Innovation & Cost Leadership, 15. November © 1 Innovation & Cost Leadership Wolfgang Kurth 15. November 2004

Innovation & Cost Leadership, 15. November © 2 Trends In The Aviation Industry Low-cost Carriers Characteristics Of The Low-cost Business Strategy Of Airlines Low-cost Business Strategies In Other Trades Summary Agenda

Innovation & Cost Leadership, 15. November © 3 Business Environment VOLUME/GDP TIME Africa Asia Middle East Latin America BEGINNING STAGE TRANSITIONRAPID GROWTH STAGE TRANSITION U.S. and Europe MATURE STAGE GDP Volume

Innovation & Cost Leadership, 15. November © 4 Growth rates are declining (  GDP >  Yield) Source: A. Sentance, Airline Business June 2000, R. Doganis, Airlines International, May- June 2001) US domestic market growth s vs 1990s Average annual growth (%) s1990s Passenger traffic Economy (GDP) Real revenue Real yield Growth Rates Are Declining

Innovation & Cost Leadership, 15. November © Index (1991=100) Airline (Yield)Consumer (CPI) Airline yields have not kept pace with inflation Airline Prices vs Consumer Prices

Innovation & Cost Leadership, 15. November © 6 5,0 6,0 7,0 8,0 9,0 10,0 11,0 12,0 13, Yield (cent/RPK) Note: Yields on international scheduled services deflated by US consumer price Source: ICAO, updated by BA estimates in Airline Business July 2001 Yield Trend Real international yields - real decline

Innovation & Cost Leadership, 15. November © 7 US airlines,. Source: The Airline Monitor in Air Transport World February ,00 59,00 61,00 63,00 65,00 67,00 69,00 71,00 73, Load factor in % Utilisation Load factor (%) 8,1 8,4 8,7 9,0 9,3 9,6 9,9 10,1 10,4 Block hours per day (approx..) Utilisation & Load Factor Trends Utilisation & Load factor, US airlines

Innovation & Cost Leadership, 15. November © 8 67,0 69,3 70,3 70,9 71,1 72,4 70,0 72,3 64,9 66,8 65,7 66,6 66,5 70,4 77,4 75,0 65,0 70,0 75,0 80, F Passenger Load Factor (%) ActualBreakeven Low prices and high costs mean carriers must fill more seats to avoid losses Breakeven Passenger Load Factor at Record Highs

Innovation & Cost Leadership, 15. November © 9 Airline Cost Overview: Externally & Internally Driven Costs Aircraft leasing Fuel Ground services Maintenace Landing charges Air traffic Control 60% % Personnel Sales & Marketing Inflight G & A Externally driven items Source: Roland Berger External Internal

Innovation & Cost Leadership, 15. November © 10 Crew Fuel Maintenance Ownership Typical Airline Cost Split

Innovation & Cost Leadership, 15. November © 11 Net reduction objective Operations Capital Operations Capital Classic fleet Next Generation Present value of costs per seat Offset Higher Capital Cost with Lower Operating Cost

Innovation & Cost Leadership, 15. November © 12 Aircraft (Sticker) prices Estimate early ,30 0,29 0,28 0,32 0,31 0,34 0,32 0,00 0,10 0,20 0,30 0, (184) X (205) A321 (216) (217) (256) (324) 767-4ER (375) A (375) Seat prive in (m) US$ MTOW in lbs Seat price MAX. TOW Aircraft Prices

Innovation & Cost Leadership, 15. November © 13 Index 1994 Constant Dollars Yield Per Passenger vs Price Per Seat

Innovation & Cost Leadership, 15. November © 14 Direct Operating Costs (%) Price Increase (%) DOC Sensitivity vs Price Increases

Innovation & Cost Leadership, 15. November © 15 0,05,010,015,020,025,0 300 Seater 150 Seater MAINTENANCE MATERIAL MAINTENANCE LABOUR MTOW FUEL % Improvement Needed to Get a 1% Cash Cost Decrease

Innovation & Cost Leadership, 15. November © 16 Today 1 year 3/4 years 10/15 years Short term Medium term Long term Very limited Fair Increased flexibility Fair to uncertain Very large uncertainty Large flexibility Today Adaptability of the means and resources Predictability of market and environment Strategic planning The Perspective of Time

