +
7/29/2013 Alaska S&P Raised Corporate Rating to BB from BB-; Outlook STABLE +
6/18/2013 Delta Fitch Revised Outlook to POSITIVE from STABLE +
Affirmed Issuer Default Rating of B+ =
5/17/2013 Southwest Moody's Comment: increase in returns to shareholders is credit negative; Ratings unaffected -
5/16/2013 United Fitch Revised Outlook To POSITIVE From STABLE +
Affirmed Issuer Default Rating of B =
Upgraded Recovery Rates on Most Senior Unsecured Debt to 'B-/RR5' from 'CCC+/RR6' +
5/14/2013 Hawaiian Moody's Initial Corporate Family Rating of B3; Outlook STABLE =
5/10/2013 Delta S&P Raised Corporate Rating to B+ from B; Outlook STABLE +
5/8/2013 Delta Moody's Comment: initiation of returns to shareholders is credit negative; Ratings unaffected -
5/7/2013 Hawaiian Fitch Initial Issuer Default Rating of B; Outlook STABLE =
4/15/2013 JetBlue Moody's Raised Outlook to POSITIVE from STABLE +
Affirmed Sen. Unsecured Rating at Caa2 =
Page 33
Page 34
US Airlines
Airlines
26 June 2018
4/5/2013 United Moody's Affirmed Corporate Rating at B2 =
Raised Sen. Unsecured Rating to B2 from B3; Outlook STABLE +
4/1/2013 US Airways Fitch Raised Issuer Default Rating to B+ from B- +
2/27/2013 Southwest Moody's Affirmed Sen. Unsecured Rating at Baa3; Outlook STABLE =
2/26/2013 JetBlue Fitch Affirmed Sen. Unsecured Rating at CCC+ =
Raised Issuer Default Rating to B from B- +
12/14/2012 JetBlue S&P Raised Outlook to POSITIVE from STABLE +
Affirmed Corporate Rating at B- =
12/20/2012 US Airways S&P Revised Outlook To POSITIVE From STABLE +
Affirmed Corporate Rating at B- =
12/11/2012 Delta Fitch Virgin Atlantic stake "could drive significant long-term strategic value" +
12/11/2012 Delta Moody's Virgin Atlantic stake "positive for operations and credit profile" +
11/20/2012 United S&P Raised Sen. Unsecured to B from B- +
Affirmed Corporate Rating at B =
11/13/2012 US Airways Moody's Raised LT Corporate Family to B3 from Caa1 +
Raised Outlook to STABLE from NEGATIVE +
9/25/2012 Southwest Fitch Affirmed Issuer Default Rating at BBB; Outlook STABLE =
9/12/2012 US Airways Fitch Raised Sen. Unsecured to CCC from CC +
9/12/2012 JetBlue Fitch Raised Sen. Unsecured to CCC+ from CCC +
7/20/2012 Alaska S&P Raised Outlook to POSITIVE from STABLE +
Affirmed Corporate Rating at BB- =
6/19/2012 Delta Fitch Raised LT Rating to B+ from B- +
5/25/2012 Delta S&P Raised Outlook to POSITIVE from STABLE +
4/20/2012 US Airways Fitch Raised LT Rating to B- from CCC +
Raised Sen. Unsecured to CC from C +
2/28/2012 JetBlue Fitch Raised Sen. Unsecured to CCC from CC +
7/29/2011 Alaska S&P Raised Corporate Rating to BB- from B+ +
26 June 2018
Airlines
US Airlines
Calculating Airline WACCs

Estimating an airline’s cost of capital
For one to estimate an airline’s cost of capital, he or she must answer the following
question, which is “what rate of return must a company earn on current assets to
meet the expectations of lenders and equity holders?” Or another way of putting
it is that an airline’s cost of capital is the cost of the different sources of capital
weighted according to their proportion of an airline’s capital structure.
In calculating total capital, we use market value of equity as that is more relevant
than book value in determining the return expectations of today’s equity investors.
For determining the debt mix, we use on balance sheet debt plus operating leases
capitalized at 7x. Although using the market value of debt results in a more
accurate calculation, many of the airline debt issues are trading near book value.
Our calculation of cost of equity is fairly straightforward. For our risk-free rate,
we used the 5-year Treasury Note yield. The equity risk premium for US airlines is
courtesy of the 2017 Ibbotson Stocks, Bonds, Bills, and Inflation Risk Premia Over
Time Report and is defined as S&P 500 total returns minus intermediate-term
government bond income returns from 1926 – 2016. Lastly, we used five year
(2013 – 2018) adjusted betas per Bloomberg, which are calculated comparing
each equity’s performance relative to the performance of the S&P 500.
For our cost of debt calculation, we looked at where ~5-year, unsecured airline
debt is currently trading. For those names without unsecured debt, we derived
the yield based on where their A and B tranches of secured debt trade. For those
without publicly-traded debt, we looked at similar comparables with publicly-
traded debt as a proxy for determining the pre-tax cost of debt. The tax rate used
for each company is similar to what we used in determining after-tax ROIC. For
some airlines it is their marginal tax rate; for others who may not be full tax payers,
we are using their effective cash tax rate (see Figure 31 for comparable airline
WACC analysis).

