Slide 1 easyJet plc Airport Charges & their Potential for Abuse 3rd July 2007 Presentation to the Expert Group on Air Transport IMPRINT-NET Ian Clayton

Slide 2 easyJet plc Market Power Many EU airports enjoy high levels of market power, as the supply of airport infrastructure is finite & potentially constrained; & –runway constraints are the most difficult to overcome; so –typically, availability of morning peak departures slots becomes the constraining factor; & demand for airport infrastructure is increasing, as competition in the airline market intensifies; & as a result, a number of larger EU airports have been regulated.

Slide 3 easyJet plc Airport Profitability The most profitable customers for airports are short haul scheduled carriers; because –flights operate all year round: passengers are increasingly travelling for business purposes; & leisure passengers are less tied to traditional summer breaks; & EU integration has stimulated the VFR market; & –flights operate relatively full: airline pricing models ensure high load factors; & –flights operate all day long: efficient airline business models require optimal fleet utilisation; & simple route structure & minimal complexity; so an airports most profitable customers are the same ones over which it may exercise the most market power.

Slide 4 easyJet plc Investment & Return The directors of companies are obligated to seek an optimal balance of risk & return for their shareholders; & so to be an attractive investment, airports must deliver a return over & above that which the stock market would typically deliver for a similar level of risk; & risks in the EU aviation sector have diminished, as a result of market maturation; & so airports have increasingly focused on delivering increased returns; however where airports are regulated, this has led to some interesting pricing structures…

Slide 5 easyJet plc Airport Revenues (1) Fundamentally, in order to deliver an attractive return on investment, airports must increase their revenues; & where these revenues are subject to price regulation, airport operators will seek to: –find ways to realise revenues outside the scope of regulation; & –find ways to realise increased regulated revenues, where the regulatory system allows this; & outside the scope of regulation might mean: –through commercial activities; & –through vertical integration; & –through common interest; & regulatory systems may reward efficiency & so airports may over-forecast expenditure in order to benefit from this.

Slide 6 easyJet plc Airport Revenues (2) Airport Operator Shareholders Passengers Airlines Service Providers Fares Fees Aeronautical Charges Retail, car parking, hotels etc. Property Rents, unregulated charges etc.

Slide 7 easyJet plc Increased Revenues through Commercial Activities (1) A dual-till system allows unregulated revenues from commercial activities, whereas aeronautical activities are regulated; so OPEX allocated to the regulated, aeronautical till are guaranteed to be remunerated through airport charges; & consequently, commercial activities can deliver increased net revenues; eg. in 2005/6, Schiphol Group allocated 74% of OPEX at Amsterdam (dual-till) to aeronautical activities, recovering 10.72/passenger, whereas BAA allocated just 24% of OPEX at Heathrow (single- till) to aeronautical activities, recovering 7.11/passenger; so returns on commercial activities at Amsterdam were 130%, whereas those at Heathrow were 61%.

Slide 8 easyJet plc Increased Revenues through Commercial Activities (2) Airport retail is demonstrably not in competition with other retail channels: –retail & commercial rents accrue to a single landlord; & –passengers are required to dwell at airport retail facilities; & –passengers are decreasing provided with catering on short haul flights; & –heightened security requirements preclude some products (eg. cosmetics) being carried through control posts; & –there may be tax advantages to airport shopping; & the benefits of commercial revenues flow from passengers, airlines, service providers & others, yet where a dual-till regulatory mechanism exists, these accrue just to the airports sector.

Slide 9 easyJet plc Increased Revenues through Vertical Integration (1) Where airport operators own (or control) service providers, there exists a potential to distort competition; eg. although the EC Groundhandling Directive ensures that charges for access to monopoly infrastructure must be non-discriminatory & transparent, this does not effectively preclude an airport operator from making excessive charges to all groundhandlers, for access to its monopoly infrastructure; & from a group perspective this would: –be cost-neutral between an airport operator & its subsidiary; but –deliver increased overall revenues, where third-party groundhandlers operate; & where accounts are consolidated, such abusive behaviour is difficult to prove.

Slide 10 easyJet plc Increased Revenues through Vertical Integration (2)

Slide 11 easyJet plc Increased Revenues through Vertical Integration (3)

Slide 12 easyJet plc Increased Revenues through Vertical Integration (4)

Slide 13 easyJet plc Increased Revenues through Common Interest (1) Where an airports shareholders share a common interest with those of airlines, there exists a potential to distort competition; as airport charges may be structured to deliver advantage to a favoured airline; eg. –by weighting charges away from a particular business model; or –by weighting charges towards or away from passenger or aircraft activity; & a rational investor would chose a charging regime that was structured in such a way as to deliver the maximum net present value of benefits from a portfolio of assets; & in a constrained airport, this is likely to be one which incentivises best use of infrastructure, such as high load factors & quick turnaround of aircraft, ie. is weighted towards aircraft activity.

Slide 14 easyJet plc Increased Revenues through Common Interest (2) the Schiphol Group is owned (76%) & controlled by the Dutch state (& 24% owned by regional Government); & AF/KLM is 21% owned by the previous shareholders of KLM, who are predominantly Dutch investors; & airport charges at Schiphol favoured transfer passengers over point-to-point passengers, by a factor of 3:1 (26.00 vs 8.67); & 60-70% of AF/KLMs passengers are transferring through Amsterdam.

Slide 15 easyJet plc Rewards for Efficiency Regulatory systems may allow airports to retain so-called capital & operational efficiencies; stemming from –capital savings; & –operation savings; & –increased commercial revenues; however these are simply the differences between forecast & actual expenditure &/or revenues; & between 2003 & 2008, BAA under spent its capital budget at Stansted by 229m (40%) & so is currently achieving returns of 11.41%, in contrast to a regulatory settlement of 7.75%; & the UK CAA is considering changing the regulatory mechanism in order to return such revenues to airlines.

Slide 16 easyJet plc Key Points Constrained airports enjoy excessive market power, potentially over their most profitable customers; & airport owners are obligated to seek to maximise returns; & this can be achieved through increasing revenues outside the scope of regulation & by leveraging regulatory systems; & dual-till, vertical integration & common interest all have the potential to distort competition; & experience shows that the majority of abuse takes place in constrained airports, whether or not these are regulated; & so rigorous & targeted regulation is needed to increase competition.