airline trends 2009

8/6/2019 Airline Trends 2009

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Welcome

Current Trends in The Airline Industry

– A Global Perspective



AVMAN CEO Conference 01-02 MAY 2006 - 2 -

Disclaimer

This document was created for the exclusive use at the AVMAN CEOConference “The Glass is half Full”, held in Miami 01-02 MAY 2006. It isonly complete in conjunction with the underlying detailed analysis andthe oral presentation by Lufthansa Consulting.

The opinions expressed are those of Lufthansa Consulting GmbH, notnecessarily those of Lufthansa German Airlines and/or itsaffiliates/partners .

.




Content

1. The airline business – an attractive industry….?2. Three elements of an airline strategy




RPK annual growth is estimated at 4,4% until 2020 – equal to 1,5%points above the average GDP growth (World)

Source: ICAO (http://www.icao.int/icao/en/atb/fep/Longterm.htm)

RPK development since 1985 (billions)

0

2.500

5.000

7.500

10.000

85 9590 2000 2005 2010 2015 2020

Long term future growth annual rateGDP 2.9%Passenger 4.4% (most likely)Cargo 6.2%

Optimistic (5.6%)

Realistic (?) (4.4%)

Pessimistic (3.1%)

Note:1. The pessimistic and optimistic are according to ICAO estimates.

1




012

34

56

78

USA & Canada WesternEurope Asia Latin America &Caribbean Middle East Africa (Northplus Sub-Saharan)

GDP 2005-2009 PAX 2005-2009

Forecasts imply that PAX growth in Latin America and the Caribbeanwill closely correlate GDP performance.

GDP vs Passenger Development (2005-2009)

Source: Global Insight, Airport-Information.com (2006)

%

1




World airline profitability is projected to go into black in 2006-07

-$15,0

-$10,0

-$5,0

$0,0

$5,0

$10,0

$15,0

$20,0

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05

World airline profitability ($B)

Source: World Air Transport Statistics, IATA (2006), June 2004, Air Transport World, Jan. 2005

7,2

I A T A F o r e c a s

t

1




Profitability is cyclical: The airline industry rarely create value, inparticular the US players 1

Development of net profit since 1997-2005(e)

Development of EBIT margin compared to Cost of Capital since 1997

Source: IATA March 2006

-15

-10

-5

0

5

10

1997 1998 1999 2000 2001 2002 2003 2004 2005E

N e

t P r o

f i t ( U S $ b n

)

US Rest of World

-10

-5

0

5

10

1997 1998 1999 2000 2001 2002 2003 2004 2005E

E B I T m a r g

i n , % s

a l e s

USRest of WorldCost of Capital




0%100%200%

300%400%500%

B a s i c M

a t e r i a l s

H e a l t h c a

r e

T e c h n

o l o g y

I n d u s t r i a l G

o o d s

S e r v i c e s

C o n s u

m e r G

o o d s

C o n g l o m

e r a t e s

U t i l i t i e s

F i n a n c i a l

A i r D e l i v e r

y & F r e i g h t

" R e g i o n

a l l y " B a s e

d A i r . . .

M a j o r

" G l o b a

l " A i r l i n e

s G O

L

S o u t h w

e s t A i r l i n e

s C o .

T A M S

. A .

A i r T r a n H

o l d i n g s I n c .

L A N A

i r l i n e s S . A .

C o p a

H o l d i n g s S

A

-5%

0%

5%

10%15%

20%

25%

S e r v i c e s

I n d u s t r i a l G

o o d s

U t i l i t i e s

C o n s u

m e r G

o o d s

C o n g l o m

e r a t e s

T e c h n

o l o g y

B a s i c M

a t e r i a l s

H e a l t h c a

r e

F i n a n c i a l

M a j o r " G

l o b a l " A

i r l i n e s

" R e g i o n a

l l y " B a s e

d A i r l i n e s

A i r D e l i v e r

y & F r e i g h t

A i r T r a

n H o l d i n g s I n c .

T A M S

. A .