Page 36
Figure 31: Airline 2017 Weighted Average Cost of Capital Analysis
US Airlines
Airlines
26 June 2018
Adjusted Equity Adjusted Weighted
Equity Debt at Capitalized Risk- Equity Levered Cost Market Pretax After-tax Debt Average
Price Market Book Operating Total Free Risk Equity of Value/ Cost of Tax Cost of Value/ Cost
Company Ticker 06/21/18 Value Value Leases Capital Rate (a) Premium (b) Beta (c) Equity Total Capital Debt (d) Rate Debt Total Capital of Capital
United States
LEGACY AIRLINES
Alaska ALK $64.05 $7,882 + $2,569 + $1,918 = $12,369 2.8% + 6.9% x 1.01 = 9.8% 64% 4.75% x (1 - 37%) = 3.0% 36% 7.3%
American AAL 41.49 19,729 + 25,065 + 8,386 = 53,180 2.8% + 6.9% x 1.26 = 11.5% 37% 5.50% x (1 - 1%) = 5.5% 63% 7.7%
Delta DAL 53.73 37,998 + 8,834 + 2,457 = 49,289 2.8% + 6.9% x 1.11 = 10.5% 77% 4.13% x (1 - 0%) = 4.1% 23% 9.0%
Hawaiian HA 38.95 1,993 + 571 + 969 = 3,532 2.8% + 6.9% x 1.27 = 11.6% 56% 7.13% x (1 - 35%) = 4.6% 44% 8.6%
United Continental UAL 74.42 21,357 + 14,392 + 4,347 = 40,096 2.8% + 6.9% x 1.13 = 10.6% 53% 5.25% x (1 - 1%) = 5.2% 47% 8.1%
Average 10.6% 4.2% 8.3%
GROWTH AIRLINES
Allegiant ALGT $146.15 $2,348 + $1,165 + $22 = $3,535 2.8% + 6.9% x 0.93 = 9.2% 66% 6.63% x (1 - 37%) = 4.2% 34% 7.5%
JetBlue JBLU 19.27 6,186 + 1,640 + 707 = 8,533 2.8% + 6.9% x 1.02 = 9.9% 72% 5.50% x (1 - 38%) = 3.4% 28% 8.1%
Southwest LUV 53.15 31,281 + 3,668 + 1,386 = 36,335 2.8% + 6.9% x 1.04 = 10.0% 86% 3.65% x (1 - 36%) = 2.3% 14% 8.9%
Spirit SAVE 38.63 2,634 + 1,387 + 1,470 = 5,492 2.8% + 6.9% x 1.20 = 11.1% 48% 6.00% x (1 - 37%) = 3.8% 52% 7.3%
Average 10.1% 3.4% 8.0%
SkyWest SKYW $56.35 $2,918 + $2,687 + $1,511 = $7,116 2.8% + 6.9% x 1.33 = 12.0% 41% 7.13% x (1 - 36%) = 4.6% 59% 7.6%
Average 12.0% 4.6% 7.6%
(a) Equivalent to the current yield of the 5-year Treasury Note.

(b) Source is Ibbotson 2016 Classic Yearbook: S&P 500 total return minus risk free rate using long-horizon from 1926 – 2016.
(c) Five year (2013 - 2018) adjusted β per Bloomberg and measures each equity relative to the performance of the S&P 500 Index. Betas as of June 14, 2018.
(d) Pre-tax cost of debt reflects current trading levels of medium-term unsecured paper; estimates per Deutsche Bank research for airlines without publicly-traded, unsecured debt.
26 June 2018
Airlines
US Airlines
A Recent History of
Shareholder Returns
What %-age of FCF should be shared with stockholders?
A commonly-asked question by airline investors is how much should airlines share
with stockholders? We are of the view that most airlines are at a point where
sustainable FCF has now become an ordinary course of business (i.e., the US
airline industry has generated positive FCF in 11 of the last 12 years (2006 – 2017);
the prior 21 years (1985 – 2005), we observed positive FCF in only 3 years!). As
such, we believe airlines are now in a position to articulate a value-creation plan
for shareholders that includes some stated percentage of FCF that owners can
expect to receive every year assuming a stable backdrop (and, of course, positive
free cash flow, although there are instances where airlines will continue to pay a
dividend and repurchase shares using borrowed funds given the attractiveness of
interest rates). We think a plan that contemplates sharing as much as one-third to
one-half of FCF with stockholders in the form of share repurchases and dividends
is doable and reasonable. For example, Delta announced a year ago that it would
return “at least 70%” of FCF to shareholders, up from prior target of “at least
50%” of FCF. The company targets $8 billion of annual operating cash flow, with
approximately half reinvested in the airline to drive long-term earnings growth. Of
the $4 billion of annual free cash flow, 70%+ is returned to shareholders with the
remaining 30% used to strengthen the balance sheet.
In Figures 32, 33 and 34 below, we track the shareholder enhancement initiatives

announced by the airline industry since late 2010. We start in late 2010 as the prior
decade (i.e., 2000 – 2009) saw very little activity on this front given the numerous
bankruptcies and restructurings that occurred across the industry.
In Figures 35 – 44, we graphically highlight shareholder returns for each carrier

by quarter since December quarter 2010. We depict share repurchases on
a cumulative basis and dividends as recurring adjusted for any subsequent
increases. From the following charts, one can see how the industry has evolved
into one that is far more focused on creating value and subsequently sharing it
with stockholders.

Page 38
Figure 32: Shareholder Enhancement Initiatives (page 1 of 3)
US Airlines
Airlines
26 June 2018
Airline Date Action Notes
June 2010 Authorized a $50 million share repurchase program in June 2010 Share repurchase plan to expire June 2011
4/21/2011 Completed $50 million share repurchase authorization
7/21/2011 Authorized a $50 million share repurchase program
9/26/2012 Authorized $250 million share repurchase program
7/25/2013 Announced dividend of $0.20 per share First time since 1992 Alaska has paid a dividend
Alaska
2/13/2014 Raised dividend 25% to $0.25 per share
5/12/2014 Authorized $650 million share repurchase program
1/22/2015 Raised dividend to $0.20, up 60% from stock-split adjusted amount of $0.125 2:1 stock split led to $0.125 dividend in June quarter 2014
8/6/2015 Authorized $1 billion share repurchase program
1/21/2016 Raised dividend 38% to $0.275 from $0.20
2/21/2017 Raised dividend 9.1% to $0.30 from $0.275
1/25/2018 Raised dividend 7% to $0.32 from $0.30
Pre-2010 Repurchased $40 million worth of shares prior to 2010 First share repurchase program announced in 2008
4/26/2010 Announced special dividend of $0.75 per share
4/24/2013 Repurchase program reapproved up to $100 million
Allegiant
1/28/2015 Announced recurring quarterly dividend of $0.25 per share
7/29/2015 Announced an increase in the share repurchase authority to $100 million
7/29/2015 Announced an increase to recurring quarterly dividend from $0.25 to $0.30 per share
4/27/2016 Announced an increase to recurring quarterly dividend from $0.30 to $0.70 per share
7/24/2014 Introduced capital deployment plan, "including over $2.8 billion in debt and aircraft lease Dividend included in plan was the first dividend declared
prepayments, a $1 billion share repurchase program, the initiation of a quarterly cash dividend since 1980. Share repurchase plan originally set to expire on
[$0.10 per share], and $600 million of additional pension contributions " YE2015, but completed in the December quarter 2014
American Airlines 1/27/2015 Completed previous share repurchase plan; introduced a new $2.0 billion share repurchase New repurchase plan expires at YE2016
program
7/24/2015 Introduced a new $2.0 billion share repurchase program Additional repurchase plan expires at YE2016
Source: Company filings and Deutsche Bank Airline Research.

