1 Air Line Pilots Association, International Overview of the Global Alliance Trends Cape Town, South Africa April 2005

2 Air Line Pilots Association, International  Global economy saw robust expansion in the past year  Estimate is that global economy grew 5% in 2004 and the forecast for 2005 is for 4.3%  Inflation appears to be a growing concern for some countries  China takes measures to slow down growth for fear of inflation  Despite multiple U.S. Fed lending rate increases, inflation still seen as a threat  Energy cost increases are a continuing concern  Impacting consumer confidence  Unemployment still remains a concern in many parts of the world  Geo-political environment still a threat to global growth  Terrorist act or significant military action would negatively impact current positive trend in growth  Significant halt in oil production could ultimately increase fuel cost to $80/bl Global Economy Saw Growth in 2004

3 Air Line Pilots Association, International Source: IMF (September 2004) Real GDP Growth and Forecasts Economic Expansion Seen in All Regions Economic Expansion Seen in All Regions

4 Air Line Pilots Association, International Global Industry

5 Air Line Pilots Association, International Global Airline Industry  International traffic for 2004 surpassed 2000 levels  Likely to record a 5% increase for the year  2004 ended on a more positive note  Traffic has surpassed levels seen in 2001 but pressure on yields have resulted in challenging revenue environment  Asia & Europe show positive results  U.S. losses continue to absorb industry profitability  Major swing element is price of fuel now hovering around $55/bl  China’s increased demand for fuel calls for greater production capacity  OPEC target price and production policy unclear  Cold winter in America puts pressure on supplies and prices  Other significant challenges remain – the unforeseen events  Geopolitical concerns (instability of various nations and terrorism threats)  Continuous warnings of an Asian flu at a pandemic level threat

6 Air Line Pilots Association, International Global Aviation Outlook  IATA I worldwide traffic in 2004 increased 15.3%  Not optimistic on profits for 2005  Any anticipated earnings to be wiped out by high fuel costs  International traffic forecast to grow 7.2% in 2005 and 6.0% in 2006  Skies to become more congested  Recovery in Europe and the US will not be as robust as the rest of the world  Near-breakeven results elevated by the strongly profitable low-cost carrier segment  European industry to continue consolidation  LCCs are moving into Asia-Pacific but increased demand can withstand the near term capacity growth

7 Air Line Pilots Association, International Global Alliances

8 Air Line Pilots Association, International Airlines Continue to Focus on What Alliances can Provide Airlines Continue to Focus on What Alliances can Provide  Given state of the industry, airlines first priority is their own operations  Alliance can enhance operations through revenue and cost sharing  Depressed revenue environment forces management to consider all available sources of revenue  LCC’s driving down yields with increased capacity and low fares  Cost savings and enhanced revenues have become the main objective of alliance members  Alliances considered to provide cost-saving benefits of a merger without the risks and regulatory hurdles  Network expansion opportunities are explored  The many partnership changes show how partners are thinking  Alliances aim for growth regions in China, Russia and India  Management s believe that passenger loyalty toward alliance will help preserve market share  Enhanced by alliance expansion  Remains to be seen as passengers’ loyalty seems to gravitate to lowest fares

9 Air Line Pilots Association, International Dependence on Global Alliances Continues As Membership Seek New Revenue Opportunities 2003 World Share of Scheduled Traffic 2003 World Share of Scheduled Traffic Source: Airline Business, July 2004 Oneworld Star Alliance SkyTeam Unaligned Increased since last year due to tremendous traffic growth in Asia- Pacific & Middle East markets Alliances battle to gain members in Asia-Pacific and Middle East as traffic in those regions are growing faster than anyplace else and almost all carriers are not formally attached to a specific alliance Unaligned share was 28.5% last year

