Global Airline Industry Overview

1. Global Airline Industry Overview Ana McAhron-Schulz IFALPA Industrial Advisor April 2005

2. Global & Regional Economies

3. Global Economy Continued to See Growth in 2004 • Global economy saw robust expansion in the past year • Global growth estimate is 5% for 2004 and forecasted at 4.3% for 2005 • Inflation appears to be a growing concern for some countries • China takes measures to slow down growth for fear of inflation • Despite multiple interest rate increases, inflation still seen as a threat • Energy cost increases are a continuing concern • Impacting consumer confidence

4. Fragile state of the upswing • Reliance on the US and China for global growth emphasizes a need for structural reforms in many countries • Labor and product market reforms needed in Europe • Corporate and financial restructuring needed in Japan despite strong performance mid 2003 – early 2004 • China and emerging Asia need greater exchange rate flexibility • Countries would have greater monetary control • Facilitate emergence of more dynamic economies • Contribute to orderly reduction of global imbalances

5. Fragile state of the upswing • 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

6. Robust economic expansion continues Real GDP Growth and Forecasts Source: IMF (September 2004)

7. Industry Trends and Performance

8. World airlines see traffic and capacity recovery coupled with financial pressure • Global traffic recovers from impact of Iraq War and SARS • Traffic for 2004 increased 8.8% over 2000 levels - and up 15.3% over 2003 • 5% growth attributed to recovery from impact of SARS • Overall 2004 traffic higher than expected increase of 14% • Capacity for 2004 was 7.3% higher than 2000 levels and 12.1% over 2003 • Airlines carried a record 1.8 billion passengers – 11% more than 2003 • Passenger growth forecast is 6% per year for 2005 to 2008 • World carriers loss estimates for 2004 are $4.8B-$5B • Between 2001 and 2004 the industry has lost $35B • Initial forecasts for 2004 were $3B profit, prior to increase in fuel costs

9. World airlines see traffic and capacity recovery coupled with financial pressure • Yields have dropped 30% in the last 10 years • Business traveler has changed travel patterns • Transparency of fares with increased use of internet distribution • Industry has no pricing power • Low cost carriers continue robust growth • Overcapacity • Increasing liberalization • Some airlines continue to face significant financial pressure • On-going losses • Increased debt loads • Difficulty in accessing capital markets • Dwindling liquidity

10. 2004 World Traffic and CapacityAll Regions Post Double-Digit Traffic Growth Full Year 2004 Year-Over-Year Percentage Change Source: IATA International Traffic Statistics, 1/31/05

11. Jan 2005 World Traffic and Capacity continued to See Improvements January 2005 YOY Percentage Change Lower than expected due to Tsunami

12. Preliminary Feb 2005 Traffic highlights Asian recovery from tsunami • World traffic growth was 6.6% • Load factors remained high at 72% • Passenger traffic grew across all sectors • Led by the Middle East and Latin America • Asia Pacific posted an 8% increase over Feb last year • Growth rates returned to normal levels • Cargo traffic slumped 1% • Weaker economic activity • Slight slump in Chinese imports

13. Summary of Regional Trends Fuel Costs Europe LCC expansion Airline Mergers High-speed Trains North America Airline Restructuring Yield pressure Overcapacity LCC expansion Asia-Pacific LCC growth Industry expansion Increasing fuel demand Bi-lateral agreements Strong economy Middle East Political instability Huge traffic growth Latin America Poor economy in key areas International ownership Corruption Africa Political instability Largest carriers expanding Role of Government

14. Industry Impacted by the Rising Cost of Fuel

15. Rising Fuel Prices Impacting Industry • Global Production Crisis • Political unrest in oil producing nations • Nigeria’s two oil unions threaten strike • Iraq oil production continuously disrupted by oil well attacks • Russian oil giant, Yukos, plagued with problems • Ever increasing demand for fuel • Largest demand increase in 24 years • China’s oil imports rose 35% in 2004 and forecast for 2005 is a 22% increase over 2004 • “Fear factor” now a component of the market • Difficult to quantify but adds to the volatility • Estimates are US$/bbl attributed to “fear factor” • Airlines spent 32% more on fuel in 2004 over 2003 • Resulted in $62B fuel cost for 2004 Source: www.wtrg.com, Merrill Lynch report March 18, 2005, IATA speeches

