© Oliver Wyman AVIATION, AEROSPACE & DEFENSE

Phoenix Sky Harbor International Aviation Symposium

APRIL 2–4, 2014

• How are traditional hubs affected by industry changes, such as the substitution of low-cost, short-haul feed partners; range improvements in small- and medium-sized aircraft; and introduction of the 787 and A350?

• How can airlines and airports position themselves for success in a world of changing flows?

• Is low-cost, long-haul transoceanic service becoming viable?

Panel 1

Hub 3.0

2 2 © Oliver Wyman

50 Longest 787 Routes The 50 longest 787 routes are concentrated in Asia. In August, airlines will operate 787s with 311 daily departures. The longest 787 flight is from Toronto to Addis Ababa, Ethiopia: 7,154 miles.

NRT – Tokyo Narita

LAX – Los Angeles

HND – Tokyo Haneda

ARN – Stockholm Arlanda

LHR – London Heathrow

MEX – Mexico City

YYZ – Toronto Pearson

CAN – Guangzhou, China

OSL – Oslo, Norway

PEK – Beijing (Capital)

SFO – San Francisco

Routes 10 6 5 4 4 4 4 3 3 3 3

Airports with the largest number of the 50 longest 787 routes

3 3 © Oliver Wyman

50 Longest A380 Routes The 50 longest A380 routes are concentrated in the Middle East and Europe. In August, airlines will operate A380s for 194 daily departures. The longest A380 flight is Dubai, UAE, to Los Angeles: 8,336 miles

DXB – Dubai, UAE

CDG – Paris de Gaulle

FRA – Frankfurt, Germany

LAX – Los Angeles

SIN – Singapore Changi

LHR – London Heathrow

ICN – Seoul, South Korea

HNK – Hong Kong

JFK – New York Kennedy

SYD – Sydney

Routes 14 11 9 8 7 6 5 4 4 4

Airports with the largest number of the 50 longest A380 routes

Source: PlaneStats.com > schedule > monthly operations for August 2014. Map generated by the Great Circle Mapper - copyright © Karl L. Swartz.

4 4 © Oliver Wyman

50 Longest 777 Routes The longest 777 routes are split among the US, Asia and Middle East. In August, airlines will operate 777 on 2,140 daily departures. The longest 777 route is Atlanta to Johannesburg: 8,449 miles

Airports with the largest number of the 50 longest 777 routes

DXB – Dubai, UAE.

LAX – Los Angeles

HKG – Hong Kong

AUH – Abu Dhabi, UAE.

DOH – Doha, Qatar

DFW – Dallas/ Fort Worth

EWR – New York Newark

JFK – New York Kennedy

ORD – Chicago O’Hare

SYD – Sydney

Routes 8 7 6 5 5 4 4 4 4 4 Source: PlaneStats.com > schedule > monthly operations for August 2014. Map generated by the Great Circle Mapper - copyright © Karl L. Swartz.

5 5 © Oliver Wyman

Eight ways airports can differentiate themselves from competitors

Successful, world class

airport operations

Embrace a commercial mind set. Be entrepreneurial about service offerings.

Manage service providers efficiently. Integrate them smoothly into the organization and process.

Provide structured and organized management of stakeholders. This cannot happen in a vacuum.

Use – or invent your own – innovations. Bring a spirit of technology leadership to the organization.

Identify and communicate clear strategic objectives. Consistently share key objectives with business units.

Adopt a customer orientation. Establish a customer experience function that owns the overall strategy.

Cooperate closely with hub partners, especially the home carrier Lead by facilitation.

Improve your governance model. Outmoded governance can impede your ability to act.

Source: Oliver Wyman, The Future of Airports http://www.oliverwyman.com/insights/publications/2012/oct/the-future-of-airports--part-2---eight-ways-airports-can-differe.html#.UyyYoxBNdf8

• Then and now: What are typical airline career trajectories? How have the economics and demographics changed over time? Are there shortages of pilots, mechanics, and others?

• Management career paths: What skills and experiences will be essential for airline executives in the future?

