Andrew Lobbenberg*, Analyst HSBC Bank plc, Airline economics RunwaysUK Manchester – 2 Dec 2014 View HSBC Global Research at: Issuer of report: HSBC Bank plc *Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA regulations Disclosures and Disclaimer This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it

Agenda  Airline profitability  Short haul low cost  Long haul low cost  Traffic distribution rules  Time horizons 2

3 Never forget the quality of the airline industry Return on invested capital in the airline industry vs the cost of capital Source: IATA

4 The UK sees less value destruction than the global industry Source: Company data Financial years, HSBC estimate for IAG FY14. Return on invested capital

A divided world 5 Source: IATA

Unit costs and stage length – two worlds Flag carriers - unit cost against stage length Low cost carriers - unit cost against stage length Source: Company data 6

7 Low cost carrier cost advantages Source: Company data

8 Low cost carrier revenue advantage LGW Venice lowest fares as at 26 November Indexed revenue per aircraft - you say low cost, we say high revenue Source: Company dataSource: HSBC

9 Short haul: the rise and rise of low cost carriers What shapes LCC network planning? Flexibility EZJ Profitability Fortresses Business – network, frequency Leisure – demand, competition, costs Old Ryan Operations – lowest cost always wins New Ryan Profitability

Why do flag carriers bother with short haul? 10  Feed the long haul  Corporate demand  Defence  Relevance  Hence  Restructuring  Vueling, Transavia, Germanwings  Network carrier short haul network drivers  Corporate  Feed routes  Defensive strategies vs low cost carriers

Long haul low cost is unproven 11  Costs  Fuel a large part of costs  Turnaround costs a small part of costs  Long haul aircraft not available on the cheap  Long haul charters a relevant but limited business

Premium revenues matter 12 LON JFK lowest fares as at 26 November for travel 19/26 Mar 2015 A380 Configurations Source: Company data

13 Long haul routes need feed Source: Company data, AF-KL, BA, HSBC estimates for LH Percentage of connecting traffic on long haul operations of base carrier

14 UK Regional long haul fllights predominantly to hubs Source: Capstats UK REGIONAL LONG HAUL ROUTES December 2014 Source: ASKs, Dec 2014 Capstats

– the hub building aircraft CURRENT 787 OPERATIONS BY CARRIER December 2014 Source: ASKs by carrier for 787 operations Capstats Source: Boeing, HSBC CURRENT 787 ORDERS BY CARRIER December 2014

16 What shapes long haul network decisions Demand and supply Regulation History Geography Economics Quality of competition Rationality of competition Fleet Partnerships

17 Traffic distribution rules Gatwick and the BCal routes Gatwick and the US exiles pre Open Skies Milan

18 Time horizons Financial markets: 6 months to 3 years Airline rolling business plans: 3 to 5 years Airline fleet plans: 1 to 10 years Airport planning: 5 to 20? years

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