S o u t h w

e s t A i r l i n e

s C o .

L A N A

i r l i n e s S . A .

C o p

a H o l d i n g s S

A G O

L

A cross industry analysis shows the relative poor profitperformance of the major carriers and a high level of gearing 1

Net Profit Margin (cross sector analysis and comparison to the air travelsegment)

Debt/Equity Ratio (cross sector analysis and comparison to the air travelsegment)

Source: http://biz.yahoo.com – Latest Annual Reports




A 5-Year average profitability comparison underlines the resilienceof the low-cost business model

Source: Thomson Financial. Annual Reports. All ratios consolidated according to Thomson Financial – similar to USGAAP

Average 5-Year Net Margin 2001-2005 (Net Margin /Net Income)

-10%

0%

10%

20%

S o u

t h w e s

t A i r l i n e s

E a s y

j e t

A i r T r a n

R y a n a

i r

G O L

J e

t B l u e

A i r w a y s

T A M

S A

A M R

L u

f t h a n s a

D e

l t a

A i r F r a n c e -

K L M

B r i t i s

h A i r w a y s

U n

i t e d A i r l i n e s

C o n

t i n e n

t a l

I b e r i a

A l i t a l i a

V a r i g

L A N A i r l i n e s

A u s

t r i a n

U S A i r w a y s

5 y r

N e

t P r o

f i t M a r g

i n

Low Cost Legacy Carriers

South American Carriers

Note:1. All figures cover the period 2001-2005 wherever figures are available.2. Legacy carriers AF-KLM, AMR, BA, Continental, LAN, and US Airways all cover the period until FYR 2005.3. The remainder are FYR 04.

1



AVMAN CEO Conference 01-02 MAY 2006 - 1 0 -

The downward trend in yield has stopped but remains 28% lower incomparison to 1994

Source: IATA Economics Forecast, March 2006

?

Development Airline Yield (1993=100)

1




0

24

68

10

1214

16

I n t r a E u

r o p e

E u r o p e -

N o r t h A

f r i c a

I n t r a A f r

i c a

I n t r a F a

r E a s t

E u r o p e -

M i d d

l e E a s t

E u r o p

e - S o

u t h e r n

A f r i c a

E u r o p

e - F a

r E a s t

S o u t h A

t l a n t i c

N o r t h A

t l a n t i c

N o r t h A

m e r i c a -

S o u t h A

m e r i c a

M i d A t l a n t

i c

N o r t h a n d M

i d P a c i f i c

A f r i c a

- F a r E a

s t

F a r E

a s t - S o

u t h w e s t

P a c i f i c

M i d d l e E a

s t - F a

r E a s t

Y i e l d

( U S ¢ / R P K )

-6%

-4%-2%

0%2%

4%

6%8%

10%

%

c h a n g e

( Y O Y )

20042005%Change

Intra European traffic shows the highest yield/RPK. North - SouthAmerica has a relatively low level of yield/RPK ranking 10 out of 15

Source: IATA (2006)

Yield ¢ /RPK. 2004 - 2005

1




Fuel price poses a risk with the last 20 year period showing largeswings. Such risks will drive profitability and innovation

0

25

50

75

100

1 8 7 0

1 8 8 0

1 8 9 0

1 9 0 0

1 9 1 0

1 9 2 0

1 9 3 0

1 9 4 0

1 9 5 0

1 9 6 0

1 9 7 0

1 9 8 0

1 9 9 0

2 0 0 0

2 0 1 0

$ money of the day $ 2004

1860-1880 1881-1900 1901-1920 1921-1940 1941-1960 1961-1980 1981-2000 2010

Pennsylvanianoil boom

Russian oilexports beginDiscovery of

Spindletop,Texas

Fear ofshortage in

USA

Growth of

Venezuelanproduction East Texasfield

discovered

Post warreconstruction

Loss ofIraniansupplies

Suezcrises Yom

Kippurwar

Iranianrevolution

Netback pricingintroduced

IraqinvadedKuwait

Asianfinancialcrises

Invasionof Iraq

?

