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

2. Innovation & Cost Leadership, 15. November 2004 www.advolar.com © 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

3. Innovation & Cost Leadership, 15. November 2004 www.advolar.com © 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

4. Innovation & Cost Leadership, 15. November 2004 www.advolar.com © 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 - 1980s vs 1990s Average annual growth (%) -4 -3 -2 0 1 2 3 4 5 6 1980s1990s Passenger traffic Economy (GDP) Real revenue Real yield Growth Rates Are Declining

5. Innovation & Cost Leadership, 15. November 2004 www.advolar.com © 5 95 100 105 110 115 120 125 130 135 9192939495969798990001 Index (1991=100) Airline (Yield)Consumer (CPI) Airline yields have not kept pace with inflation Airline Prices vs Consumer Prices

6. Innovation & Cost Leadership, 15. November 2004 www.advolar.com © 6 5,0 6,0 7,0 8,0 9,0 10,0 11,0 12,0 13,0 70727476788082848688909294969800 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 010203

7. Innovation & Cost Leadership, 15. November 2004 www.advolar.com © 7 US airlines,. Source: The Airline Monitor in Air Transport World February 2002 57,00 59,00 61,00 63,00 65,00 67,00 69,00 71,00 73,00 909294969800 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

8. Innovation & Cost Leadership, 15. November 2004 www.advolar.com © 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 80,0 19951996199719981999200020012002F 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

9. Innovation & Cost Leadership, 15. November 2004 www.advolar.com © 9 Airline Cost Overview: Externally & Internally Driven Costs 11 15 12 5 5 Aircraft leasing Fuel Ground services Maintenace Landing charges Air traffic Control 60% 20 8 6 6 40% Personnel Sales & Marketing Inflight G & A Externally driven items Source: Roland Berger External Internal

10. Innovation & Cost Leadership, 15. November 2004 www.advolar.com © 10 Crew Fuel Maintenance Ownership Typical Airline Cost Split

11. Innovation & Cost Leadership, 15. November 2004 www.advolar.com © 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

12. Innovation & Cost Leadership, 15. November 2004 www.advolar.com © 12 Aircraft (Sticker) prices Estimate early 2002 0,30 0,29 0,28 0,32 0,31 0,34 0,32 0,00 0,10 0,20 0,30 0,40 737-800 (184) 737-900X (205) A321 (216) 757-200 (217) 757-300 (256) 767-300 (324) 767-4ER (375) A330-200 (375) Seat prive in (m) US$ 0 100000 200000 300000 400000 500000 600000 MTOW in lbs Seat price MAX. TOW Aircraft Prices

13. Innovation & Cost Leadership, 15. November 2004 www.advolar.com © 13 Index 1994 Constant Dollars Yield Per Passenger vs Price Per Seat

14. Innovation & Cost Leadership, 15. November 2004 www.advolar.com © 14 Direct Operating Costs (%) Price Increase (%) DOC Sensitivity vs Price Increases

15. Innovation & Cost Leadership, 15. November 2004 www.advolar.com © 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

16. Innovation & Cost Leadership, 15. November 2004 www.advolar.com © 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

17. Innovation & Cost Leadership, 15. November 2004 www.advolar.com © 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

18. Innovation & Cost Leadership, 15. November 2004 www.advolar.com © 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

19. Innovation & Cost Leadership, 15. November 2004 www.advolar.com © 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

20. Innovation & Cost Leadership, 15. November 2004 www.advolar.com © 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 %

21. Innovation & Cost Leadership, 15. November 2004 www.advolar.com © 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

22. Innovation & Cost Leadership, 15. November 2004 www.advolar.com © 22 LCC Routes 2001 Caption: Ryanair easyjet Volareweb bmi Baby Hapag-Lloyd Express Germanwings Sterling Skyeurope jet2

23. Innovation & Cost Leadership, 15. November 2004 www.advolar.com © 23 LCC Routes 2002 Caption: Ryanair easyjet Volareweb bmi Baby Hapag-Lloyd Express Germanwings Sterling Skyeurope jet2

24. Innovation & Cost Leadership, 15. November 2004 www.advolar.com © 24 LCC Routes 2003 Caption: Ryanair easyjet Volareweb bmi Baby Hapag-Lloyd Express Germanwings Sterling Skyeurope jet2

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

26. Innovation & Cost Leadership, 15. November 2004 www.advolar.com © 26 Caption: Ryanair easyjet Volareweb bmi Baby Hapag-Lloyd Express Germanwings Sterling Skyeurope jet2 LCC In Touristic Destinations Example: Spain 2002

27. Innovation & Cost Leadership, 15. November 2004 www.advolar.com © 27 Caption: Ryanair easyjet Volareweb bmi Baby Hapag-Lloyd Express Germanwings Sterling Skyeurope jet2 LCC In Touristic Destinations Example: Spain 2003

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

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

30. Innovation & Cost Leadership, 15. November 2004 www.advolar.com © 30  18 LCCs in Germany vs. 2 in 2002.  65 LCCs in Europe vs. 5 in 2000.  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

31. Innovation & Cost Leadership, 15. November 2004 www.advolar.com © 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

32. Innovation & Cost Leadership, 15. November 2004 www.advolar.com © 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