16. Rising Fuel Prices Impacting Industry • Supply concerns resulted in an oil price rally to highest level ever with prices reaching record levels of over $56/barrel • Most airlines had forecasted fuel prices at $28-30 a barrel for 2004 and $42-$47 a barrel for 2005 • 2005 analyst fuel forecasts are $51/bl with 2006 at $40-$45/bl • U.S. carriers need $36/bl fuel cost to break even • Inability to hedge given airlines’ financial condition and dwindling liquidity • Difficult for airlines to manage a large cost that is so volatile • Goldman Sachs recently said we could be entering a “super-spike” period with prices as high as $105bbl • Economy cannot support fuel costs exceeding $70/barrel • Governments will have to intervene • Meanwhile, airlines continue to seek alternatives to adjust for fuel cost spike Source: www.wtrg.com, Merrill Lynch report March 18, 2005, IATA speeches

17. Fuel prices have risen dramatically this year U.S Fuel Price is Closely Matched by Other Countries Fuel closed at high of $56.72 in Mar 05 $55.40/bl as of Mar. 31, 2005 Reflects end of month NYMEX spot Price $/bbl Source: www.eia.doe.gov and www.wtrg.com

18. Hedging fuel costs has helped some carriers • Best hedged airlines* maintain a cost advantage over those with no hedging position • In Europe, Lufthansa, Iberia, Air France and British Airways are about 50% hedged • Qantas is hedged for 70% at $31 until June, Thai Airways for 50%, and SIA 45% at $41 • Southwest has 85%of fuel requirements hedged at $26, and Alaska has 50% at $29.87 • Airlines not hedged are exposed to the higher cost of fuel • In North America: Delta, United, US Airways, Continental, American • In Europe: Ryanair and Swiss hedges expired • Many of Asia’s LCC’s don’t hedge at all • Plan to weather the storm * Indicates percentage of fuel hedged for Full Year 2005 unless stated otherwise

19. Hedging fuel costs has helped some carriers • Many global airlines are just beginning to feel impact of fuel costs as a result of their strong currency vis-à-vis the US dollar • Airlines are implementing or increasing fuel surcharges to off-set fuel costs • European carriers have been able to off-set 1/3 of fuel costs through fuel surcharges • Cathay Pacific increased fuel surcharge in May by 40% for international and 35% for regional, while Japan Airlines and ANA saw 5% increases • U.S. airlines are added several small fare increases

20. Airline Performance by Geographic Region

21. European Airlines Face Fewer Challenges • AEA airlines estimate a break-even year up to an operating loss of between $500M in 2004 • Much improved performance over 2003 loss of $1.5B and $800M in 2002 • In fact, the top European flag carriers earned a $319M profit in 2003 • Traffic increased 9.0% in 2004 • Capacity increased 7.3% for the year • Trunk carriers add capacity to maintain market share • Yields continued to face pressure from low cost carrier growth and price discounting from full service airlines • Pressure from North America capacity plans and aggressive fares • LCCs compete against each other for market share • Are there too many low cost carriers in Europe? • Eastern European states’ admission to EU fuels growth • Despite some failures, new ones are continuously emerging Source: Traffic & Capacity data is for AEA Note: Top flag carriers include Air France Group, British Airways, Alitalia, Iberia, Lufthansa, SAS

22. European Operating Margins Saw Improvement Over 2003 *2003 Pro forma **Full year operating margin AF/KLM, Ryanair & BA 4Q04 estimates to determine FY2004 results Source: Company Reports, includes all unusual items

23. Asia-Pacific Industry Experiences Robust Growth • Region estimates a $3B net profit in 2004 • China’s airlines posted combined profits of $753M • Air China, China Eastern & China Southern responsible for $651M • Traffic increased 20.5% for the year on 15.5% capacity increase and is expected to continue growing • Favorable economic conditions, increasing liberalization and high consumer confidence to continue driving growth • Low Cost Carriers expected to play a major role in growth • LCC’s account for 16% of current announced orders • Excludes unconfirmed orders & LCC operators finalizing launch plans • China to be a major market over the next two years • Aviation regulation will be ease as demand for air travel explodes • China begins approving applications for privately owned airlines • China leads world in aircraft orders • 1,790 planes in the next 20 years