Source: British Petroleum

Crude oil price development 1860-2010, current vs 2004 prices

1




In average legacy network carriers show lower hedging levels thanlow cost carriers

Source: Annual reports, Citibank

Comparison of fuel hedging according to business model (2004/05)

Note:1. Fuel hedging varies year by year. The above is based on the latest known information February 2006.2. The length of hedging contract and value of the hedge (fuel price) also influence the overall impact of the contract.

0%

25%

50%

75%

100%

R y a n a

i r

S o u t h w

e s t A i r l i n e s

E a s y j

e t G O

L

A i r T r a n

J e t B l u e

A i r w a y s

A i r F r a n

c e - K L M

B r i t i s h A i r w a

y s

L u f t h a n

s a A l i t a l i a

I b e r i a

D e l t a

U n i t e d

A i r l i n e s A M R

U S A i r w a

y s

A u s t r i a n

C o n t i n e n

t a l V a

r i g

L A N A

i r l i n e s

T A M S

A

1




Increases in the price of fuel have raised its share of costs from 4thto 2nd. Fuel could become the largest cost segment by 2010

Airline DOC Analysis

Source: National Materials Advisory Board Dec. 05. Lufthansa Consulting

Note:1. Fleet mix will influence the cost shares. Short haul has a much lower contribution than long haul2. The extrapolation until 2010 assumes 2,5% annual escalation of the cost base until 2010. Fuel escalates by 40% compared to 2005.3. No allowance for accelerated fleet rollover to new equipment assumed.

The dilemma

Fuel, MRO and ownership costs areinterdependent.A higher price of fuel will:

- Accelerate the phase-out of older equipmentlowering the MRO burden,

- Be passed on to the customer potentiallyforcing demand downwards or

- Reduce EBITDA and the ability of the marketto support CAPEX.

The airline cost equation is dynamic –increased fuel costs will force changeelsewhere

0%

25%

50%

75%

100%

1992 2005 2010?

Insurance Ground Handling Flight CrewFuel Maintenance Ownership

1




The industry legacy problems and the drivers for change…

Encrusted industrial relations

State Interference

Poor management

Complexity penalties

Fragmented Business

Ownership

Regulatory Requirements

Lack of bargaining power

Lack of competitive pressure

Globalisation

Liberalisation

Shareholder/Investor Pressure

Innovation

www..

1




Content

The airline business – an attractive industry….?Three elements of an airline strategy




Learning from other industries: Three ways of creating Value

Value Creation

Reduce input costs through

Increased Asset utilisation

Outsourcing

Product differentiation

Segmentation

Branding

Growth through Consolidation

M&A, Partnering

Expanding alliance scope

OperationalEfficiency

„De-commoditi-

sation“

Critical

Mass

2




The Global Airline industry is fragmented: The largest player has 6%share of supply, the top 10 airlines have a 35% share

0

50100

150

200

250

300

350

A A D L U A C O B A

N WA F L H W N J L

S Q Q F U S A C C X K L E K N H C Z T G K E I B C A M H

M U

0%

10%20%

30%

40%

50%

60%

70%

Cum. SKO (bn) Cum. Mkt Share

SKO (bn) Global Market (March 2005 – March 2006).

Source: IATA Global Market Statistics - 2006

2




0

5001.000

1.5002.000

2.500

3.0003.500

4.000

V R G L A N

T S D A M X

M X A G L O

A R G A V A

V L O A J M

B W A

L A V F W

I S L I

T P A T T L

S L M S A M

R S L B H S

L I A A R E

L A P

R e v e n u

e ( $ U S D M i l l i o n

)

-40%

-30%

-20%

-10%

0%

10%

20%

30%

N

e t M a r g

i n

Revenue Net Margin

Revenue and Net Margin (2003-2005): Latin American Carriers (with annualrevenue greater than $50 Mil)

The Latin American Airline Industry show the same trend…

Source: Thomson Financial, RATI.

