1. CTAIRA Chris Tarry Aviation Industry Research and Advisory Dreams and Realities Will the airline industry ever be sufficiently profitable? Chris Tarry Guildford June 11 th 2003

2. CTAIRA Chris Tarry Aviation Industry Research and Advisory A simple business strategy for airlines Survive Compete Prosper

3. CTAIRA Chris Tarry Aviation Industry Research and Advisory The real cyclical issue – the life cycle For the airline industry : 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

4. CTAIRA Chris Tarry Aviation Industry Research and Advisory Airline traffic and capacity trends

5. CTAIRA Chris Tarry Aviation Industry Research and Advisory Long term industry trends

6. CTAIRA Chris Tarry Aviation Industry Research and Advisory Reported traffic and GDP Data: IMF/IATA

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

8. CTAIRA Chris Tarry Aviation Industry Research and Advisory US Airlines: scheduled traffic and GDP Source: BTS/IMF

9. CTAIRA Chris Tarry Aviation Industry Research and Advisory US traffic multipliers Source: BTS/IMF

10. CTAIRA Chris Tarry Aviation Industry Research and Advisory Long term US yield trends in a mature market

11. CTAIRA Chris Tarry Aviation Industry Research and Advisory US Airlines: Fare changes vs. 2 years ago Source: ATA

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

13. CTAIRA Chris Tarry Aviation Industry Research and Advisory AEA members overall Data: AEA

14. CTAIRA Chris Tarry Aviation Industry Research and Advisory The more complete Transatlantic market Source: AEA, ATA

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

16. CTAIRA Chris Tarry Aviation Industry Research and Advisory Economic Forecasts: Current Prices 19992000200120022003E2004E AUSTRALIA5.27.16.36.27.76.0 CHINA,P.R.:HONG KONG-2.63.4-0.7-0.61.32.5 FRANCE3.74.73.32.93.03.9 GERMANY2.6 2.01.81.63.2 ITALY3.35.34.63.13.64.1 JAPAN-1.30.8-1.2-1.4-0.50.1 KOREA8.68.14.45.95.28.6 SINGAPORE0.514.3-3.62.43.95.3 SPAIN7.17.86.96.56.16.0 UNITED KINGDOM5.05.34.34.74.8 UNITED STATES5.65.92.63.64.15.8 Source: IMF

17. CTAIRA Chris Tarry Aviation Industry Research and Advisory Europe: Changing market terminology Low cost airline Low fare airline New entrant airline Traveller Customer Business traveller Product Commodity Segment

18. 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 will value and price the attributes differently

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

20. CTAIRA Chris Tarry Aviation Industry Research and Advisory The London area experience (2) Source: CAA

21. CTAIRA Chris Tarry Aviation Industry Research and Advisory The London area experience (3) Source: CAA

22. CTAIRA Chris Tarry Aviation Industry Research and Advisory The Mainline response (1) With a focus on: Price discriminators Quality discriminators Now able to offer “more options” Club to Full fare Economy Full Fare Economy to Restricted Economy Fundamentally changed “rules of engagement”

23. CTAIRA Chris Tarry Aviation Industry Research and Advisory Mainline response (2) Fare structure simplification Easier internet booking process Raising awareness of value proposition

24. CTAIRA Chris Tarry Aviation Industry Research and Advisory The mainline fight-back Source: ba.com; date of “booking” 8th November, earliest outbound; “peak” inbound British Airways - Restricted "peak fares" savings vs Fully flexible economy fare 0.00 10.00 20.00 30.00 40.00 50.00 60.00 70.00 80.00 90.00 LHR - FRA LGW - AMS LHR - CDG LGW - EDI LHR- EDI LHR - ZRH LHR - FCO % saving vs fully flexible economy fare 20th November 27th November 4th December

25. CTAIRA Chris Tarry Aviation Industry Research and Advisory The mainline fight-back Source: ba.com; date of “booking” 8th November, earliest outbound; “peak” inbound

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

27. CTAIRA Chris Tarry Aviation Industry Research and Advisory Traffic experience at British Airways Source: Company reports

28. CTAIRA Chris Tarry Aviation Industry Research and Advisory Traffic mix issues - overall Source: British Airways

29. CTAIRA Chris Tarry Aviation Industry Research and Advisory Traffic mix issues - overall Source: British Airways

30. CTAIRA Chris Tarry Aviation Industry Research and Advisory British Airways: Operating profit and margin

31. CTAIRA Chris Tarry Aviation Industry Research and Advisory British Airways: Capacity and traffic trends (1)

32. CTAIRA Chris Tarry Aviation Industry Research and Advisory British Airways: Capacity and traffic trends (2)

33. CTAIRA Chris Tarry Aviation Industry Research and Advisory British Airways: Load factors and profit margins

34. CTAIRA Chris Tarry Aviation Industry Research and Advisory Changes in break even load factors Source: company data

35. CTAIRA Chris Tarry Aviation Industry Research and Advisory British Airways: Average revenue per passenger

36. CTAIRA Chris Tarry Aviation Industry Research and Advisory British Airways: Volume sensitivities Source: company data

37. CTAIRA Chris Tarry Aviation Industry Research and Advisory British Airways: Revenues and Costs (index)

38. CTAIRA Chris Tarry Aviation Industry Research and Advisory British Airways: Productivity measures compared Source: Company data

39. CTAIRA Chris Tarry Aviation Industry Research and Advisory British Airways : Productivity measures compared Source: Company data

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

41. CTAIRA Chris Tarry Aviation Industry Research and Advisory For the mainline airlines - what needs to be done? Reduce of structural excess supply Differentiate increasingly commoditised products Address the gap between “customer and the traveller” React to changing market structures Structurally reduction of cost Improve shareholder returns

42. CTAIRA Chris Tarry Aviation Industry Research and Advisory Will airlines make sufficient profits? It depends, but the consequences of failure include: –Increased perception of financial risk increases –Increased cost of capital –Falling asset values –Greater separation between “haves and have-nots” –Survivability

43. 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.