US Airline Industry Today B. Ben Baldanza

My Background Eleven years as CEO of Spirit Airlines Six Years as SVP of US Airways Three Years as President of TACA Three Years as SVP of Continental Early Years at American, Northwest, and UPS SU ‘84 and Princeton ’86* * Dr. Kornhauser was a teacher and advisor

Major Airline Theme: Consolidation Eight Large Airlines Down to Four DL/NW UA/CO WN/FL AA/US 80% + of Domestic US Passengers Highs Costs, Intransigent Labor

Major Airline Theme: High Fuel Costs Rapid Fuel Price Increase Started Consolidation Wave Contributed to Legacy Adoption of Ancillary Charges Encourages Up-gauging of Fleet Discourages New Start-ups

Major Airline Theme: ULCC Growth Spirit, Frontier, and Allegiant now Carry About 4% of all US Air Travelers RyanAir + Clones in Europe Carry 20% Likely ULCC Penetration Rate in US is 10%-15% Due to Southwest Still From Today That Means a Tripling in Size

Major Airline Theme: Ancillary Growth Ancillary Revenues Have Structural Benefits to Ticket Revenues: Price Elasticity Harder to Match Fares Reduced Excise Taxes Dampen Seasonality Gives Pricing Power to Consumers But Often at the Cost of Consumer Expectations Mismanagement

Major Airline Theme: Encroaching Regulation Newest Regulations Based on “Unfair and Deceptive” Standard Is $80+$20 = $100 more deceptive than $100? The DOT says so! Social Media Creates Action Due to Availability Bias Tarmac Rule, Full Fare Rule, FAR 117, 1500 Rule, 24-Hour Rule all Based on Politics versus Economics or Safety

Airline Competition Is Evolving: Yield Management Yield Management Is Getting Smarter Started as a Way to Sell More Low Fares Without Diluting Business Fares Now Combined With Physical Delivery “Basic Economy” Idea Is Smart Better Way for High Cost carriers to Compete with Low Cost Carriers

Airline Competition Is Evolving: Stuck in the Middle “Big 4” are Clear, ULCCs are Clear, Others “Stuck in the Middle” JetBlue, Alaska, Virgin, Hawaii Over Time, Need to Move “Up, Down or Out” Frontier the First Example Alaska and Virgin have merged JetBlue Moving Both Ways at Once!

Airline Competition Is Evolving: Real Estate Limited Access to Big Cities is Huge Competitive Advantage New Gates Swallowed Up by Big Carriers as Available (ATL) Airport Pricing Held Hostage (MIA) Keeps Fares High Keeps Competition Limited

Airline Competition Is Evolving: Product Bifurcaction Just Like Other Products Consumer Reluctance to Change Moving Away From “Serving the Whole Market” Even Worldwide Alliances Get This Compete, But Only As Needed

What’s Next? Increased Labor Costs More ULCC Growth Clarification of Business Strategies Limited or No New Start-ups Increased Consumer Acceptance of New Models Trump Administration Likely to Rollback Some Regulation

Questions?