US Airlines
Airlines
26 June 2018
5/8/2013 Authorized a $500 million share repurchase program; announced $0.06 per share quarterly Share repurchase plan to expire June 30, 2016, but
dividend; announced plan to further reduce net debt to $7 billion; contributed an incremental completed in the June quarter 2014
$1 billion to its underfunded DB pension plan
1/21/2014 Contributed an incremental $250 million to its DB pension plan above required funding
5/6/2014 Completed previous share repurchase plan; authorized a new $2 billion share repurchase Share repurchase plan set to expire on YE2016, but
program; increased quarterly dividend 50% to $0.09 per share; announced plan to further expected to be completed in the June quarter 2015
reduce net debt to $5 billion by year end 2016; contributed $1 billion in annual pension
funding (required and incremental) through 2020 to get to 80% funded at that time
Delta
5/13/2015 Announced plan to complete previous repurchase plan by the end of the June quarter 2015; Share repurchase plan to expire YE2017
authorized a new $5 billion share repurchase program; increased annual dividend 50% to
$0.54 per share; announced plan to further reduce net debt to $4 billion by year end 2017;
made an additional one-time $200 million contribution to its pension
5/16/2016 Announced plan to complete $3 billion remaining authorization of previous repurchase plan
by May 2017 including $375 million ASR in June Q; increased annual dividend 50% to $0.81
per share
5/11/2017 Announced share repurchase program of $5 billion to be completed by June 2020; increased
annual dividend 50% from $0.81 per share to $1.22 per share
1/29/2015 Repurchased a portion of 5% Convertible Notes due 2016; $71.1 million remaining
Hawaiian 4/23/2015 Authorized $100 million share repurchase program over a 2 year period; repurchased $63 $8 million of convertible notes remain outstanding
million of convertible notes outstanding
4/20/2017 Replenished share repurchase program to $100 million
10/12/2017 Initiated $0.12 per share quarterly dividend; 1.2% dividend yield
12/5/2017 Announced a new $100 million share repurchase program
10/26/2011 Prepaid $32 million of convertible notes outstanding Eliminated the potential issuance of 6.6 million shares
JetBlue
10/25/2012 Announced share repurchase program of up to 25 million shares over five years To offset the impact of employee stock awards/purchase
1/1/2016 Authorized share repurchase program of $250 million programs
12/13/2016 Authorized Increasing share repurchase program from $250 million to $500 million Extended the term of the program to December 31, 2019
4/25/2017 Announced accelerated share repurchase program of $150 million to be completed by July
12/8/2017 Announced share repurchase program of $750 million to be completed by December 31,
2019
Pre-2010 Paid regular quarterly dividend of $0.04 per share since 2009; as of YE 2010, had
repurchased 14.3 million shares for $277.1 million as part of share repurchase program that
was initiated in 2007
SkyWest 9/14/2012 Authorized the repurchase of an additional 5 million shares; total repurchase plan as of Augmented plan expired on October 15, 2014
September 14, 2012 includes a total of 6.5 million shares
5/7/2015 Authorized to repurchase 1.25 million shares
5/7/2016 Increased quarterly dividend from $0.04 to $0.05 per share
2/9/2017 Increased quarterly dividend from $0.05 to $0.08 per share, authorized $100 million share
repurchase program over the next 3 years
5/9/2018 Increased quarterly dividend from $0.05 to $0.08 per share, authorized $100 million share
Page 39
repurchase program over the next 3 years

Page 40
US Airlines
Airlines
26 June 2018
Pre-2011 Paid regular quarterly dividend of $0.0045 per share; initiated a $500 million share repurchase
program in Jan. 2008 and bought back $54 million worth of shares; plan was suspended in
Feb. 2008. Didn't make any common stock repurchases in 2009-2010
8/5/2011 Re-instated $500 million share repurchase program

5/16/2012 Increased share repurchase program to $1 billion; increased dividend to $0.01 per share
5/15/2013 Increased share repurchase program to $1.5 billion; increased dividend to $0.04 per share
Southwest
5/14/2014 After completing previous $1.5 billion program, started new $1 billion program; increased
dividend to $0.06 per share
5/13/2015 After completing previous $1.0 billion program, started new $1.5 billion program; increased
5/18/2016 After completing previous $1.5 billion program, started new $2.0 billion program; increased
5/17/2017 Announced new $2.0 billlion share repurchase program; increased quarterly dividend from
$0.10 per share to $0.125 per share
5/16/2018 Announced new $2.0 billlion share repurchase program; increased quarterly dividend from
$0.125 per share to $0.16 per share
12/17/2014 Authorized $100 million share repurchase program Share repurchase plan to expire December 16, 2015
Spirit
10/26/2015 Authorized $100 million share repurchase program Share repurchase plan to expire October 26, 2016
10/26/2017 Authorized $100 million share repurchase program Share repurchase plan to expire October 25, 2018
7/24/2014 Introduced $1.0 billion share repurchase program Planned for completion over the following three years
United
7/23/2015 Introduced $3.0 billion share repurchase program Planned for completion by year end 2017
7/1/2016 Introduced $2.0 billion share repurchase program
12/7/2017 Introduced $3.0 billion share repurchase program

Figure 35: Alaska Air Group - Shareholder Enhancement Initiatives (1)
US Airlines
Airlines
26 June 2018
2,500
Authorized new $1 billion share Raised dividend 9.1% to $0.30 Raised dividend 7% to $0.32
repurchase program in August from $0.275 from $0.30
Completed $250 million 2015
2,000 share repurchase
Completed $50 program and introduced
million share new $650 million share $636 $611 $599
$686 $686 $686 $664
repurchase program June $752 $752
Completed $50 repurchase $879
million share Completed $50 million program and Q 2014 $1,003
1,500
($ in millions)
repurchase share repurchase introduced new

program Mar Q program Dec Q 2011; $250 million share
2011; introduced introduced new $50 repurchase
new $50 million million share program Sep Q
1,000 repurchase program $122
share repurchase $282
Mar Q 2012 $384
program June Q $491
1,451
$650 1,364 1,364 1,364 1,386 1,414 1,439
2011 1,298 1,298
1,171
1,047
500 928
$83 $53 768
$189 $157 666
$250 $240 $221 559
$0 $27 347 400
$0 $17 $43 243 317
$45 150 160 179 211
$28 50 56 84 100 107 123
0
Dividends Share Repurchases Share Repurchases Left
(1) Share repurchase activity reflects cumulative amounts as of quarter end. Dividend reflects amount paid out during the quarter.
(2) This chart depicts shares repurchased from the company's June 2010 authorization on; previous to this authorization, the company returned $162 million to shareholders via share repurchases.
Page 41
Page 42
US Airlines
Airlines
26 June 2018
Figure 36: Allegiant Travel Co. - Shareholder Enhancement Initiatives (1)
800 Announced an Announced an
increase in share increase in share
Announced an increase to repurchase authority repurchase
700 recurring quarterly to $100 million in April authority to $100
dividend, now $0.70 2016 million
Announced an $111 $111 $111
600 increase in share $11
repurchase $98 $95
$102 $101
500 authority to $100
($ in millions)
million in July 2015 $63 $9