10 Air Line Pilots Association, International Today's Major Global Systems Members … And then there were three

11 Air Line Pilots Association, International Alliance Members Adria Airways Air Canada Air New Zealand All Nippon Asiana Austrian Air Group Blue1 bmi british midland Croatia LOT Polish Lufthansa oneworld Aer Lingus American Airlines British Airways Cathay Pacific Finnair Iberia LAN Chile Qantas SkyTeam AeroMexico Air France Alitalia Continental CSA Czech Delta Air Lines Korean Air Lines KLM Northwest Malev Aeroflot China Southern Air Europa SAS Singapore Airlines Spanair TAP Air Portugal Thai Airways United Airlines US Airways Varig South African Air China Star Alliance

12 Air Line Pilots Association, International Star Alliance Includes South African Airways Source: OAG data February 2005

13 Air Line Pilots Association, International oneworld Alliance Source: OAG data February 2005

14 Air Line Pilots Association, International SkyTeam Alliance Source: OAG data, February 2005 Includes prospective members: Aeroflot, Malev, China Southern

15 Air Line Pilots Association, International Alliance Update

16 Air Line Pilots Association, International  SkyTeam boosted to a close second vs. Star Alliance  The smallest of the 3 alliances in 2002, now it’s competing for top spot  KLM, Northwest and Continental became members in September  Make up 43% of 2003 alliance RPKs  Closest to enlisting a Chinese partner  China Southern, China’s largest airline, has signed membership agreement  Breaking into Russia  Aeroflot, country’s biggest international and domestic carrier signs MOU  Malev and Air Europa seeking associate membership  Members expecting delivery of more than 160 aircraft over next 5 years  Airlines which have orders and will accept aircraft are AeroMexico, Air France, Continental, CSA Czech, KLM, Korean Air and Northwest SkyTeam Experiences Strong Growth

17 Air Line Pilots Association, International SkyTeam is Looking for Group Benefits  Purchasing power of large group used to negotiate with suppliers at SkyTeam airports in Latin America  AeroMexico, Delta, Air France and Alitalia worked together to negotiate ground handling contracts at five airports resulting in a 40% overall cost reduction  Secured more competitive rates for fuel  SkyTeam has expressed interest in other joint initiatives and has not ruled out coordinated purchasing  Interline ticketing across all carriers to be implemented by end of 2005  Alliance has developed transatlantic network revenue-sharing program  Estimates a revenue increase of $100M for first year members

18 Air Line Pilots Association, International Star Alliance Remains Largest Alliance  Star Alliance edges out SkyTeam as largest alliance in 2003  Portugal’s leading airline, TAP Air Portugal, joins alliance  Network grows as Star begins adding regional airlines  Blue1, Croatia Airlines and Adria Airways  Future members  Swiss to join as a result of merger with Lufthansa  South African Airways to become member in 2005  Air China membership is also expected in 2005  Regions targeted for additional alliance growth include China, Middle East and Eastern Europe  High growth areas to provide benefits to alliance

19 Air Line Pilots Association, International Star Members Capitalize on Alliance for Cost Savings  Star Alliance to establish mini-hub at Paris CDG  Will allow all Star Alliance members to be located in Terminal 1  Effort designed to offer an alternative to SkyTeam hub at CDG  Technology cost structure is focus  Aman Khan appointed VP of Information Technology  Launched global interline e-ticket product in December  Roll-out to be completed by August 2005  Star Alliance increases initiative to create joint commercial ventures  Decided to move ahead with a complete analysis and comparison of the B787 and the A350 for alliance members  Several airlines may delay potential orders while waiting for study results  Formally established a joint company in 2004 to buy jet fuel more cheaply  Signed 5 year corporate agreement with Chevron USA to improve travel management and substantially reduce its annual travel bill  Expanding on current ad-hoc practices of joint purchases at various airports

20 Air Line Pilots Association, International Oneworld Expected to Expand as well  Oneworld looking for partners offering expansion opportunities  Finds prospective Mexican partner, Mexicana  Continues to woo Japan Air Lines  Launches website for its Japanese customers  Looks for a potential China airline partner  Will not rule out the addition of a low cost carrier  Route network grew 5% in 2004  Aggressively targeting French business travel market for growth  Offering Alliance fares with greater flexibility and schedule options  Alliance revenues rise by a third in 2004 to $600M  Amost two-thirds considered incremental revenue-money that would not have been earned had it not been for oneworld  The only alliance whose members earned a combined profit in 2004  Oneworld: $1.5B profit  Star: $2.2B loss  SkyTeam: $7B loss

