巴克莱美股航空业深度研究

Equity15NovemberNorthAmericaAirlinesDeepEquity15NovemberNorthAmericaAirlinesDeepDiveonMaybe,justmaybe,2019canbetheyearforairlineinvestorsasrevenuemomentumway,werealizeplentycanandwillchangefortheindustry.Butweremainsteadfastinourconvictionthat,long-term,lowairlinevaluationsprovidedeepvalueopportunitiesforpatientinvestors.Abovemarketdemandgrowth,consolidatedindustryinputcosts,respectablefinancialreturnsandfreecashflowgenerationkeepusbullishonlong-termprospectsforUSairlineequities.However,throughanobjectivelens,theindustryhassustainedthreestraightyearsofmargincompression,creatingafairmarketnarrativethat‘nothinghaschanged’andprofitabilitywillbeultimatelycompetedaway.Whileitiseasytobedismissive,theindustryremainssubjecttonear-termvolatilityinoilprices,whichwouldbequitesupportiveforearningsandmarginexpansionin2019,ifcurrentenergyfutureshold.Butwewouldarguethelargeropportunityisthepotentialthatinvestorsbegintoappreciatethematurityoftheindustry.Inthatregard,2019shouldhelptoshapeamorepositiveindustrynarrativeasmanageablecostinflation,incrementalpricingopportunitiesandimprovedcashgenerationarelikelytodriveincreasedattentionforairlineequities.INDUSTRYNorthAmericaForafulllistofourratings,pricetargetandearningschangesinthisreport,pleaseseetableonpage2.NorthAmericaAirlinesBrandonR.+1212526BCI,USMatthewWisniewski,+1212526BCI,USDavidZazula,+1212526BCI,USAirlinedemandremainsrobust,defyingindustryskepticism;weseetop-lineexpansionapproaching6%in2019,following7%thisyear.Withplentyoffocusonindustrycapacity,wethinkthemarketsometimesoverlooksfavorabledemanddynamicsforairlines.Since2001,domesticUSrevenuehasoutperformednominalGDPexpansionby100-150bps.WithapparentstrengthinUSconsumerandindustrialmarketsheadinginto2019,wesuspectrevenueexpansioncouldapproach6%.Relativetoexpectationsforcapacityexpansionofroughly4%,webelievepositiveunitrevenueoutcomesarelikelyin2019.+1212526BCI,USApartfromfuel,unitcostinflationshouldscreenfavorablyfortheindustryin2019,2020.Followingseveralyearsofelevatedindustrycostinflation,weforecastonlymodestincreasesin2019.Further,withindustrywagesnowroughlymatchingpre-2001inflationadjustedlevels,wesuspectfuturelabordealsshouldreflectmorenormalincreasesrelativetowhatweviewas‘catchup’ratesinthepastfewyears.Highermarginsandlowercapitalspendingheadinginto2020shoulddriveafavorablecashnarrativeformanyairlines,especiallyAmerican.FollowingsignificantfleetinvestmentsfromcarrierssuchasAmericanandUnited,lowerrelativespendingoverthenexttwoyearsshoulddriveamaterialimprovementinfreecashflowyields,likelytoattractinvestorattention.BarclaysCapitalInc.and/oroneofitsaffiliatesdoesandseekstodobusinesswithcompaniescoveredinitsresearchreports.Asaresult,investorsshouldbeawarethatthefirmmayhaveaconflictofinterestthatcouldaffecttheobjectivityofthisreport.Investorsshouldconsiderthisreportasonlyasinglefactorinmakingtheirinvestmentdecision.PLEASESEEANALYSTCERTIFICATION(S)ANDIMPORTANTDISCLOSURESBEGINNINGONPAGE每日每日免费获取报（增值服务关注公回复：研究报加入“起点财经”微信群Barclays|NorthAmericaSummaryofourRatings,PriceTargetsandEarningsBarclays|NorthAmericaSummaryofourRatings,PriceTargetsandEarningsChangesinthisReport(allchangesareshowninAlaskaAirGroup,Inc.