• Which industries will attract airline executives or provide new executives, and how will that shape the future of industry leadership?

Panel 2

The airline workforce – what will the labor

market provide?

7 7 © Oliver Wyman

US airline employee productivity rose in the last two decades

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800

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1,200

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0.5

1.0

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ASM (millions) per employee Passengers per employee

Available seat miles and passengers per employee

Avai

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e se

at m

iles,

in m

illion

s, p

er e

mpl

oyee

Passengers per em

ployee

Source: BTS employee statistics, MIT airline data project

8 8 © Oliver Wyman

Total US airline employment declined in the last two decades

$0

$10,000

$20,000

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$80,000

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1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Pilots/co-pilots Flight attendantsPassenger, cargo and aircraft handling Maintenance (in-house)Management/other Annual average wages and salaries

Total employees and average wages/salaries

Average wages/salaries

Tota

l em

ploy

ees

Source: BTS employee statistics, MIT airline data project

9 9 © Oliver Wyman

Asia pacific sees strongest demand for new pilots and technicians

Source: Boeing Current Market Outlook (2013-2032)

Pilot and technician outlook

New pilots by region 2013–2032

New technicians by region 2013–2032

39%

20%

17%

10%

8%

3% 3%

Region Pilots

Asia Pacific 192,300

Europe 99,700

North America 85,700

Latin America 48,600

Middle East 40,000

Africa 16,500

CIS 15,200

Total = 498,000

39%

19%

18%

9%

9%

3% 3%

Region Technicians

Asia Pacific 215,300

Europe 108,200

North America 97,900

Latin America 53,100

Middle East 47,600

Africa 18,000

CIS 15,900

Total = 556,000

• Have alliances delivered on the promise of seamless service? Is the customer experience closer to being truly seamless among joint venture partners with anti-trust immunity?

• What intra-alliance conflicts are emerging? How are the new bilateral carrier agreements impacting the traditional alliances?

• What degree of partnership between mainline and regional or low-cost feed providers is required to deliver benefits?

Panel 3

Alliances, partnerships, and the customer

experience

11 11 © Oliver Wyman

Alliance share of departures by region in August 2014

16%

25%

7%

52%

Global total Star 21.0%

SkyTeam 17.6%

Oneworld 13.8%

Other 47.6% 21%

21%

25%

33% 21%

15%

12%

52%

Asia US Europe

Source: PlaneStats.com > schedule > monthly operations for August 2014. US Airways will leave Star at the end of March 2014 and join oneworld as American’s affiliate.

Star SkyTeam Oneworld Other

VERSION 2

12 12 © Oliver Wyman

Source: PlaneStats.com > schedule > monthly operations for August 2014. US Airways will leave Star at the end of March 2014 and join oneworld as American’s affiliate.

Star Alliance is comprised of 27 airlines with 22,301 daily departures

13 13 © Oliver Wyman

Source: PlaneStats.com > schedule > monthly operations for August 2014

SkyTeam is comprised of 20 airlines with 16,283 daily departures

14 14 © Oliver Wyman

Oneworld is comprised of 14 airlines with 12,772 daily departures

Source: PlaneStats.com > schedule > monthly operations for August 2014. US Airways will leave Star at the end of March 2014 and join oneworld as American’s affiliate.

15 15 © Oliver Wyman

Source: PlaneStats.com > schedule > monthly operations for August 2014

Top 10 non-aligned airlines account for approximately 25.8% of total non-aligned departures

• How are consumers using technology to create better service environments and get more out of their travel experiences?

• What are the major battles being waged between airlines and third-party intermediaries? Will travelers ultimately own and manage their digital travel plans, or will these plans be held by travel partners?

• Who are the emerging key players in the digital battle for the customer? Which new entrants are gaining ground from outside the traditional industry set?

