1. CTAIRA Chris Tarry Aviation Industry Research and Advisory Is sustainable profit an unrealisable dream? Chris Tarry Stockholm 19 th November 2003

2. CTAIRA Chris Tarry Aviation Industry Research and Advisory Agenda Industry background issues Structural changes and consequences Managing the responses Conclusions Final thoughts

3. CTAIRA Chris Tarry Aviation Industry Research and Advisory General Strategic Objectives Survive Compete Prosper BUT: How does the industry match up

4. CTAIRA Chris Tarry Aviation Industry Research and Advisory Global airline industry: Performance Source: ICAO

5. CTAIRA Chris Tarry Aviation Industry Research and Advisory Airline traffic and capacity trends Source: ICAO

6. CTAIRA Chris Tarry Aviation Industry Research and Advisory Passenger load factor trends

7. CTAIRA Chris Tarry Aviation Industry Research and Advisory Break even load factor trends Break even load factor = ((op cost x traffic)/(op rev x capacity))

8. CTAIRA Chris Tarry Aviation Industry Research and Advisory Long term industry trends Source: ICAO/CTAIRA research

9. CTAIRA Chris Tarry Aviation Industry Research and Advisory International operating economics Data: IATA

10. CTAIRA Chris Tarry Aviation Industry Research and Advisory The source of profit Data: IATA

11. CTAIRA Chris Tarry Aviation Industry Research and Advisory Long term US yield trends in a mature market Source: ATA

12. CTAIRA Chris Tarry Aviation Industry Research and Advisory European Airlines Trends: Europe Source: AEA

13. CTAIRA Chris Tarry Aviation Industry Research and Advisory European Airlines Trends: North Atlantic Source: AEA

14. CTAIRA Chris Tarry Aviation Industry Research and Advisory European Airlines Trends: Far East Source: AEA

15. CTAIRA Chris Tarry Aviation Industry Research and Advisory Forecasting issues – traffic and real GDP Data: IMF, ICAO

16. CTAIRA Chris Tarry Aviation Industry Research and Advisory Nominal GDP and airline revenue Source: IMF/ICAO

17. CTAIRA Chris Tarry Aviation Industry Research and Advisory The search for a turning point: USA Source: Pollingreport.com/ATA

18. CTAIRA Chris Tarry Aviation Industry Research and Advisory Industry Outlook Still an exceptionally tough environment Unsupported profit may not be possible before 2005/06 Airlines still need to achieve structural cost reduction

19. CTAIRA Chris Tarry Aviation Industry Research and Advisory Structural changes and consequences

20. CTAIRA Chris Tarry Aviation Industry Research and Advisory Terminology Low cost airline Low fare airline New model airline (NMA) Traveller Customer Business traveller Travel policy Compliance Product Commodity Marketplace Value for money ROI

21. CTAIRA Chris Tarry Aviation Industry Research and Advisory Product issues What constitutes the product offer? The flight? Flexibility? Timing? Frequency? Airport attractiveness? On board service? On ground service It depends – Each of us (and our employer) will value and price the attributes differently

22. CTAIRA Chris Tarry Aviation Industry Research and Advisory Market segmentation - The UK example Mainline British Airways Virgin bmi British Midland Lower Cost easyJet Low cost Ryanair Charter airlines More widely, segmentation is also possible between geographic region, maturity of market and market type

23. CTAIRA Chris Tarry Aviation Industry Research and Advisory Market segmentation - International Regional: limited long haul network (Finnair) Supra-regional: extensive long haul network (Lufthansa) Intra-regional: cross- border but not long haul (easyJet) Global hub and spoke: global reach (Singapore, Emirates)

24. CTAIRA Chris Tarry Aviation Industry Research and Advisory Industry life cycles What happens ? Slowing growth rate Changing consumer behaviour in maturing markets Decline unless there is change and re-invention

25. CTAIRA Chris Tarry Aviation Industry Research and Advisory What are the constraints to change? Management? Labour? Capital? Infrastructure? Regulation? In reality a combination

26. CTAIRA Chris Tarry Aviation Industry Research and Advisory Airline industry life cycles Is maturity and decline the only option? Does structural rigidity mean an inability to change? Has the managerial prerogative at some airlines been ceded? Is the fundamental and necessary change impossible? Are the costs of change too high? Will there be further exits? Opportunities for segmental new entrants

27. CTAIRA Chris Tarry Aviation Industry Research and Advisory If traffic alone is not the route to profit, what is? A need for: The “right cost base” The best revenue stream The appropriate level of assets There is not a “one size fits all” template