76% of Market by Revenue

Avg. Margin = 3.2%

18% of Market by Revenue

Avg. Margin = 3.1%

Note:1. Aeropostal, AirJamaica, and Bahamasair are not depicted due to lack of availabe data.2. Data represents the year 2003, 2004 and 2005.3. Poor reporting of the sector means that the above is only a small component of operators albeit a large component of

revenue.

Airline Operator(ICAO Code)

2




-1,0

0,0

1,0

2,0

3,0

The airline sector shows relatively poor financial returns inthe value chain

Source: Thomson Financial (Worldscope). Lufthansa Consulting Research.

...Major

system

vendors

OEM’s Airlines Ground

Support

MRO

Competitive dynamics in the value chain – concentration and profitability

3 or moresuppliers

per sub-system

2 majorsuppliers

OligopolyAirbus &Boeing

2 Lessors >50% market

share

Marketconsolidation

occurringplus OEM’sentering thebusiness

Monopolist1685 airlinesdespite

overcapacityand fierce

competition

Average financial performance (EBIT/Sales Margin - latest 12months)

MRO Catering Airport

Limitedcompetition

at airports

Lessor

Limitedcompetition

2




An M&A driver analysis show industry need for consolidationthough regulation is a hindering factor 2

Consolidation, InternationalConsolidation in EuropeRegion

Highly available

To cover debtand fund growth

Low

Decrease

Low

Low

Low

Low(On bilateral level)

DevelopmentImplication

HighMarket deregulation

AvailableAlternatives to M&A

To cover debtand fund growthCapital requirement

PredictableStrategy differentiation

Decrease +(LCC)Pricing

MiddleProduct differentiation

LowFinancial performance

LowIndustry concentration

ImplicationDevelopmentMerger Driver





Value Creation

Reduce input costs through

Increased Asset utilisation

Outsourcing

OperationalEfficiency

2




0%

10%

20%30%

40%

50%

60%

70%

80%

S o u t h w e s t

J e t B l u e

A i r T r a n

R y a n a i

r

G O L

e a s y j e t

D e l t a

U n i t e d

U S A i r w

a y s

A m e r i c a n

C o n t i n e

n t a l

A i r F r a n c e

B r i t i s h A i r w a y s

L u f t h a n s a

A l i t a l i a

I b e r i a

A u s t r i a n

L A N

T A M

Salaries & Wages Fuel Depreciation, Amortisation & AC rental

The salary cost block for the European and South American low costcarriers are up to 50% lower than their “legacy” rivals

Main Cost Drivers of selected carriers, 2004 (% of total operating costs)

Source: Lufthansa Consulting, company reports; Average Exchange Rate, source oanda.com

1 4 2 0

9 1 2

8 2 9 4 4

4 0 1 5

1 0 0 9

1 1 5 1

5 9 3 7

5 3 5 6

1 7 1 3

2

Actual Total Costs, US$ m

1 9 4 6 3 8

3 5

1 8 7 7

8 8 4

6 6

1 4 2 8

7

1 2 3 9

9

1 4 7 6

2 3 7

6 8 1 9

2 1 1 9

0 3

Note:1. Latest annual reports not available for all carriers. AirTran, Delta, United, US Airways, Continental, and JetBlue based on data

from FY02/03

2




The average LCC EBIT/Employee is more than 20 times higher thanthe Legacy Carrier average 2

Note:1. All Low Cost Results reported for FYR 20052. Legacy carriers AF-KLM, AMR, BA, Continental, LAN, and US Airways all FYR 2005.3. The remainder are FYR 04.

-100

-50

050

100

150

200

250

A i r T r a n

J e

t B l u e

A i r w a y s

S o u

t h w e s

t

A i r l i n e s

E a s y

j e t

G O L

R y a n a

i r

A l i t a l i a

D e

l t a

U n

i t e d

A i r l i n e s

U S A i r w a y s

A M R

C o n

t i n e n

t a l

A i r F r a n c e -

K L M

A u s

t r i a n

V a r i g


I b e r i a

T A M

S A

B r i t i s

h

A i r w a y s

L u

f t h a n s a

E B I T / E m p

l o y e e

( $ 0 0 0 )



Source: Thomson Financial, Annual Reports, ACAS, RATI, IATA. EBIT according to Thomson Financial – similar to USGAAP.