Innovation & Cost Leadership, 15. November © 17 Agenda Trends In The Aviation Industry Low-cost Carriers Characteristics Of The Low-cost Business Strategy Of Airlines Low-cost Business Strategies In Other Trades Summary

Innovation & Cost Leadership, 15. November © 18 For what reason would you fly more often? Today's Demand Is Triggered By Low Fares 11% 8% 41% 8% 6% 17% 0% 10% 20% 30% 40% 50% upgradesschedulesafety ground low faresmore FFP´s safety board others Source: IATA Online Survey 2003

Innovation & Cost Leadership, 15. November © 19 Market Share Of LCCs LCCs Charter Network Carriers LCCs will have a market share of about 25% in Europe in 2010 Quelle: Mercer Management Consultants 2003

Innovation & Cost Leadership, 15. November © 20 Impressive Growth Of LCCs Within Europe PAX numbers of European LCCs Source: Analystenreports, Unternehmensinformationen, Monitor Group Analysis PAX (m) Avg. growth p.a. 46 %

Innovation & Cost Leadership, 15. November © 21 Growth Generated By ‘New’ Passengers (Germany 2004) 59% 37% 100%4% 0% 25% 50% 75% 100% New passengers Shift within airline market No detailsTotal 71% 15% 6% 8% 100% 0% 25% 50% 75% 100% Otherwise would not have travelled Otherwise by car Otherwise by rail OthersTotal Classification of low-cost passengers Classification of “new” passengers Source: NFO Infratest, 2002; Monitor Group Analysis

Innovation & Cost Leadership, 15. November © 22 LCC Routes 2001 Caption: Ryanair easyjet Volareweb bmi Baby Hapag-Lloyd Express Germanwings Sterling Skyeurope jet2

Innovation & Cost Leadership, 15. November © 23 LCC Routes 2002 Caption: Ryanair easyjet Volareweb bmi Baby Hapag-Lloyd Express Germanwings Sterling Skyeurope jet2

Innovation & Cost Leadership, 15. November © 24 LCC Routes 2003 Caption: Ryanair easyjet Volareweb bmi Baby Hapag-Lloyd Express Germanwings Sterling Skyeurope jet2

Innovation & Cost Leadership, 15. November © 25 LCC Routes 2004 Caption: Ryanair easyjet Volareweb bmi Baby Hapag-Lloyd Express Germanwings Sterling Skyeurope jet2

Innovation & Cost Leadership, 15. November © 26 Caption: Ryanair easyjet Volareweb bmi Baby Hapag-Lloyd Express Germanwings Sterling Skyeurope jet2 LCC In Touristic Destinations Example: Spain 2002

Innovation & Cost Leadership, 15. November © 27 Caption: Ryanair easyjet Volareweb bmi Baby Hapag-Lloyd Express Germanwings Sterling Skyeurope jet2 LCC In Touristic Destinations Example: Spain 2003

Innovation & Cost Leadership, 15. November © 28 Caption: Ryanair easyjet Volareweb bmi Baby Hapag-Lloyd Express Germanwings Sterling Skyeurope jet2 LCC In Touristic Destinations Example: Spain 2004

Innovation & Cost Leadership, 15. November © 29 Market Share Of LCCs In The European Union Source: aviasolutions, May 2004

Innovation & Cost Leadership, 15. November © 30  18 LCCs in Germany vs. 2 in  65 LCCs in Europe vs. 5 in  In 2003 German airports reported a growth of low-cost passengers of 112% making a total of 14 million passengers.  Consolidation has started; remaining carriers have to grow to cover marketes. Increasing Competition Between LCCs Norwegian

Innovation & Cost Leadership, 15. November © 31 Positioning Of LCCs Short-haul routes Long-haul routes Non-business passengers Price-conscious business passengers Quality-conscious business passengers Network carrier Regional airlines Charter LCCs Source: Mercer Management Consultants 2003

Innovation & Cost Leadership, 15. November © 32 Agenda Trends In The Aviation Industry Low-cost Carriers Characteristics Of The Low-cost Business Strategy Of Airlines Low-cost Business Strategies In Other Trades Summary