(ALK)AllegiantTravelCompany(ALGT)AmericanAirlinesGroupInc.(AAL)DeltaAirLines,Inc.(DAL)SouthwestAirlinesCo.(LUV)SpiritAirlines,Inc.(SAVE)UnitedContinentalHoldings,Inc.102140214532829Source:BarclaysResearch.SharepricesandtargetpricesareshownintheprimarylistingcurrencyandEPSestimatesareshowninthereportingcurrency.FY1(E):CurrentfiscalyearestimatesbyBarclaysResearch.FY2(E):NextfiscalyearestimatesbyBarclaysResearch.StockRating:OW:Overweight;EW:EqualWeight;UW:Underweight;RS:RatingSuspendedIndustryView:Pos:Positive;Neu:Neutral;Neg:Negative15November2 EPSFY1 EPSFY2OldNew14-Nov- %ChgOldNew%Chg NewNorthAmerica PosBarclays|NorthAmericaDeepDiveon2019AirlineInBarclays|NorthAmericaDeepDiveon2019AirlineInthisnotewetakeacloserlookatkeyassumptionsdrivingour2019Afterayearofhigherfuelpricesdrovemargin,andsubsequentlyearnings,expectationslower,therecentcollapseincrudepricesmayproviderelieffortheairlinesin2019.Wetakeestimatesupbutlowerourtop-linegrowthforecasts(Page4).Wethinkthefundamentalsetupformostcarriersshouldbefavorablenextyear.Lookingatourcurrentestimates,weseeEBITmarginsexpandingroughly100bps,whichshouldprovidesupportforrobustEPSgrowth.•Capacitygrowthlikelytomarginallyslowin2019from2018levels(Page7).Weanticipateaslightlylowergrowthoutlookfrommostcarriersin2019thatincludessubstantiallylowergrowthfromAlaskaandSpiritrelativetorecentyears.WeexpectthenetworkcarriersUnitedandDeltaalongwithSouthwestwillcontributeover60%ofUSsystemcapacityexpansionwithslowersub-GDPlevelsfromAmerican.Despitecontinueddomesticgrowth,ourrecentanalysissuggeststhatdemandissufficienttosupportthegrowthoutlook(See'UnitedAirlines:GrowthinContext',published13May2018and'DebatingFlight2018:áLaCarteLowFareCarrierWeek’,published27March•Weexpectairlineindustryrevenuetogrowroughly6%,or2ptsinexcessofnominalGDPin2019(Page10).Continuedeconomicstrengthshouldbenefitindustryrevenuegrowth,whichwemodelat6%nextyear.Theincreaseisdrivenby4%capacitygrowthandpricingimprovementsofroughly2%.AnominalGDPoutlookof4.2%,includingroughly2ptsofinflationkeepsusconfidentthatrecentpricingstrengthcouldcontinueinto2019.However,giventhestrongpositivecorrelationbetweenindustryrevenueandfuelexpense,anexpectedfuelcostreductionofroughly3%onaunitbasiscouldcreatedownsiderisktoourestimatesin2019.•Followingrecentlabordealsandelevatedfleetinvestments,weexpectmoderatecostinflationin2019(Page13).Non-fuelunitcostinflationshouldremainmoderatenextyearasmeaningfulwageratehikesappeartobemostlyinthepastandtheindustrybenefitsfromlowermaintenancecostsfollowingaperiodofelevatedspendingonneweraircraft.WhileallofthebigfourUScarriershaveatleastapilotorflightattendantcontractamendablebeforetheendofnextyear,wedonotanticipatetherelatedsalaryincreasestobeasmeaningfulasthelastroundoflabordealsthatappearstohaveputsalariesbackin-linewithpre-recession,inflationadjusted,paylevels.