$71
400
$86 $38 $9
$100
300 563 563 563 563
$68 $68 411 465 473 473 476 479
200 $40 404
282 337 366
$43
$100 $90 270
$41 142 214 214
100 $46 $45 $45 $45 $45 $45 $45 $45 59 138
54 82 91
55 55 55 55 55 55 55 39 42 44 28
0 15
Dividends Special Dividends Share Repurchases Share Repurchases Left
1) Share repurchase activity reflects cumulative amounts as of quarter-end. Dividend reflects amount paid out during the quarter.
(2) Share repurchases include amount repurchased in 2010 and beyond. Previous to 2010 the company repurchased $40 million worth of shares under a program authorized in 2008.
Figure 37: American Airlines - Shareholder Enhancement Initiatives (1)
US Airlines
Airlines
26 June 2018
16,000
Introduced new
$2 billion share
repurchase plan
14,000
Introduced new $2
Completed Introduced new $2 billion share
initial $1 billion share repurchase plan $2,000
12,000 billion share repurchase plan to be
repurchase completed by YE 2017 $677 $450
Introduced new $2 $1,500 $1,000
program 1
billion share
10,000 year ahead of
repurchase plan to
schedule;
be completed by $481
($ in millions)
introduced $1,097
YE 2016
8,000 new $2 billion
share
repurchase Introduced new $2 $797
plan to be billion share
6,000 repurchase plan to $2,397
completed by 11,380
be completed by 10,703 10,930
YE 2016 10,341
YE 2016 9,379 9,891
$1,497 8,825
4,000 8,209
Introduced
dividend of $0.10 6,509
per share $1,057 4,909
2,000 $2,000 $1,810
3,503
1,943
$1,000 $887 1,000 1,190
0 113
(1) Share repurchase activity reflects cumulative amounts as of quarter-end. Dividend reflects amount paid out during the quarter.
(2) American also elected to pay approximately $306 million to cover employee tax withholding obligations on equity awards via share repurchases. Treating this as additional share repurchase activity in the December quarter.
Page 43
Page 44
Figure 38: Delta Air Lines - Shareholder Enhancement Initiatives (1)
US Airlines
Airlines
26 June 2018
14,000
12,000
Announced share repurchase program of $5
billion to be completed by June 2020;
increased annual dividend 50% from $0.81
per share to $1.22 per share
$4,950
10,000 $5,275
$5,600
Plans to complete $3 billion of 2015 share $6,150
repurchase authorization by May 2017, including
$375 million ASR in June Q 2016; increased
annual dividend 50% to $0.81 per share
Completed prior $2 billion share
8,000 repurchase plan; introduced new $5
billion share repurchase plan to be
($ in millions)
completed by YE 2017
$1,950 $1,750
$2,250
$2,800
6,000 $3,175
Completed initial $500 million $3,950
share repurchase program 2 $4,375
years ahead of schedule; $4,800
introduced new $2 billion share
repurchase plan to be
completed by YE 2016
4,000 7,550
7,225
6,900
6,350
5,550 5,750
5,250
4,700
$725 4,325
2,000 $1,150
3,550
$1,650 3,125
$1,900
2,700
1,775
1,350
$250 $125 850
$500 $400 600
250 375
0 100
51 51 51 51 75 75 75 72 107 105 107 103 150 149 149 148 219 216 217
0
Figure 39: Hawaiian Airlines - Shareholder Enhancement Initiatives
US Airlines
Airlines
26 June 2018
120 400
Initiate $0.12 per share
quarterly dividend;
100 350 announced a new $100
Repurchased a portion of million share repurchase
5% Convertible Notes due program
$80
80 300 2016; authorized a $100 $100
Replenished share
million share repurchase repurchase program to
($ in millions)
program over a 2-year $100 million

60 250
period
($ in millions)
100 $50
200
40 $96
$174
$154
$50 $46 $46 $46
$60 $57
150 $62
20 $82 $105
$100
$50 $54 $54 $54 $58
$40 $43
100 $38
0 $18 $6 $6
50
$78 $82 $83 $86 $86 $86 $86 $86 $86 $86 $86 $86 $86
0 Dividends Share Repurchases Share Repurchases Left
Convertible Repurchases Dividends Share Repurchases Share Repurchases Left
Page 45
Page 46
Figure 40: JetBlue Airways – Shareholder Enhancement Initiatives
US Airlines
Airlines
26 June 2018
120 1,400
Announced a $750 million
share repurchase
1,200 authorization
100
Announced a additional
1,000 $250 million share $500
80 repurchase $625
Announced $100 million
Announced a $750
ASR
($ in millions)
($ in millions)
800 $250 million

60 share
600
repurchase
100
authorization
40
$130
400
$280 $750
$380 $625
20 $500 $500
200 $370
$250 $250 $250 $220
$120
0 0 $0 $0 $0
Dividends Share Repurchases

Share Repurchases Left Dividends Share Repurchases Share Repurchases Left
(1) Share repurchase activity reflects cumulative amounts as of quarter-end.