24. Asia-Pacific Operating MarginsBenefit from Economic Growth *Full Year data is Oct 2003 through September 2004 Source: Company Reports

25. Latin American industry continues to strive for recovery • Latin American airlines have lost over $3B between 2001 and 2004 • Represent 5% of worldwide traffic but 10% of industry losses • Privatized airports charge fees realizing 30-40% returns • Taxes represent 25.6% of airline ticket • Region attempts to turn losing trend around • Smaller airlines plagued by weak local economies, currency devaluations, and limited access to capital • Do not have cross border alliances common to Latin America’s larger airlines • As economy picks up, Venezuela see signs of rapid recovery • Previous 40% drop in market attributed to political unrest, poor economy • Brazil’s new bankruptcy law is a relief for troubled carriers • Financially troubled airlines can renegotiate debts and stay out of bankruptcy • Varig will negotiate $2.6B debt and take on new equity investors • Avianca and Aerolineas Argentinas exit bankruptcy • Chile approves new offshoot of Aerolineas Argentinas • Multi-national alliances, TACA and LAN, have been very successful

26. North American Aviation Continues to Face Challenges • U.S. Major airlines post a net loss of $5.5B in 2004 • Losses of $30B from 2001 through 2004 • Progress in cost reduction initiatives wiped out by increasing fuel costs • Labor has provided approximately 75% of savings in bankruptcies and restructurings • Despite an increase in revenues, yields are still down • Analysts forecasting losses of $5B in 2005 and $1.1B in 2006 • U.S. traffic increased 14.2% in 2004 • Low fares stimulate demand but weighs on yields • Capacity was up 8.1% for the year • US trunk carriers plan to switch capacity from domestic to international routes as these yields are improving • LCC’s expand domestic network as they venture into major airports • Aloha joins US Airways, United, ATA and Hawaiian in bankruptcy • Delta expects significant losses in 2005 and hints at bankruptcy Source: ATA Monthly Passenger Traffic Report

27. Losses Continue in North America Full Calendar Year 2004 Operating Margins Source: Company Press Releases includes all unusual items including restructuring costs

28. LCC Growth and Industry Impact

29. LCCs continue to grow at a phenomenal rate • Concept remains popular and continues to grow • While some emerging carriers do not survive, a large number of new carriers continue to appear • Strong LCC growth expected for Eastern Europe • Gol is a rising star in Latin America and Cintra’s Aerocaribe is expected to be re-launched in May • Concept is beginning to take off in China and India • LCC’s continue to gain market share in U.S • Top 4 carriers* control 65% of LCC market share • Firm aircraft orders to expand capacity 52% • LCC segment expected to account for 45% of both domestic US and intra-European passengers by 2009 • Asia is prime for LCC entry • 26 newcomers expected in 2005 Source: Airline Business Magazine, March 2005; Airwise news; theaustraliannews.com *AirTran, Southwest, Frontier, JetBlue

30. Laws of Darwinism applied to airline industry • “Survival of the Fittest” plays out as LCC’s battle for market share • Rivals Ryanair and easyjet control 75% of European LCC market • Easyjet plans to increase fleet 62% over the next 3 years • Ryanair plans to double in size in the next 10 years • LCC’s evolve as next phase includes plans for long-haul carriers • Aer Lingus considers trans-Atlantic carrier • Canadian carrier Zoom is running profitably after June 2002 launch • SkyLink is next planning to operate from North America • Hong Kong plans for Oasis Hong Kong Airlines and WOW Airlines • Some LCC airlines are down but not out… • Volareweb* to resume operations in April after ceasing operations in Nov. • Wizz Air secures €25M assistance • …While we must wait to see if other airlines will be revived • Jetsgo, Lagun Air, Air Polonia, V-Bird • Air Polonia and V-Bird are working on rescue plans to secure new funding and restart services *Volare Group is resuming operations which also contains 2 leisure carriers