•FuelPricesvs.Margins(Page16).Wetakeahighlevellookattheearningspotentialoftheindustryundervariousfuelenvironments.Afterayearoffuelpriceincreasespressuringmargins,recenttrendsforlowerenergypricesnextyearcouldprovetobeatailwind.Regardlessofpricing,ouranalysissuggeststhatcurrentprofitabilitylevelsexceedhistoricalaveragesduringsimilarfuelpriceenvironments,leadingustobelievethatstructurallytheindustrymaybecapableofrecoupinghigherfuelcoststhaninthe•Cashflowshouldmodestlyimproveinaggregategivenlowerrelativecapexformostcarriersandimprovedmarginprofiles(Page8).Relativecapitalspendingappearstosubsideformostcarriersin2019asmajorinvestmentinitiativesbegintotailoff,particularlyatAlaskaandSpirit.Lowercapitalspendingcombinedwithimprovedmarginprofilesshouldultimatelyimprovecashflowprofilesformostcarriersin2019andbesupportiveofshareholderinitiativesincludingbuy-backsanddividends.•Allegiant3Q18Review(Page20).Whileweareencouragedbyimprovementintheairlinebusiness,thestrategicdirectiontowardnon-corebusinesseskeepsuscautious.•315NovemberBarclays|NorthAmerica2019PathtoImprovedEarningsandWeexpectmodestoperatingincomeimprovementnextyear,primarilydrivenbyahealthyrevenueenvironment,modestcostinflationandreducedunitfuelprices(Figure1).Weexpectaslightlyabove-consensusoutcome,withmostcarriersproducingdouble-digitearningsgrowth(Figures2-3).Drivingexpectationsformarginimprovementisourestimateofunitrevenueexpansionofroughly2%,withmodestunitcostinflationofroughly1pt,asdiscussedfurtherbelow(Figures4-FIGURE2019AirlineEarningsExpansionLikely,AssumingContinuedRevenueMomentumandMore‘Normalized’CostInflationConsolidatedUSAirlineIndustryEBIT(Ann.chgappliedtoFY18EandFY19EEBIT)WeexpectUSindustryEBITmarginstoexpandroughly100bpsnextyearNote:/1USIndustryrepresentstheaggregateofAAL,DAL,LUV,UAL,JBLU,ALK,SAVEandALGT.Source:Companyreports,BarclaysResearchestimatesFIGUREWeExpectEBITMarginExpansionin2019AcrossourUSAirlineUSAirlinesEBIT(EBIT/totaloperatingWeBarclays|NorthAmerica2019PathtoImprovedEarningsandWeexpectmodestoperatingincomeimprovementnextyear,primarilydrivenbyahealthyrevenueenvironment,modestcostinflationandreducedunitfuelprices(Figure1).Weexpectaslightlyabove-consensusoutcome,withmostcarriersproducingdouble-digitearningsgrowth(Figures2-3).Drivingexpectationsformarginimprovementisourestimateofunitrevenueexpansionofroughly2%,withmodestunitcostinflationofroughly1pt,asdiscussedfurtherbelow(Figures4-FIGURE2019AirlineEarningsExpansionLikely,AssumingContinuedRevenueMomentumandMore‘Normalized’CostInflationConsolidatedUSAirlineIndustryEBIT(Ann.chgappliedtoFY18EandFY19EEBIT)WeexpectUSindustryEBITmarginstoexpandroughly100bpsnextyearNote:/1USIndustryrepresentstheaggregateofAAL,DAL,LUV,UAL,JBLU,ALK,SAVEandALGT.Source:Companyreports,BarclaysResearchestimatesFIGUREWeExpectEBITMarginExpansionin2019AcrossourUSAirlineUSAirlinesEBIT(EBIT/totaloperatingWeexpectmarginstoincreasein2019over2018butnottoexceedlevelsachivedin201715.5%13.8%10.6%SourceCompanyreports;BarclaysResearch15November4%-Barclays|NorthAmericaFIGURE2019BarclaysEstimatesAboveConsensusAcrossMostUSAirlinesEPS(2019E;Barclaysestimatesvs.forAAL,JBLU,DAL,LUVSource:Companyreports;ThomsonReuters;BarclaysFIGUREBarclaysAirlinesEPSRevisionAirlinesEPSEstimateRe