28. CTAIRA Chris Tarry Aviation Industry Research and Advisory Mainline airlines - what needs to be done? Reduction of structural excess supply Differentiation of increasingly commoditised products Addressing the gap between “customer and the traveller” Reacting to changing market structures Structural reduction of cost Improvement of shareholder returns Also important to keep a sense of perspective

29. CTAIRA Chris Tarry Aviation Industry Research and Advisory British Airways: Productivity measures Source: Company reports

30. CTAIRA Chris Tarry Aviation Industry Research and Advisory British Airways: Total measurement Data:: British Airways

31. CTAIRA Chris Tarry Aviation Industry Research and Advisory New entrant airlines

32. CTAIRA Chris Tarry Aviation Industry Research and Advisory Changing markets - The “new entrant” formula Supply led growth High utilisation High density seating Low distribution costs Simple fare structure

33. CTAIRA Chris Tarry Aviation Industry Research and Advisory The London area experience Source: CAA

34. CTAIRA Chris Tarry Aviation Industry Research and Advisory London and the Southeast Main focus of NMAs Rich travel market and incumbents initially pressured Significant fight back by incumbents Signs of market maturity

35. CTAIRA Chris Tarry Aviation Industry Research and Advisory The Mainline “fight back” With a focus on: –Price discriminators –Quality discriminators Now able to offer “more options” –Business to Full fare Economy –Full Fare Economy to Restricted Economy Fundamentally changed “rules of engagement”

36. CTAIRA Chris Tarry Aviation Industry Research and Advisory Mainline fight back (2) Fare structure simplification Easier internet booking process Raising awareness of value proposition Exportation of new fare structures

37. CTAIRA Chris Tarry Aviation Industry Research and Advisory Fare trends – 2002 Source: American Express

38. CTAIRA Chris Tarry Aviation Industry Research and Advisory The UK in an intra-European context Source: American Express

39. CTAIRA Chris Tarry Aviation Industry Research and Advisory A snapshot of marketplace changes (1) Source: British Airways

40. CTAIRA Chris Tarry Aviation Industry Research and Advisory A snapshot of marketplace changes (2) Source: British Airways

41. CTAIRA Chris Tarry Aviation Industry Research and Advisory Potential effects on the NMAs From the mainline airlines’ response: Fall in average fare Rise in break even load factor Pressure on earnings growth Stock market reaction when “go-go” stocks go “ex”

42. CTAIRA Chris Tarry Aviation Industry Research and Advisory Limits to growth exist – even for NMAs Markets are not infinite Risk of over-dependence on journey price elasticity Need for a reason to travel even if the ticket is free Increasing importance of other “trip determinants” Relationship between income and travel

43. CTAIRA Chris Tarry Aviation Industry Research and Advisory UK Maturing markets? (1) Source: CAA

44. CTAIRA Chris Tarry Aviation Industry Research and Advisory UK Maturing markets? (2) Source: CAA

45. CTAIRA Chris Tarry Aviation Industry Research and Advisory UK Regional traffic trends (1) Source: CAA

46. CTAIRA Chris Tarry Aviation Industry Research and Advisory UK Regional traffic trends (2) Source: CAA

47. CTAIRA Chris Tarry Aviation Industry Research and Advisory Industry Consolidation

48. CTAIRA Chris Tarry Aviation Industry Research and Advisory Consolidation issues “The degree of concentration in an industry reflects the extent and nature of competition” based on Douglas Needham “The Economics of Industrial Structure” 1970 Competition and market maturity are not evenly spread So – is consolidation the answer to the industry’s problems?

49. CTAIRA Chris Tarry Aviation Industry Research and Advisory Putting it in context What are the problems of the mature and maturing airlines? Too much capacity Too much cost Not enough profit even in the best times Will these be solved by consolidation? Not in the absence of other actions Is the industry capable of managing the necessary change? Not a good track record in this area

50. CTAIRA Chris Tarry Aviation Industry Research and Advisory Conclusions Permanent change in the operating environment New business models needed Without continuing change the industry will not: –Achieve adequate profitability –Attract new capital Key challenge remains the management of change

51. CTAIRA Chris Tarry Aviation Industry Research and Advisory Two final thoughts “ Progress is a nice word but change is its motivator and change has its enemies” Robert Kennedy “More of the same is not an option” Chris Tarry

52. CTAIRA Chris Tarry Aviation Industry Research and Advisory This report has been prepared and issued by Chris Tarry Aviation Industry Research and Advisory Limited a business that is not registered to give investment advice. This report is for information purposes only and should not be construed as giving investment advice. Chris Tarry Aviation Industry Research and Advisory Limited accepts no responsibility or liability whatsoever for any expense, loss or damage arising out of or in any way connected with the use of all or any part of this report. No part of this report may be reproduced or distributed in any manner without permission of Chris Tarry Aviation Industry Research and Advisory Limited.