31. Airlines Develop Strategies to Compete with LCCs

32. Established/Trunk Airlines Are Responding • US major airlines deal with the threat by: • Restructuring mostly through cost reductions, majority of savings comes from labor • Setting up own low cost operation • Shifting capacity to more profitable international routes • Better yields due to the lack of LCC competition • Fuel costs have eroded much of the progress • Legacy carriers in Asia-Pacific arena take LCC threat seriously as they branch out with their own budget airlines • Budget airlines in the Southeast Asian region could easily grab 30% of the market in just a few years, as Virgin Blue did in Australia • ANA creates LCC entrant, Air Next launching June 1 • APAA suggests that members prepare for LCC competition

33. Established/Trunk Airlines Are Responding • European traditional carriers have few choices in response to LCC’s • Approximately 65 LCC’s are operating in Europe • As profitable operation becomes more challenging, Chapter 11 protection from creditors is not an option • Airlines forced to solve problems, merge or go under • EU’s “One time, last time” rule allow countries to bail out their carriers only once • Latin America has emerging LCC’s with Gol gaining strength • Airline restructuring in the region has been the result of growing economies and increasing demand • Need for defensive strategies against LCC’s not yet addressed

34. Industry pressure impacting LCCs • Some restructuring may succeed as LCCs appear not to be indestructible • Ryanair reports its first quarter loss in 13 years of operation • JetBlue sees profit margin dipping • Southwest offers all employees a severance package option • Would have posted past losses if not for aggressive hedging policy • Easyjet files formal complaint against Air France/KLM merger • European trunk carriers protest LCC’s receiving government incentives to attract low-cost business to their regions • Estimated aid worth €10 - €17 per ticket • A few European LCC’s have failed, could more be on the way? • Competition for market share anticipates “blood shed”

35. How is LCC Growth Affecting Industry? • LCC growth undermines attempts to maintain capacity discipline • Rapid growth results in overcapacity - too many choices • Keeping fares depressed • Results in challenges for higher cost, established trunk carriers • Given differences in structure established trunk carriers can not become LCCs • Network and fleet differences • Seniority of work force • Full service vs. no frills • Who will survive? • Will depend on competition, capitalization and ability to sustain a positive business plan • “Survival of the fittest” • Consolidation • Elimination of capacity

36. What Else Can Airlines Do?

37. Airlines Work on Programs that Strive for Profitability • Consolidation • Mergers • Alliances • Low Cost Divisions or Subsidiaries • Comprehensive Restructuring Programs • Court Assisted Restructuring • Fleet Revitalization Programs

38. Airlines Recognize Efficiencies through Consolidation • Europe • AF and KLM • Partnership is recognizing cost savings ahead of schedule • Lufthansa’s acquisition of Swiss approved by shareholders • Mirror the AF/KLM merger where each maintains existing brand identity • BA and Iberia evaluating a similar deal • British Airways currently owns 9% • SN Brussels and Virgin Express • Transaction planned to be complete in 1Q05 • Will consist of a joint holding company based in Brussels • SN receives majority stake 70.1% and Virgin takes remaining 29.9% • Continue to operate separate brands for up to 2 years • SAS plans to eventually acquire 100% of airBaltic and Estonian Air • Take advantage of low operational costs are competitive with established low cost carriers • Currently holds 49% of Estonian and 47.2% of airBaltic

39. Airlines Recognize Efficiencies through Consolidation • Latin America • LAN to acquire state owned LAFSA as well as the brand and route of a carrier in Argentina • LAN will form a new holding company, Lan Argentina • LAN has been in talks to acquire or form an extensive alliance with Argentina’s Southern Winds which is in bankruptcy • Talks broke off in June with small Argentina airline American Falcon • Already successful with LanPeru • AeroRepublica and COPA to develop an equity alliance • Jointly develop common strategies and policies in all phases of operations, finance and marketing • Operate independently under their own managements and brands

40. Airlines Recognize Efficiencies through Consolidation • Asia-Pacific • Cathay Pacific/ Air China/ Dragonair cooperation • Exploring opportunities to develop closer cooperation in various business and operational areas • Japan Air Lines and Japan Air System • Started the mergers in Asia • Nothing in the U.S. yet • ATA • Will carriers consolidation follow trend of international peers?