Figure 41: SkyWest - Shareholder Enhancement Initiatives (1)
US Airlines
Airlines
26 June 2018
800
Increased quarterly dividend from $0.05 to Increased quarterly dividend
$0.08 per share, authorized $100 million share from $0.08 to $0.10 per share
700
Introduced new share repurchase program for repurchase program over the next 3 years
600 Increased share repurchase program to include 1.25 mm shares in May 2015, which
an additional 5 mm shares immediately completed during the Q
$100 $100 $90 $80 $70 $70
($ in millions)
500
400 $84 $84 $84 $84 $72 $72 $69 $64 $64
$39 $23 $18 $17 $17
$79 $59
300
425 425 425 435 435 435
396 415 415
200 350 350 353 359 359 359 359 378 378 378 378
317 333 338 339 339 339 339 339 339
277 297
100
23
0
(2) "Share Repurchases" for Dec-10 reflect amount repurchased from 2007 until Dec 31, 2010. "Share Repurchases Left" for Dec-10 represents an estimated value based on the product of the average SKYW share price from 12/31/2009 through the expiration of the share
repurchase program on 5/15/12 and the number of shares left for repurchase under current authorization, as SKYW's share repurchase authorization allows for the repurchase of a set amount of shares (i.e. 20m shares), not a dollar amount.
(3) Starting point in Sep-2012, "Share Repurchases Left" represents an estimated value based on the product of the average SKYW share price from 9/14/2012 (initiation point of new share repurchase plan) through the expiration of the share repurchase program on 10/15/14
and the number of shares left for repurchase under current authorization, as SKYW's share repurchase authorization allows for the repurchase of a set amount of shares (i.e. 6.5m shares), not a dollar amount.
(4) Share repurchase program expired on October 15, 2014.
(5) Announced the initiation of a new share repurchase program on May 7, 2015 to buy 1.25 million shares. For the purposes of this analysis, we used the average SKYW share price during the Mar Q 2015 to formulate an estimate dollar value for the plan.
Page 47
Page 48
Figure 42: Southwest - Shareholder Enhancement Initiatives (1)
US Airlines
Airlines
26 June 2018
4,500 Announced a new $2.0 bb
9,000
Completed $1.0 bb program; share repurchase program
4,000
started new Increased quarterly dividend
3,500 $1.5 bb program in May 2015 $1,200 from $0.125 per share to
Completed $1.5 bb $0.16 per share
3,000
Announced a new $2.0 bb
program; started new $1.0
share repurchase program
($ in millions)
8,000 bb program in $80

2,500 $380 Increased quarterly dividend $850
$850
May 2014 $780 $580
Increased program to from $0.10 per share to
2,000 $1,350
Completed original $500 mm $1.5 bb in May 2013 $0.125 per share
$20 2,800 $1,700
1,500 share repurchase program; $374 $335 2,420 $2,000
$524
increased program to $1 bb in May $500 1,920
2,120
1,000
7,000 $275 1,720
$450 $375 1,480
976 1,126 1,165
500 725
$325 $275 $225 625
$500 $500 $500 500 550
175 225 275
0
($ in millions)
After completing previous

$400
6,000 $1.5 bb program, started
Dividends (3) Share Repurchases Share Repurchases Left Series4 new $2.0 billion program $950
Increased quarterly dividend $1,200
$1,500
from $0.075 per share to
$0.10 per share
5,000
Completed $1.0 bb program;

started new $200
4,000 $1.5 bb program in May 2015 7,150
$700 $700 7,150
$1,200 6,650
6,300
6,000
5,600
3,000
Completed $1.5 bb program; $80
5,050
started new $1.0 bb program in 4,800
May 2014 $380 4,500
$580
$780
2,000 3,800
$20 3,300 3,300

Completed original $500 mm Increased program to
share repurchase program; 2,800
$1.5 bb in May 2013 $335 2,420
increased program to $1 bb in May $374
$524
2,120
1,920
1,000 1,720
$275 1,480
$450 $375
$500
1,126 1,165
976
$275 $225 725
$325 550 625
$500 $500 $500 500
225 275 274 274 274 274 290 351
175 139 139 139 139 180 180 180 180 222 222 222 222
0 0 14 14 14 14 22 22 22 22 71 71 71 71
Dividends (3) Share Repurchases Share Repurchases Left Dividend
(2) Initiated a $500 million share repurchase program in Jan. 2008 and bought back $54 million worth of shares; plan was suspended in Feb. 2008
(3) Dividend payments don't reflect actual cash flow statement records, as doing so would create some lumpiness on the chart due to payment timing nuances. Reflect smoothed dividend payments throughout the year.
Figure 43: Spirit Airlines, Inc. - Shareholder Enhancement Initiatives
US Airlines
Airlines
26 June 2018
350
120 Announced new
$100 million share
300 repurchase plan to be
Announced new
$100 million share repurchase completed by October 2018
100 $55 $55
plan to be completed by October
250 2016 $100
80
($ in millions)
200
($ in millions)
$39
15060 $101 $101 $90
$100 $100 245 245

100 200 200 200 200 200
40
$33 161
50 $100 $100 99 99 110

20 68
0
0 0
Dividend Dividends Share Repurchases Share Repurchases Left

Page 49
Page 50
Figure 44: United Airlines - Shareholder Enhancement Initiatives
US Airlines
Airlines
26 June 2018
10,000
1,200
Announced a new $3 billion share
9,000
repurchase program
1,000 Announced a new $2 billion
8,000 Announced its on track to complete initial $1 billion share repurchase program $2,253
share repurchase plan during the quarter ending $3,000
7,000 September 30, 2015; introduced new
800
$3 billion share repurchase plan to be completed by YE $485
6,000 2017
$553
($ in millions)
($ in millions)
$680 $1,109
$780 $1,848 $1,535
5,000
600 $2,259 $2,004
4,000 $1,000
400 $953 6,747

3,000 Announced a new $1 billion 6,000
$2,453 5,447
share repurchase program $3,235 $2,973 4,891
515 4,152 4,465
2,000 3,741 3,996
200
320 3,047
1,000 220
$780 $680 $485 1,547
$1,000 765 1,027
220 320 515
0 0 0 4 2
Dividend
Share Repurchases Share Repurchases
Share Repurchases Left Share Repurchases Left

26 June 2018
Airlines
US Airlines
Valuation and Risks

Alaska – Buy; PT: $80
Our 12-month price target for ALK shares is $80. Our PT is derived by applying a
12x P/E multiple to our 2019 EPS forecast of $6.65. We think it is appropriate to
focus our valuation framework on 2019, which we view as more representative
of steady-state earnings for Alaska (we expect 2018 to be more of a transition
year given our more conservative stance on the ramp-up of merger synergies).
ALK has historically traded between the majors (historical P/E trading range of
10x -12x) and the LCCs/ULCCs (historical P/E trading range of 15x - 20x).
Turning to risks, a key risk is fuel price volatility: every 10% move in jet fuel
impacts our 2018 EPS estimate of $4.60 by $1.10. Other downside risk factors
are economic weakness, government regulation, taxation, airport constraints,
safety concerns, the threat of terrorism and war, associated costs/risks with labor
negotiations, and the revaluation of the stock market resulting in a higher equity
risk premium being applied to airline shares.
Allegiant – Buy; PT: $180