21 Air Line Pilots Association, International Oneworld Also Seeking Joint Purchasing and IT Efficiencies  Iberia President and Executive Chairman Fernando Conte appointed to serve as Chairman of oneworld Governing Board  First alliance to complete roll-out of interline electronic ticketing across entire network  Could potentially cut costs $60m annually  Carriers are aligning their “policies and processes” to promote cooperation and the ability to share best practices  Develop common specifications for engineering and maintenance activities  Reduced costs to be recognized through plans for centralized purchasing  Joint aircraft purchasing  Cooperation with spare parts storage  Partners have saved $300M through joint purchasing during the first three years of cooperation

22 Air Line Pilots Association, International Even Smaller Carriers and LCC’s are Forming Alliances  “Starlet Alliance” includes LCC’s owned by Star Alliance Partners  Centralwings – LOT Polish  bmibaby - bmi  Germanwings – Eurowings, 49% owned by Lufthansa  Agreements include sales and marketing cooperation  Germania Express (Gexx) and Deutche BA plan to merge  Will create the 3 rd largest airline carrier in Germany  Specifics of the deal are not available  Air Wales marketing agreement allows it to operate flights under bmibaby’s code

23 Air Line Pilots Association, International There are Two Significant Cargo Alliances Sky Team Cargo Alliance AeroMexico Air France Alitalia CSA Delta Air Logistics Korean Air WOW Lufthansa Japan Airlines Singapore Airlines SAS

24 Air Line Pilots Association, International Cargo Carriers Look for Benefits in Alliances  SkyTeam Cargo offers the largest global cargo network  Carried 21.1B freight ton kilometers throughout the world in 2003  Efficiencies offered by the alliance include Efficient regional trucking network in U.S., Europe, and Asia 72% of freight through common SkyTeam cities are processed through integrated warehouse operations or by common ground handlers  Enhances the convenience, reliability and benefits for customers  WOW provides service by the largest airfreight carriers  Carried 19.3B freight ton kilometers in 2003  Alliances would benefit from a “storefront” concept vs. current situation  Right now customers must deal with individual carriers for service  SkyTeam Cargo currently working toward this strategy  Debate on need to join into an alliance relationships  Currently the alliances have not impacted market share positively No real perceived benefits  American Airlines places no value on them as it can form side relationships with alliance members as well as other airlines

25 Air Line Pilots Association, International Alliances’ Key Focus Will Be Cost Management  Airlines will continue to rely on alliances  Airlines will continue to seek alignment with strong partners while concentrating on regional coverage – emphasis on Asia and the Middle East  Focus on cost containment and revenue enhancement  Alliance activity picking up strength as carriers strive to provide regional diversity and seek cost efficiencies  Continued effort to encourage unaligned carriers to join, particularly in Asia  SkyTeam opting for a second tier membership to maintain the current information management structure  Star incorporating regional airline partners  Financial instability may continue to result in re- alignments/defections/mergers  Alliance oversight structures becoming somewhat becoming formalized but no real effort being seen in that direction  Structure is needed to oversee revenue enhancement and cost containment efficiencies  Managements still unwilling to concede decision-making

26 Air Line Pilots Association, International Global Alliance Concerns  Airline managements beginning to focus more on what alliances can provide:  Revenue enhancement  Cost efficiencies  Network expansion  More aggressive pursuit of non-aligned members, particularly in Asia and Middle East  Organizational structures mostly in place  Will facilitate implementation of various programs  First step towards centralization – another word for consolidation?  Industry stabilization will require:  Stabilized fuel costs  Decreased capacity to counter continuing yield decline  Consolidation  Alliances going forward will be focusing on achieving some form of consolidation  Regulatory limits  Financial constraints  Labor laws  We need to focus on how these changes will affect all our pilot groups

27 Air Line Pilots Association, International Questions