41. Global Alliances Continue to be a source of additional Cost Savings and new Revenue Opportunities World Share of Scheduled Traffic Unaligned share was 28.5% last year SkyTeam Unaligned Increased since last year due to tremendous traffic growth in Asia-Pacific & Middle East markets Oneworld Star Alliance 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 Source: Airline Business, July 2004

42. Trunk Carriers look to Low Cost subsidiaries for profitability • Just to name a few: • United Airlines Ted • Delta Air Lines Song • Volare Group Volareweb • Air Canada Tango Zip • Singapore Airlines Tiger • LOT Polish Centralwings • Bmi british midland bmibaby • Lufthansa Eurowings Germanwings • Japan Air Lines JALways • Qantas Australian Airlines ` JetConnect JetStar Asia

43. Several European Airlines Have Multi-year Restructuring Programs • Iberia has established strategies/goals for market growth and profitability • Maintain leadership position in the Europe-Latin American market • Develop competitive service and prices in Domestic and European point-to-point routes • Improve competitive cost base • Manage the portfolio of airline related businesses efficiently • Lufthansa’s “D-Check” program was launched in Spring 2001 and focuses on 4 main areas • External providers • Internal providers • Production framework & processes • Staff cost reduction through increased productivity • British Airways plan emphasizes the need to “Simplify the Business” • Develop a high performing organization • Deliver a competitive cost base • Maintain the best UK based network and schedule

44. Several European Airlines Have Multi-year Restructuring Programs • Austrian Airlines began its “Break Even Turnaround Program 2001 • Network expansion - “Focus East” • Successful cost and capital management • Implementation of various strategic initiatives • Alitalia develops new 2005-2008 Business Plan Recover market share • Close CASK gap • Realign load factor performance • Financial turnaround • SAS “Turnaround” Program • Structural cost savings • Revenue stabilization • Capacity cost adjustments • AF/KLM virtual merger allows for efficiencies in revenue and cost management

45. North American Airlines forced to use bankruptcy court to reorganize costs • Several airlines have filed for Chapter 11 bankruptcy: United, US Airways (twice in as many years), Air Canada, ATA, Hawaiian, Aloha • Goal is to eliminate or reduce debt • Vendors and lenders negotiate new agreements with airlines • Process allows airlines to disregard contractual labor agreements • Labor groups agree to deep cuts for fear of the wages and work rules airlines would enforce through the court • Airlines walking away from Employees’ Defined Retirement Plans • PBGC takes over payments offering a fraction of anticipated payments • Major restructuring continuing • More focus on cost reductions than anywhere else

46. Industry Outlook

47. Industry hopes for a profitable 2005 dwindling due to high fuel prices • World airline industry was hoping for a profit in 2005 • Previous profit forecast of $1-2B now doubtful due to fuel costs • Expecting revenues of $350B up from $316B in 2003 • International traffic forecasted to grow 7.2% in 2005 and 6% in 2006 • 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 • Asia Pacific region continues to be bright spot • LCCs are moving into Asia-Pacific but increased demand can withstand the near term capacity growth Source: IATA, www.wtrg.com

48. International Traffic Expected to Continue to Rebound Scheduled International Passenger Traffic Growth and Forecasts Measured in PKP’s (Passenger Kilometers Performed) Source: IATA Passenger Forecast 2004-2008, November 2004

49. Demand returns but challenge remains in yields and financial condition • Capacity and traffic balance is key • Carriers are adding capacity for fear of losing market share • LCC expansion to continue • Overcapacity will keep yields down • Deteriorating balance sheets will take a long time to improve • Fuel prices continue to have a significant negative impact on bottom line • Significant overall recovery not expected before 2006 • 2005 and 2006 will see continued major structural changes around the world • U.S. not expected to see any recovery until 2007

50. What will airlines do to survive? • Revenue enhancement strategies • Few alternatives in this low fare, low yield environment • Too much competition • Increased use of internet is a deterrent • Increased code-sharing and reliance on alliances • Cost Reductions • Labor will continue to be a target • Fuel price volatility will affect timing of strategies • Consolidation