CurrentCurrentCurrentBarclays|NorthAmericaFIGURE2019BarclaysEstimatesAboveConsensusAcrossMostUSAirlinesEPS(2019E;Barclaysestimatesvs.forAAL,JBLU,DAL,LUVSource:Companyreports;ThomsonReuters;BarclaysFIGUREBarclaysAirlinesEPSRevisionAirlinesEPSEstimateRe CurrentCurrentCurrent15November5EPS2019E BarclaysRe Barclays|NorthAmericaFIGUREBarclaysUnitRevenueandUnitCostBarclaysAirlinesUnitRevenue&CostEstimaBarclays|NorthAmericaFIGUREBarclaysUnitRevenueandUnitCostBarclaysAirlinesUnitRevenue&CostEstimateRevisions 15November6CASMex-fue Prior PriorCurrent Prior 2.7%2.8% 3.3%1.5% 2.4% 4.0%3.9% 3.6%2.0% 1.8% 4.1%3.8% 2.5%1.1% 1.6% 1.5%1.5% 3.5%2.8% 1.8% 2.5%2.2% 4.1%2.3% 2.7% 2.6%2.4% 3.3%1.4% 1.9% 6.0%6.0% 2.1%1.2% 1.2%1.1% 2.5%1.7% 3.2%1.8% 2.0%1.7%BarclaysRe 4Q18E2019E. -.-.%-.%-.-. -.. -.-. -.-. -.. -.-. -. 3. 3. 3. 1. 1. 1.-0.2%-1.5%-1. - - - - 0.7%0.7% 1.0%0.9%1.0% 0.6%3.1%3.2% 1.0%-0.2%0.0% 0.1%0.8%0.8%-1.5%-0.3%0.5% 0.5%-3.9%-3.9%-0.7%---..--. 1. 1. 0. 0. 0. 0.0. 0. 0.-.-.-.-.-.-.-.Barclays|NorthAmericaOur2019capacityestimatesfallroughly20bpsaheadofconsensus(Figure6).In2019weexpectthatUnited,DeltaandSouthwestcombinedwillgeneratenearly60%ofindustrycapacitygrowthwithmorereasonablesub-GDPlevelsfromAmerican(Figure7).Whilecapacitymaystillseemslightlyhighforsomecarriers,ourrecentanalysissuggeststhatstrongdemandstillexistsinUSdomesticmarkets.BasedonourrecentextensiveanalysisintothehubmarketopportunityforUnited(See'UnitedAirlines:GrowthinContext',published13May2018)wenotethatwhiletotalUSsystemunitrevenuesexpanded7.5%inthelast7yearsalongwithpassengergrowthof30%,connectingmarketunitrevenuesincreasedbyover20%ononly4%passengergrowth,signallingtousthatdemandstillexistsforconnectingmarketexpansion(Figure8).Similarly,inourrecentnoteontheUSlowfarecarriers(See'DebatingFlight2018:áLaCarteLowFareCarrierWeek’,published27March2018),weindentifiedover500newhighdemanddomesticgrowthmarketscurrentlylacksubstantialdirectservice(FigureFIGUREWeModelIndustryCapacityGrowthof4%inBarclays|NorthAmericaOur2019capacityestimatesfallroughly20bpsaheadofconsensus(Figure6).In2019weexpectthatUnited,DeltaandSouthwestcombinedwillgeneratenearly60%ofindustrycapacitygrowthwithmorereasonablesub-GDPlevelsfromAmerican(Figure7).Whilecapacitymaystillseemslightlyhighforsomecarriers,ourrecentanalysissuggeststhatstrongdemandstillexistsinUSdomesticmarkets.BasedonourrecentextensiveanalysisintothehubmarketopportunityforUnited(See'UnitedAirlines:GrowthinContext',published13May2018)wenotethatwhiletotalUSsystemunitrevenuesexpanded7.5%inthelast7yearsalongwithpassengergrowthof30%,connectingmarketunitrevenuesincreasedbyover20%ononly4%passengergrowth,signallingtousthatdemandstillexistsforconnectingmarketexpansion(Figure8).Similarly,inourrecentnoteontheUSlowfarecarriers(See