Our 12-month price target for ALGT shares is $180. Our PT is derived by applying
a ~16 P/E multiple to our 2018 EPS estimate of $11.00. Our target P/E multiple
compares with an historical P/E trading range of 15x – 20x typically commanded
by profitable, growth-oriented, low-cost carriers.
Turning to risks, fuel price volatility is a key risk for ALGT – every 10% move
in jet fuel impacts our 2018 EPS estimate of $11.00 by $2.20. Other downside
risk factors are economic weakness, government regulation, taxation, airport
constraints, safety concerns, the threat of terrorism and war, associated costs/
risks with labor negotiations, and the revaluation of the stock market resulting in
a higher equity risk premium being applied to airline shares.
American – Buy; PT: $60

Our 12-month price target for AAL shares is $60. We arrive at our PT by applying
a ~10 P/E multiple to our 2018 EPS estimate of $5.50 (within the historical range
of 10x – 12x for legacy carriers) and subsequently adding back an estimated $3
per share to account for the company’s NOLs. Our price target implies an EV/
EBITDAR multiple of ~7x our 2018 forecast, within the group’s 5x – 7x historical
valuation range.
Turning to risks, fuel price volatility presents both an upside and downside risk;
every 10% move in fuel impacts our 2018 EPS estimate of $5.50 by approximately
$1.50, all else equal. Another material risk for American is integration. Others are
economic weakness, government regulation, labor issues, the threat of terrorism
and war, and the revaluation of the stock market resulting in higher equity risk
premiums for airline stocks.
Delta – Buy; PT: $64

Our 12-month price target for DAL shares is $64. We arrive at our PT by applying
an 11x P/E multiple to our 2018 EPS estimate (within the historical range of 10x –
12x for legacy carriers) and subsequently adding back an estimated $1 per share
to account for the company’s NOLs. Our price target implies an EV/EBITDAR
multiple of 6.5x our 2018 forecast, within the group’s 5x – 7x historical valuation
range.

26 June 2018
Airlines
US Airlines
Turning to risks, fuel price volatility presents both an upside and downside risk;
every 10% move in fuel impacts our 2018E EPS of $5.75 by $0.75 (ceteris paribus).
Other risks include economic weakness, government regulation, labor issues, the
threat of terrorism and war, and the revaluation of the stock market resulting in
higher equity risk premiums for airline stocks.
Hawaiian – Hold; PT: $45

Our 12-month price target for HA shares is $45. Our PT is derived by applying
a ~10x P/E multiple to our 2018E EPS estimate, at the low end of its 5-year
trading history due to the fact that we believe the competitive capacity outlook has
raised the equity risk premium for HA shares. On an EV/EBITDAR basis, our price
target is derived by applying a multiple of 5.1x to our 2018 EBITDAR estimate.
This compares with the historical trading range of 5x – 7x forward EBITDAR
commanded by legacy airlines during stable earnings periods (with growth names
trading 6x – 8x).
Turning to risks, fuel price volatility is a major upside/downside risk for Hawaiian:
every 10% move in jet fuel (ceteris paribus) impacts our 2018 EPS estimate
of $4.65 by approximately $0.80. Other downside risk factors are economic
weakness, government regulation, labor issues, taxation, airport constraints,
safety concerns, the threat of terrorism and war, and the revaluation of the stock
market. An upside risk would be if the competitive capacity outlook become more
sanguine.
JetBlue – Buy; PT: $25

Our 12-month price target for JBLU shares is $25. Our PT is derived by applying
a ~13x P/E multiple to our 2018 EPS estimate of $1.85 (vs. historical range of
15x – 20x for the low cost carriers). Our lower-than-average P/E multiple reflects
cost pressures from the rising labor costs (e.g., pilots recently reached a tentative
agreement on their initial contract and the flight attendants recently voted to
unionize). On an EV/EBITDAR basis, our price target is derived from applying a
multiple of 6.7x to our 2018 EBITDAR forecast, within the historical range of 6x –
8x forward EBITDAR that we typically apply to profitable, growth-oriented airlines.
Turning to risks, fuel price volatility is a key risk for JBLU as evidenced by a $0.45
impact to our 2018 EPS forecast of $1.85 from a 10% annual change in the price
of fuel, all else equal. Other downside risks are economic weakness, government
regulation, labor issues, taxation, airport constraints, safety concerns, the threat
of terrorism and war, and the revaluation of the stock market resulting in a higher
equity risk premium being applied to airline shares.
SkyWest – Buy; PT: $71

Our 12-month price target for SKYW shares is $71. Our PT is derived by applying
a P/E multiple of ~15x to our 2018 EPS forecast of $4.60 and adding an estimated
$2 per share to account for SkyWest’s NOLs on an NPV basis. We think this is
reasonable as SKYW’s above-average growth earnings prospects over the next
several years merit a growth carrier multiple (i.e., growth carriers typically trade
15x – 20x on a P/E basis).
Risks to achieving our target price include associated "speed bumps" with the
company's fleet transition as well as turnaround of its ExpressJet subsidiary
company. Moreover, given that the SkyWest still operates a pro-rate business
(~9% of revenue), fuel price volatility is a potential risk, albeit a modest one.

26 June 2018
Airlines
US Airlines
Southwest – Buy; PT: $66

Our 12-month price target for LUV shares is $66. Our PT is derived by applying
a 15x P/E multiple to our 2018 EPS forecast of $4.40, which compares with the
historical range of 15x – 20x for the low-cost carriers
A key risk for LUV is fuel price volatility (every 10% move in jet fuel impacts
our 2018 EPS estimate of $4.40 by $0.60). Other risk factors are economic
weakness, government regulation, labor issues, taxation, airport constraints,
safety concerns, war and terrorism threats, and market risk.
Spirit – Buy; PT: $54

Our 12-month price target for SAVE shares is $54. Our PT is derived by applying
a 16 P/E multiple to our 2018 EPS estimate of $3.40. Our target P/E multiple
compares with an historical P/E trading range of 15x – 20x typically commanded
by profitable, growth-oriented, low-cost carriers.
Turning to risks, like most airlines, fuel price volatility is a key risk for Spirit – every
10% move in jet fuel (ceteris paribus) impacts our 2018 EPS estimate of $3.40
by $1.00. Other risk factors are economic weakness, government regulation,
taxation, airport constraints, safety concerns, the threat of terrorism and war, and
the revaluation of the stock market resulting in a higher equity risk premium being
applied to airline shares.
United – Buy; PT: $81

Our 12-month price target for UAL shares is $81. Our PT is derived by applying
~10x P/E (vs. historical range of 10x – 12x) to our 2018E EPS of $8.10 and adding
an estimated $1 per share to account for United’s NOLs on an NPV basis. On an
EV/EBITDAR basis, our target is derived by applying a multiple of 6.4x to our 2018
EBITDAR forecast, which we think is reasonable given that major airlines have
historically traded at 5x – 7x.
Turning to risks, fuel price volatility is a key risk; every 10% move in fuel impacts
our 2018 EPS estimate of $8.10 by $2.15. Others are economic weakness,
government regulation, labor issues, the threat of terrorism and war, and the
revaluation of the stock market resulting in higher equity risk premiums for airline
stocks.