Panel 4

The digital age takes flight – battle

for the customer

17 17 © Oliver Wyman

Social media following doesn’t correlate to airline size The world’s largest airlines have dramatically different results on Facebook and Twitter

Airline Daily departures Facebook page likes Twitter followers

Delta 5,589 1,272,737 639,410

United 5,421 699,867 413,119

American 3,557 1,475,176 785,573

US Airways 3,115 135,269 410,979

Southwest 3,195 4,210,929 1,635,081

China Southern 1,988 NA 24,252

RyanAir 1,730 NA 64,044

Air Canada 1,657 842,816 180,570

China Eastern 1,612 NA 264

Lufthansa 1,470 1,577,491 143,195

easyJet 1,390 245,264 180,489

Turkish 1,239 3,674,096 418,888

ANA 1,233 544,097 142,901

Air China 1,165 66,243 3,701

British Airways 1,006 1,217,258 406,381

Air France 973 3,540,193 329,872

Alaska 934 395,931 105,813

jetBlue 894 898,335 1,804,185

GOL 879 1,802,040 284,030

Aeroflot 796 41,364 52,403

Notes: Source: PlaneStats.com departures for August 2014, Facebook.com and Twitter.com as of March 31.

• Are investors now expecting airlines to live by the criteria of 10 percent or greater return on invested capital? If so, how does this change future airline expansion decisions?

• What is the business case for new versus older aircraft in different fuel price environments?

• Is the airline investor profile changing from short-term trader to more typical fund manager?

Panel 5

The 10%+ ROIC world and its impact

on expansion, aircraft orders, and other

investments

19 19 © Oliver Wyman

3Q2013 Load factor: 86.1% Break-even load factor: 77.8%

Source: PlaneStats.com > form 41 financial > financial indicators for all network carriers, domestic entity

US network carriers generate profit on more domestic seats US network carriers’ domestic average load factor has reached 86 percent, while break-even load factor has dropped to less than 78 percent, generating a profit on 13 seats per departure

Covers cost Profit Revenue opportunity

20 20 © Oliver Wyman

US value carriers make money on 11 domestic seats For US value carriers, domestic average load factor has reached 83 percent, with break-even requirement of less than 75 percent, thus generating a profit on 11 seats per departure

Source: PlaneStats.com > form 41 financial > financial indicators for all value carriers, domestic entity

3Q2013 Load factor: 83.0% Break-even load factor: 74.6%

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Covers cost Profit Revenue opportunity

• Electronic devices: Will cell phones be permitted?

• Expanded pre-check and other security improvements: Are more consumer protection regulations on the way?

• What is the cost and impact of recent regulations: tarmac delay rules and ancillary fee displays?

• How will regulations develop around requiring access to airline ancillary products for on-line and traditional travel agencies?

Panel 6

Regulatory changes ahead – good, bad,

and indifferent

22 22 © Oliver Wyman

US government regulations on airlines compared with other industries

Source: Airlines for America

Airlines Hotels Rental cars Cruises Amtrak Buses Cable Telecom

Service delivery reporting No No No No No No No

Full-fare advertising (incl. taxes) No No No No No No No

Ancillary revenue reporting No No No No No No No

24-hour purchase refund ability No No No No No No No

Detailed reporting of demand No No No No No No

Detailed reporting of cost No No No No

Reporting of average prices paid No No No No No

Operational contingency plans No

23 23 © Oliver Wyman

Source: PlaneStats.com > US O&D survey > O&D market detail for the YE3Q2013 All taxes and fees for domestic travel including airport PFC charges.

Taxe

s an

d fe

es fo

r yea

r end

ed 3

Q 2

013

(in

billi

ons

of d

olla

rs)

Taxing passengers US domestic air travelers pay more than $11.9 billion annually in taxes and fees that are included in the price of the airline ticket

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US domestic travel

Allegiant Virgin America

Spirit Hawaiian Frontier AirTran Alaska American US Airways

United Southwest Delta JetBlue

Taxes and fees per passenger Annual taxes and fees

Taxes and fees per passenger

Taxes and fees

24 © Oliver Wyman 24

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Inclusive of key industry and governmental data sets, paired with our own proprietary research and algorithms, it is easy to use and very flexible to analyze things like airline schedules, fleet composition, cost data, passenger loads and more.

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