Comparison of value generation according to EBIT/Employee




5

67

8

9

1011

12

S o u

t h w e s

t A i r l i n e s

A i r T r a n

E a s y

j e t

R y a n a

i r

G O L

J e

t B l u e

A i r w a y s

A l i t a l i a


A i r F r a n c e -

K L M

I b e r i a

L u

f t h a n s a

B r i t i s

h A i r w a y s

A u s

t r i a n

D e

l t a

C o n

t i n e n

t a l

A M R

V a r i g

U S A i r w a y s

U n

i t e d A i r l i n e s

T A M

S A

H o u r s

/ d a y

( N B F l e e t s ) ( 1 2 M o n

t h

A v e r a g e

)

The LCC’s average 24% more hours aircraft utilisation than thelegacy carriers (narrowbody comparison only)

Average asset utilization of the narrow body fleets (B737, A320, MD80, MD90)

Source: ACAS 2006



-24%

Average = 7.3 hrs

Average = 9.7 hrs

2




South America has the second oldest fleet in operation (behindAfrica) and has aged the most since 2001.

Fleet Age Development – World Regions (2001-2005)

Source: ACAS. Lufthansa Consulting Research.

Note:1. The fleets addressed include aircraft that are used for passenger transport, regional jets, narrow body above 100 seats, and wide body

aircraft. TP’s, smaller aircraft, and aircraft for other roles (e.g. Cargo) are excluded.

0

5

10

15

20

Europe Pacific

Rim

North

America

Asia Middle

East

South

America

Africa

A v g .

F l e

e t A g e

( Y r s

)

2001 2002 2003 2004 2005

+1.5 +1.4 -0.4 +0.1 +1.1 +1.8 +0.9Delta avg. agesince 2001

2




2

4

6

8

10

0 1.000 2.000 3.000 4.000 5.000

Avg. Distance Flown / PAX (km)

C a s h

C o s t s / A

S K ( € c e n

t s )

Costs matter in a fragmented market – the traditional networkcarriers are being squeezed from both sides.

Source: Goldman Sachs Global Investment Research (July 2005)

Cash Costs/ASK vs. Stage length for selected carriers, 2004

FR EK

SK

IB

AF

KL BA

LX

LHAZ

U2LCCShort haul only

Wide-body Network CarriersWide-body fleets

Mixed Fleet Network CarriersShort and long haul

G3

LARG

SQCX

FL

2




In the airline business considerable operational and administrativeactivities can be outsourced

Operational activities Administrative activities

Ground handling

Maintenance

Flight training

HR

IT

Accounting

Commercial

Operations

• Travel management• HR training• Payroll• Pension

IATA GH agreement • Baggage handling• Check-In• Ramp operations• Catering

EASA part 145 • All checks• Inventory management

JAR 147 • Pilot training• Crew training

EASA part M, sub-part G

• Scheduling• Pricing• In-flight product

• CRS / Internet booking engines• Lost-and-found• Call centers• Sales & GSAs

• Ledger• Financial audit

• IT planning, sourcing,service, training

• Telecommunication

Source: Lufthansa Consulting 2005

2





Value Creation

Product differentiation

Segmentation

Branding

„De-commoditi-

sation“

2




With increasing segmentation levels differentiation will driverevenue potential but complexity will drive cost

Region

“One Class for all”

Oneto

One

Differentiation /

Complexity

Standard / Commodity

Individual Segmentation

Detailed Segmentation

Motivation Segmentation

Geographic Segmentation

No Segmentation

Size ofgeographical area

Density ofpopulation

Business

Leisure

Visiting

friends & relatives

Foreign workers

Behavioral

Demography Psychographic

2




The target is to address individual customer needs withoutincreasing complexity and drive cost