Appendix: US Airline 2017 ROIC Analysis
Page 54
US Airlines
Airlines
26 June 2018
Figure 45: Airline 2017 Return on Invested Capital Analysis (page 1 of 2)
Major Networks
United
Alaska Air American Delta Hawaiian Continental
Group Airlines Air Lines Holdings Holdings
Net Operating Profit After Tax (NOPAT)

Pretax income as reported $1,197 $3,395 $5,500 $405 $3,004
+/- Special charges 118 755 (250) 65 176
Pretax income excluding special charges 1,315 4,150 5,250 470 3,180
+ Interest expense 103 (a) 1,124 (a) 454 (a) 31 (a) 643 (a)
+ Interest component of capitalized aircraft rent 102 626 154 (b) 101 (b) 302
+ Net interest on pension* 0 (b) 18 (b) (221) (c) 8 (c) 41 (b)
Net Operating Profit (NOP) 1,520 5,918 5,637 610 4,166
- Adjusted income tax expense 562 35 0 213 25
NOPAT $957 $5,883 $5,637 $396 $4,141
Effective/marginal tax rate 37.0% (c) 0.6% (c) 0.0% 35.0% 0.6% (c)
Imputed interest on aircraft rent 7.5% (d) 7.5% (d) 6.9% (b) 10.7% (b) 6.6%
Invested Capital (five-quarter average)

Total Assets $10,493 $52,207 $51,951 $2,829 $41,757
+ Capitalized aircraft rent at 7x 1,357 8,347 2,243 926 4,585
- Non-interest bearing liabilities (4,072) (16,119) (19,450) (1,189) (16,398)
Average Invested Capital $7,777 $44,435 $34,744 $2,565 $29,944 (d)
ROIC (Return on Invested Capital), Pretax 19.5% 13.3% 16.2% 23.8% 13.9%
ROIC (Return on Invested Capital), After Tax 12.3% 13.2% 16.2% 15.5% 13.8%
Assumptions/Inputs:
Five quarter average aircraft rent $194 $1,192 $320 (c) $132 $655
Interest component of capitalized aircraft rent 102 626 154 101 302
Proportion of interest in rentals 53% 53% 48% 76% 46%
*For all companies, net interest on pension is equal to interest cost net of expected return on plan assets for both DB and OPEB plans
Other notes begin on page 55
Figure 46: Airline 2017 Return on Invested Capital Analysis (page 2 of 2)
US Airlines
Airlines
26 June 2018
Low Cost Carriers Regionals
Allegiant JetBlue
Travel Airways Southwest Spirit
Company Corp. Airlines Co. Airlines SkyWest
Net Operating Profit After Tax (NOPAT)

Pretax income as reported $199 $914 $3,265 $350 $288
+/- Special charges 35 0 45 13 0
Pretax income excluding special charges 234 914 3,310 363 288
+ Interest expense 42 (a) 95 (a) 114 (a) 57 (a) 106 (a)
+ Interest component of capitalized aircraft rent 1 53 (b) 89 (b) 109 135
+ Net interest on pension* 0 0 0 0 0
Net Operating Profit (NOP) 278 1,062 3,513 530 530
- Adjusted income tax expense 103 404 1,265 196 191
NOPAT $175 $658 $2,248 $334 $339
Effective/marginal tax rate 37.0% (b) 38.0% (c) 36.0% (c) 37.0% (b) 36.0%
Imputed interest on aircraft rent 7.0% (c) 7.2% 5.9% 7.5% (c) 8.5% (b)
Invested Capital (five-quarter average)

Total Assets $1,881 $9,563 $24,066 $3,656 $5,269
+ Capitalized aircraft rent at 7x 15 741 1,515 1,457 1,593
- Non-interest bearing liabilities (457) (3,607) (11,926) (1,004) (1,135)
Average Invested Capital $1,440 $6,697 $13,655 $4,109 $5,726
ROIC (Return on Invested Capital), Pretax 19.3% 15.9% 25.7% 12.9% 9.3%
ROIC (Return on Invested Capital), After Tax 12.1% 9.8% 16.5% 8.1% 5.9%
Assumptions/Inputs:
Five quarter average aircraft rent $2 $106 $216 $208 $228
Interest component of capitalized aircraft rent 1 53 89 109 135
Proportion of interest in rentals 49% 50% 41% 53% 60%
*For all companies, net interest on pension is equal to interest cost net of expected return on plan assets for both DB and OPEB plans
Other notes begin on page 55
Page 55
26 June 2018
Airlines
US Airlines
Notes
Alaska Air Group
(a) Interest expense excludes capitalized interest
(b) Net interest on pension is zero as return on plan assets for DB exceeds interest
cost by $32 mm, per Note 7, pages 82-85, ALK 2017 10-K
(c) Effective tax rate per 2017 10-K (page 55)
(d) Interest rate for aircraft rent per DB research
American Airlines
(a) Interest expense excluding capitalized interest (which was $49 mm in 2017),
but including $22 mm of amortization of debt issuance costs and extinguishment
costs; pages 59 and 291, American 2017 10-K
(b) Net interest on pension is zero as return on plan assets for DB exceeds interest
cost by $69 mm; for OPEB is equal to interest cost net of expected return on plan
assets, page 108, AAL 2017 10-K
(c) Effective tax rate based on 2017 cash taxes paid per 2017 10-K (page 120)
(d) Interest rate for aircraft rent per DB research
Delta Air Lines

(a) Includes amortization of debt discount in interest expense; interest expense
excludes capitalized interest of $58 mm, DAL 2017 10-K, page 441
(b) Interest component of capitalized aircraft rent per DB research
(c) Net interest on pension is equal to interest cost net of expected return on plan
assets for both DB and OPEB plans, per Note 8, pages 78-81, DAL 2017 10-K
(d) Delta aircraft rent reflects mainline airline; Delta is the primary lessor of
regional aircraft that are subsequently sub-leased to its regional partners (both
independent and DAL-owned)
Hawaiian Holdings
(a) Interest expense excludes capitalized interest and Includes amortization of
debt discount and issuance costs in interest expense
(b) Imputed interest in aircraft rent inferred from imputed operating lease interest
expense of $135 million and debt of $34 million for LTM September 2017 per
Hawaiian Investor Day December 5, 2017 presentation, page 120
(c) Net interest on pension is equal to interest cost net expected return on plan
assets for both DB and OPEB plans, per Note 12, page 76, HA 2017 10-K
(d) Effective tax rate per HA 2017 10-K, pg. 31
United Continental Holdings