'DebatingFlight2018:áLaCarteLowFareCarrierWeek’,published27March2018),weindentifiedover500newhighdemanddomesticgrowthmarketscurrentlylacksubstantialdirectservice(FigureFIGUREWeModelIndustryCapacityGrowthof4%in2019,SlightlyaboveUSAirlinesCapacity(2019E;Barclaysestimatesvs.Inaggregateourmodelsarefairlyconsistentwithconsensus4.7%4.3%Source:Companyreports;ThomsonReuters;Barclays15November7Barclays|NorthAmericaFIGUREUSAirlinesCapacityGrowth(2019E;Barclaysestimatesvs.1115 44476340072ofcapacitygrowthin2019112Source:Companyreports;BarclaysFIGUREMaterial‘Pent-up’Demand,GivenHighRelativeYieldGrowthCoupledwithLowCapacityGrowthinConnectingMarkets2010-2017USDomesticMarket(%growth2017vs.2010)DirectTotalConnectingbutlowpassengerPassengersPassengerRevenuePassengersSource:Diio;Barclays|NorthAmericaFIGUREUSAirlinesCapacityGrowth(2019E;Barclaysestimatesvs.1115 44476340072ofcapacitygrowthin2019112Source:Companyreports;BarclaysFIGUREMaterial‘Pent-up’Demand,GivenHighRelativeYieldGrowthCoupledwithLowCapacityGrowthinConnectingMarkets2010-2017USDomesticMarket(%growth2017vs.2010)DirectTotalConnectingbutlowpassengerPassengersPassengerRevenuePassengersSource:Diio;USDOTForm41&DB1B;Barclays15November834Barclays|NorthAmericaFIGUREFurthermore,RespectivetotheLowFareCarriers,WeIdentifiedRoughly550PotentialHighDemandDomesticGrowthMarketsthatCurrentlyLackSubstantialDirectBarclays|NorthAmericaFIGUREFurthermore,RespectivetotheLowFareCarriers,WeIdentifiedRoughly550PotentialHighDemandDomesticGrowthMarketsthatCurrentlyLackSubstantialDirectPotentialLowFareCarrierGrowth(TTM3Q17;USdomesticroutes;origin-destinationpairs;cotermed)Note:/1Growthmarketsrepresentrouteswithgreaterthan50PDEWs(Passengersdirecteachway)withlimiteddirectservice.Source:USDOTForm41;Barclays15November9Weidentifiedover550potentialdomesticgrowthmarketsforlowfarecarriersBarclays|NorthAmericaRevenueAmajorcomponentofourlong-termbullishthesisonthesectorremainsthatairlinesareagrowthindustry.Whilethesector’spasthasbeenpunctuatedwithdifficultyearsandahistoryofbankruptcies,aggregateindustryrevenuehasoutgrownGDPduringthelasttwocycles(Figure10).Wethereforeexpectrecenteconomicmomentumtobenefitindustryrevenueheadinginto2019.Wecurrentlyestimaterevenueexpansionofroughly6%derivedfromcapacitygrowthof4.0%andunitrevenueexpansionofnearly2%.InthecontextofnominalUSGDPthatcontinuestotrackatroughly4%includinginflationexpectationsof2%,wethinkourgrowthestimates,including2ptsofunitrevenueexpansioninparticular,arereasonable(Figure11).However,withourcurrentestimatesforfueldownnearly3%onaunitbasis,pricingcouldbepressuredgivenastrongpositivecorrelationbetweenfuelandunitrevenues,whichlikelycontributestoourbelowconsensusestimatesonrevenue(Figures12-13).FIGUREWeExpectDomesticUSRevenueGrowthtoExceedCapacityGrowthinConsolidatedUSAirlineIndustryDomesticRevenue,Capacityand(TTM;annual1993-20002001-20082009-2018EBarclays|NorthAmericaRevenueAmajorcomponentofourlong-termbullishthesisonthesectorremainsthatairlinesareagrowthindustry.Whilethesector’spasthasbeenpunctuatedwithdifficultyearsandahistoryofbankruptcies,aggregateindustryrevenuehasoutgrownGDPduringthelasttwocycles(Figure10).Wethereforeexpectrecenteconomicmomentumtobenefitindustryrevenueheadinginto2019.Wecurrentlyestimaterevenueexpansionofroughly6%derivedfromcapacitygrowthof4.0%andunitrevenueexpansionofnearly2%.InthecontextofnominalUSGDPthatcontinuestotrackatroughly4%includinginflationexpectationsof2%,wethinkourgrowthestimates,including2ptsofunitrevenueexpansioninparticular,arereasonable(Figure11).However,withourcurrentestimatesforfueldownnearly3%onaunitbasis,pricingcouldbepressuredgivenastrongpositivecorrelationbetweenfuelandunitrevenues,whichlikelycontributestoourbelowconsensusestimatesonrevenue(Figures12-13).FIGUREWeExpectDomesticUSRevenueGrowthtoExceedCapacityGrowthinConsolidatedUSAirlineIndustryDomesticRevenue,Capacityand(TTM;annual1993-20002001-20082009-2018EDomesticairlinerevenuedeclined13%in2001and2009DomesticU.S.RealU.S.NominalU.S.DomesticSource:USDOTForm41;Haver;BarclaysResearch15NovemberBarclays|NorthAmericaFIGUREWeContinuetoExpectDomesticUSRevenueExpansionAheadofNominalGDPinUSAirlineDomesticGrowthvs. Source:USDOTForm41;Haver;BarclaysResearchFIGUREIndustryUnitRevenueCorrelated(80%R-Sq.)withUnitFuelCostSince2009,SuggestingthataLowerFuelPriceoutlookwillModerateUnitRevenuegrowthU.S.AirlineDomesticMainlineTRASMvs.Fuel(4Q09-2Q18;TTMannualch.)R²=0.822019WhileTRASMappearssettoBarclays|NorthAmericaFIGUREWeContinuetoExpectDomesticUSRevenueExpansionAheadofNominalGDPinUSAirlineDomesticGrowthvs. Source:USDOTForm41;Haver;BarclaysResearchFIGUREIndustryUnitRevenueCorrelated(80%R-Sq.)withUnitFuelCostSince2009,SuggestingthataLowerFuelPriceoutlookwillModerateUnitRevenuegrowthU.S.AirlineDomesticMainlineTRASMvs.Fuel(4Q09-2Q18;TTMannualch.)R²=0.822019WhileTRASMappearssettounderperfomeredrisingfuelcostsin2018ourmodelssuggest2019willbemoreinlinewithhistroicalDomesticMainlineFuelNote:/12018Eand2019EbasedonaggregateAAL,DAL,UAL,LUV,ALK,JBLU,SAVE,ALGTdata;impliedTRASMbasedonestimatedincreaseinfuelCASMforabovegroupSource:DOTForm41;Companyreports;Barclays15NovemberDomesticMainline2018Barclays|NorthAmericaFIGUREOur2019RevenueOutlookisBelowUSAirlinesRevenue(2019E;Barclaysestimatesvs.Barclaysbelowconsensusaggregaterevenuegrowthin7.5%Source:Companyreports;ThomsonReuters;Barclays15NovemberBarclays|NorthAmericaFIGUREOur2019RevenueOutlookisBelowUSAirlinesRevenue(2019E;Barclaysestimatesvs.Barclaysbelowconsensusaggregaterevenuegrowthin7.5%Source:Companyreports;ThomsonReuters;Barclays15NovemberBarclays|NorthAmericaCostUnitcostshavesteadilyincreasedoverthepastdecade,butweexpectCASMex-fueltoexpandatamoremodestratein2019,albeitataslightlyhigherlevelthan2018(Figure14).Ourforecastisdrivenbylowerotherexpensesprimarilyduebyreducedmaintenancecostsforneweraircraftaswellasmorenormalizedlaborinflationgivensignificantcontractincreasesin2016and2017(Figure15).WhilelaborcontractsareupcomingforUnited(Pilots),Southwest(FlightAttendants),Delta(Pilots)andAmerican(FlightAttendants),wedonotanticipatethesalaryincreasestobeasimpactfulasthelastroundofdealsaswagesappeartohavefinallyrecoveredabovepre-recession,inflationadjustedlevels(Figures16-FIGUREIndustryCASMex-FuelHasSteadilyGrownOverPastDecade,butShouldRemainModestinUSAirlinesIndustryCASMex-Barclays|NorthAmericaCostUnitcostshavesteadilyincreasedoverthepastdecade,butweexpectCASMex-fueltoexpandatamoremodestratein2019,albeitataslightlyhigherlevelthan2018(Figure14).Ourforecastisdrivenbylowerotherexpensesprimarilyduebyreducedmaintenancecostsforneweraircraftaswellasmorenormalizedlaborinflationgivensignificantcontractincreasesin2016and2017(Figure15).WhilelaborcontractsareupcomingforUnited(Pilots),Southwest(FlightAttendants),Delta(Pilots)andAmerican(FlightAttendants),wedonotanticipatethesalaryincreasestobeasimpactfulasthelastroundofdealsaswagesappeartohavefinallyrecoveredabovepre-recession,inflationadjustedlevels(Figures16-FIGUREIndustryCASMex-FuelHasSteadilyGrownOverPastDecade,butShouldRemainModestinUSAirlinesIndustryCASMex-Industryunitcostshavebeengrowingsteadilyoverthepasttenyears,butweexpectcostinflationtoremainmoderatein2019 2009201220132014 20172018ENote:/1Industryincl.AAL,DAL,UAL,LUV,ALK,JBLU,SAVE,ALGT;incl.entryofVAtoALKin4Q16,USAirwaystoAALin4Q13,AirTrantoLUVin2Q11;NWAtoDALin4Q08andCALtoUALin4Q10Source:Companyreports;BarclaysResearch15NovemberBarclays|NorthAmericaFIGUREFuelExpectedtobeaTailwind2019,butOtherCostInflationShouldRemainConsolidatedUSAirlineIndustryUnit(Ann.change,expense/systemASMs)TotalOperatingD&AandOtherNon201620172018E2019E20162017Barclays|NorthAmericaFIGUREFuelExpectedtobeaTailwind2019,butOtherCostInflationShouldRemainConsolidatedUSAirlineIndustryUnit(Ann.change,expense/systemASMs)TotalOperatingD&AandOtherNon201620172018E2019E201620172018E2019E201620172018E2019E201620172018E2019E201620172018ENote:/1USIndustryrepresentstheaggregateofAAL,DAL,LUV,UAL,JBLU,ALK,SAVEandALGT;incl.entryofVAtoALKbeginning4Q16Source:Companyreports;BarclaysResearchestimatesFIGUREDespiteUpcomingLaborDealsthatTypicallyComewithSalaryAirlinesLaborUnions Amendable AirliWorkFlightFlightAttendantsSource:Company15NovemberBarclays|NorthAmericaFIGURE…WeExpectPotentialWagesIncreasestobeMoreModestNowthatSalariesAppeartoHaveExceededPre-2001InflationLevelsSelectNetworkCarrierPilotandCopilotSalaryperAircraftBarclays|NorthAmericaFIGURE…WeExpectPotentialWagesIncreasestobeMoreModestNowthatSalariesAppeartoHaveExceededPre-2001InflationLevelsSelectNetworkCarrierPilotandCopilotSalaryperAircraftHour(TTM;indexedto1Q0'01wages,adj.forinflationInflation-Note:/1SelectnetworkcarriersincludeDelta,UnitedandAmerican.Source:CompanyreportsPilotSalary/AC15NovemberBarclays|NorthAmericaFuelvs.Whilefuelpricesarevolatile,andthushardtopredict,giventheclearimpactonmarginswetakeahighlevellookatindustryearningspotentialundervariousfuelscenarios.Lowerfuelpricessincelate2014havebeenalargebenefitduringoneofthehighestmarginerasforUSairlines;however,asfuelpriceshaverecentlyincreasedfromtroughlevelsinearly’16marginshavestartedtocomeunderpressure(Figures18-19).Nonetheless,ifwelookatprofitabilityundercomparablefuelpriceenvironments,ouranalysisindicatesthatatcurrentWTIprices,industrymarginoutcomeshaveexceededrelevanthistoricallevels,suggestingairlinesmaybestructurallycapableofrecoupinghigherfuelcoststhaninthepast(Figure20).Furthermore,inthecaseofaslowdowninunderlyingeconomicfundamentals,lowerfuelprices,commonindownturns,couldprovidecountercyclicalsupportoffsettingsomeofthenegativeimpactfromweakerdemandforairtravel(FigureFIGURESince2015,LowerFuelCostshasHelpedContributetotheHighestIndustryMarginsin25USAirlineEBITMarginsvs.WTI(TTMEBIT/Revenue;Avg.TTM$-2015-2Q18WTI:$33-$68EBIT:10%-15%--TTMEBITAvg.Source:USDOTForm41;Companyreports.BarclaysFIGURE…ButGiventheRecentRiseinFuelfromRoughly$40attheendof2016,MarginsHaveLargeCapBarclays|NorthAmericaFuelvs.Whilefuelpricesarevolatile,andthushardtopredict,giventheclearimpactonmarginswetakeahighlevellookatindustryearningspotentialundervariousfuelscenarios.Lowerfuelpricessincelate2014havebeenalargebenefitduringoneofthehighestmarginerasforUSairlines;however,asfuelpriceshaverecentlyincreasedfromtroughlevelsinearly’16marginshavestartedtocomeunderpressure(Figures18-19).Nonetheless,ifwelookatprofitabilityundercomparablefuelpriceenvironments,ouranalysisindicatesthatatcurrentWTIprices,industrymarginoutcomeshaveexceededrelevanthistoricallevels,suggestingairlinesmaybestructurallycapableofrecoupinghigherfuelcoststhaninthepast(Figure20).Furthermore,inthecaseofaslowdowninunderlyingeconomicfundamentals,lowerfuelprices,commonindownturns,couldprovidecountercyclicalsupportoffsettingsomeofthenegativeimpactfromweakerdemandforairtravel(FigureFIGURESince2015,LowerFuelCostshasHelpedContributetotheHighestIndustryMarginsin25USAirlineEBITMarginsvs.WTI(TTMEBIT/Revenue;Avg.TTM$-2015-2Q18WTI:$33-$68EBIT:10%-15%--TTMEBITAvg.Source:USDOTForm41;Companyreports.BarclaysFIGURE…ButGiventheRecentRiseinFuelfromRoughly$40attheendof2016,MarginsHaveLargeCapAirlineEBITMarginsvs.WTI(TTMEBIT/Revenue;Avg.TTM$-Source:USDOTForm41;USEnergyInformationAdministration();Companyreports.Barclays15NovemberBarclays|NorthAmericaFIGUREHowever,DespiteRisingFuelCosts,IndustryMarginsHaveExceedHistoricalAverages,IndicatingaPotentiallyStructurallyImprovedBusinessUSAirlineAverageOperating(TTM;Avg.EBITMargin1994-2Q18(ex2001-2003);groupedbyWTIcost;#of69668Despiterecentlyhigherfuel,marginsaretrackingaheadofhistoricalresultsundersimilarfuelenvironments$35-$45-$55-$65-$75-$85-$56Note:Fuelpricesbasedonpublishedaveragesfor2017andYTD2018;2019EbasedonWTIspotpriceasBarclays|NorthAmericaFIGUREHowever,DespiteRisingFuelCosts,IndustryMarginsHaveExceedHistoricalAverages,IndicatingaPotentiallyStructurallyImprovedBusinessUSAirlineAverageOperating(TTM;Avg.EBITMargin1994-2Q18(ex2001-2003);groupedbyWTIcost;#of69668Despiterecentlyhigherfuel,marginsaretrackingaheadofhistoricalresultsundersimilarfuelenvironments$35-$45-$55-$65-$75-$85-$56Note:Fuelpricesbasedonpublishedaveragesfor20