C o s

t A d v a n

t a g e t

h r o u g

h s

t a n

d a r d

i z a

t i o n

Price premium through addressing individual passenger needs

L o w

HighLow

H i g h

Low Cost

Model

FullServiceModel

Strategy:

Reducecomplexitywithoutneglectingindividualpassengerneeds

Strategy:

Address individual customerneeds without increasingcomplexity

Success Factors for both strategies:

Apply information technology

Data Mining and Data Warehouse

Address individual desiresPersonalization and mass customization

Create customer-oriented processesBPR adding value for the customer

Establish long term perspectiveCustomer life time value

Adapt controllingCustomer-oriented cost and revenues

Sustainableoperating

profit

2




Airline Global Brand (and name) recognition is low comparedto other industries & institutions (Interbrand 2005-ranking)

61 Café deColombia/JuanValdez62 Bacardi63 G864 Ford65 AOL66 MandarinOriental Group67 Mitsubishi68 Peninsula

Hotels69 NTT DCoMo70 Daewoo

41 CNN42 Disney43 Pepsi44 Dell45 Philips46 Mercedes47 FedEx48 Fairtrade49 Volvo50 Nestlé51 Canon

52 UN53 Hello Kitty54 Burger King55 UBS56 Medecins..57 Gucci

58 Mazda59 Nissan60 GE

21 Toyota22 Mini23 Microsoft24 Red Cross25 al Jazeera26 BMW27 Bono28 Red Bull29 BBC30 Motorola31 McDonald’s

32 Cirque du S33 Honda34 Volkswagen35 MTV36 HSBC37 LG

38 Guinness39 ING Direct40 Vodafone

1 Google2 Apple3 Skype4 Starbucks5 Ikea6 Nokia7 Yahoo!8 Firefox9 eBay10 Sony11 Zara

12 Bluetooth13 H&M14 Coca-Cola15 Amazon.com16 Puma17 Samsung

18 Nike19 Virgin20 adidas

Source: Interbrand/Brandchannel 2005 Internet polling. Population 2500 from 99 countries – brands are judged on their Impact

(positive or negative).

In 2003 SingaporeAirlines was placed No.62…

2




..although regional Top-20 gives a different result..

1 Sony2 Toyota3 Samsung

4 LG Electronics5 HSBC6 Singapore Airlines7 Honda8 Lonely Planet9 Tiger Beer

10 Hello Kitty11 Cathay Pacific12 Star TV13 Qantas14 Lenovo15 Jet Airways16 Tata17 Nissan18 Mazda19 Acer20 Muji

1 Apple2 Google3 Starbucks

4 Target5 Lance Armstrong6 craigslist7 Whole Foods8 Coca-Cola9 Oprah Winfrey

10 Amazon.com11 Trader Joe’s12 Yahoo!13 eBay14 Wal-Mart15 Firefox16 BlackBerry17 Pixar18 JetBlue19 Bluetooth20 AMEX

1 Nokia2 Ikea3 Skype

4 Zara5 BMW6 BBC7 adidas8 al Jazeera9 H&M

10 Aramex11 Mini12 Virgin13 Audi14 Puma15 Nestlé16 Emirates Airline17 Vodafone18 Dove19 Mercedes20 Orange

1 Corona2 Bacardi3 movistar

4 Havaianas5 Cemex6 Café de Colombia7 Bimbo8 Natura9 Lan Airlines

10 Concha y Toro11 Petrobras12 Brahma13 Aeromexico14 Falabella15 Telcel16 Lala17 Itaú18 Arcor19 AmBev20 Bancolombia

Latin America Europe & Africa USA & Canada Asia-Pacific

Source: Interbrand/Brandchannel 2005 Internet polling. Population 2500 from 99 countries – brands are judged on Impact (positive or

negative). Survey carried out in Nov-Dec. 2005

2

h f h b d h bl d d l




The creation of the easyJet brand has enabled easyGroup to developits franchise to other industries

Source: www.easy.com - 2006

Earning potential

2



Thank you

for your

attention

airline trends 2009

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