(a) Interest expense excludes capitalized interest; page 32, Item 7 UAL 2017 10-K

26 June 2018
Airlines
US Airlines
(b) Net interest on pension is equal to interest cost net expected return on plan
assets for both DB and OPEB plans, per Note 8, page 78-80, UAL 2017 10-K
(c) Effective tax rate per UAL Q4 2017 PR
(d) Average invested capital per UAL Q4 2017 PR
Allegiant Travel Company

(b) Effective tax rate per ALGT 2017 10-K, pg. 33
(c) Interest rate for aircraft rent per DB research
JetBlue Airways
(b) Interest component of capitalized aircraft rent, pg. 48 JBLU 2017 10-K
(c) Effective tax rate per JBLU 2017 10-K
Southwest Airlines
(b) Interest component of capitalized aircraft rent calculated by subtracting

depreciation component of aircraft rent; Southwest 10K, page 52
(c) Effective tax rate per 2017 10-K
Spirit Airlines
(b) Effective tax rate per 2017 10-K
(c) Interest rate for aircraft rent per DB research
SkyWest
(b) Interest rate for aircraft rent per DB research

26 June 2018
Airlines
US Airlines
Appendix 1
Important Disclosures
*Other information available upon request
*Prices are current as of the end of the previous trading session unless otherwise indicated and are sourced from
local exchanges via Reuters, Bloomberg and other vendors . Other information is sourced from Deutsche Bank, subject
companies, and other sources. For disclosures pertaining to recommendations or estimates made on securities other than
the primary subject of this research, please see the most recently published company report or visit our global disclosure
look-up page on our website at https://research.db.com/Research/Disclosures/CompanySearch. Aside from within this
report, important risk and conflict disclosures can also be found at https://research.db.com/Research/Topics/Equities?
topicId=RB0002. Investors are strongly encouraged to review this information before investing.
Analyst Certification
The views expressed in this report accurately reflect the personal views of the undersigned lead analyst about the subject
issuers and the securities of those issuers. In addition, the undersigned lead analyst has not and will not receive any
compensation for providing a specific recommendation or view in this report. Michael Linenberg
Equity Rating Key Equity rating dispersion and banking relationships

Buy: Based on a current 12- month view of total share-holder
return (TSR = percentage change in share price from current
price to projected target price plus pro-jected dividend yield ) ,
we recommend that investors buy the stock.
Sell: Based on a current 12-month view of total share-holder
return, we recommend that investors sell the stock.
Hold: We take a neutral view on the stock 12-months out and,
based on this time horizon, do not recommend either a Buy
or Sell.
Newly issued research recommendations and target prices
supersede previously published research.

26 June 2018
Airlines
US Airlines
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26 June 2018

North America Industry Date

Airlines Special Report

Value Creation Through the Cycle

Doug Runte, CFA

Value creation through the cycle

Deutsche Bank Securities Inc. Distributed on: 27/06/2018 02:33:11 GMT

North America Industry Date

Airlines Special Report

Value Creation Through the Cycle

Majority of airline management incentivized to maximize margins/returns

Deutsche Bank Securities Inc.

Maintaining a value creation mindset necessary for airlines to re-rate

Page 2 Deutsche Bank Securities Inc.

How Do You Measure Financial Success?........................18

Calculating Airline WACCs............................................... 35

A Recent History of Shareholder Returns.........................37

Valuation and Risks.......................................................... 51

Deutsche Bank Securities Inc. Page 3

Page 4 Deutsche Bank Securities Inc.

The 2017 ROIC – WACC scorecard

Figure 1: 2017 ROIC - WACC spread for selected US airlines

1 Southwest 16.5 8.9 7.5 11.5

Source: Company ﬁlings and Deutsche Bank Airline Research

Of the 9 publicly-traded US airlines that generated a positive ROIC – WACC gap,

While lower returns have contributed to contracting ROIC – WACC spreads, it is

Deutsche Bank Securities Inc. Page 5

Figure 2: 2017 Operating margin

Source: Company ﬁlings and Deutsche Bank Airline Research

Figure 3: 2017 Pre-tax margin

Source: Company ﬁlings and Deutsche Bank Airline Research

Page 6 Deutsche Bank Securities Inc.

Figure 4: Price performance (2018 year-to-date)

Prices as of June 25, 2018

2017 vs. 2016 ROIC comparison

Deutsche Bank Securities Inc. Page 7

Figure 5: Pre-tax return on invested capital for selected US airlines

Comparing ROIC on an after-tax basis, Hawaiian and SkyWest produced a higher

Figure 6: After-tax return on invested capital for selected US airlines

Page 8 Deutsche Bank Securities Inc.

Figure 7: Price performance (full-year 2017)

Deutsche Bank Securities Inc. Page 9

From Figure 8 above, it appears there is indeed a meaningful positive correlation

Page 10 Deutsche Bank Securities Inc.

Figure 9: ROIC – WACC spread (2013 – 2017)

ROIC – WACC analysis: global airline perspective

Figure 10: Global airlines ROIC vs. WACC

Source: IATA and Deutsche Bank Airline Research

Deutsche Bank Securities Inc. Page 11

Notwithstanding the concerns highlighted above, the global industry is

A value-creation mindset is necessary for airlines to re-rate

As shown in Figure 11 below, which highlights the operating margin history of

Page 12 Deutsche Bank Securities Inc.

Figure 11: Operating Margin History - 1960-2022E

Deutsche Bank Securities Inc. Page 13

Figure 12: Airline Stock Price Valuation Matrix

Source: Company ﬁlings, Factset, and Deutsche Bank Airline Research

Figure 13: Airline Stock Price Drivers

Total/Average 34% 7% NM 7% $902 $905 $969 0% 7% $3,186 $3,243 $3,442 2% 6%

Source: Company ﬁlings, Factset, and Deutsche Bank Airline Research

Figure 14: Airline Enterprise Value to 2018E EBITDAR

Source: Company ﬁlings, Factset, and Deutsche Bank Airline Research

Figure 15: Airline Enterprise Value to 2019E EBITDAR