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Global Industry Overview

Global Industry Overview. Kye Johanning Air Line Pilots Association, Intl. Utrecht, Kingdom of the Netherlands October 5, 2011. Key Points. Global Economic Overview. Global Growth Moderately Revised, Increased Risks More Apparent.

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Global Industry Overview

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  1. Global Industry Overview Kye Johanning Air Line Pilots Association, Intl. Utrecht, Kingdom of the Netherlands October 5, 2011

  2. Key Points ALPA - Economic & Financial Analysis

  3. Global Economic Overview ALPA - Economic & Financial Analysis

  4. Global Growth Moderately Revised, Increased Risks More Apparent • World economic growth forecast revised to an estimated 4.0% in both 2011 and 2012 • Global activity has weakened and become more uneven, consumer confidence has fallen sharply, and downside risks are growing • Assumptions to growth forecast depend on several factors: • European policymakers will be able to contain the euro area crisis • U.S. policymakers can strike a balance between support for the economy and medium-term fiscal consolidation • Volatility in global financial markets stabilizes • Advanced economies facing anemic growth of only 1.6% in 2011 • Shocks including the earthquake and tsunami in Japan and social unrest in some oil-producing countries, major financial turbulence in the euro area, and sell-off of risky assets in global markets all contribute to lower estimate for advanced economies • Emerging economies projected to grow 6.4% growth in 2011 • Economic growth remains robust, but concerns over inflation and overheated economies Source: IMF, Wall Street Journal, The Economist, OECD, IATA ALPA - Economic & Financial Analysis

  5. Global Economic Recovery Slowing; Downside Risks Growing Real GDP Growth and Forecasts (as of September) Source: IMF World Economic Outlook Update (September 20, 2011) Note: (P) Projected ALPA - Economic & Financial Analysis

  6. Global Composite Leading Indicators Signal Widespread Slowdown in 2011 Source: OECD ALPA - Economic & Financial Analysis

  7. Current Airline Industry Trends & Performance ALPA - Economic & Financial Analysis

  8. Continued Passenger Demand Strength Buoys the Industry…But How Long Will It Last? • Strong passenger demand, driven by economic optimism earlier in the year, will push revenues up by 9% YOY to $594 billion • YTD capacity growth is outpacing demand – a troubling sign • From January-July, total passenger traffic grew 6.4% and capacity grew 6.8% YOY, with international passenger traffic growing 7.8% and capacity growing 9.2% • Meanwhile, from January-July, total cargo traffic grew 1.0% and capacity rose 5.6% YOY, with international cargo traffic growing 1.5% and capacity rising 7.3% • Premium passenger traffic has increased 8.2% YOY, for January-July • Premium & economy trends (after weakness at the end of 1Q and beginning of 2Q) rebounded to levels close to average growth trends for the past 20 years • Global airlines to post $6.9b in net profits for 2011, down from $15.8b in 2010 as a result of economic uncertainty and volatile fuel Source: IATA “Financial Forecast “ (September 2011), Premium Traffic Monitor ALPA - Economic & Financial Analysis

  9. Passenger Traffic Slows, But Remains Positive, While Cargo Traffic Declines World Traffic Growth, % Change YOY Source: IATA Monthly Traffic Reports ALPA - Economic & Financial Analysis

  10. Premium Volumes & Revenues Recover Premium Ticket Volume & Revenue Growth Source: IATA Premium Traffic Monitor ALPA - Economic & Financial Analysis

  11. Global Passenger and Cargo Revenues Trends Shrink, But Remain in Positive Territory Source: IATA “Financial Forecast” (September 2011) ALPA - Economic & Financial Analysis

  12. Premium Traffic Improving in Most Regions, But Still Below Pre-Recession Highs Jan-July 2011 Int’l Premium Traffic YOY % Change 12.4% 8.8% 10.2% -9.1% 10.8% 3.3% 2.9% 7.6% -58.8% 16.3% 14.7% 4.2% 15.4% 9.3% Total Int’l Premium Traffic: 8.2% Source: IATA Premium Traffic Monitor ALPA - Economic & Financial Analysis

  13. 2011 Expected to Yield Profitable Results, Despite Industry Challenges Distribution Of Forecasted Global Net Profits of $6.9 Billion In 2011 Latin America $0.6 billion North America $1.5 billion Middle East $0.8 billion Africa to breakeven Europe $1.4 billion Asia-Pacific $2.5 billion Source: IATA “Financial Forecast” (September 2011) ALPA - Economic & Financial Analysis

  14. Industry Challenges ALPA - Economic & Financial Analysis

  15. Economic Uncertainty Expected to Challenge Passenger Airlines in the Coming Months • Passenger market is running on fumes of earlier economic optimism • Strong passenger demand, driven by economic optimism from earlier this year, was met by increased capacity and intense aircraft utilization • Premium travel remains strong, most likely due to travel plans made earlier in the year as well as travel budgets being set • Fourth quarter and early 2012 may be the weakest time • Weakness in 2H11, but tighter supply/demand conditions will help offset • Economic challenges may catch up to premium travel and cause a slowdown in 4Q11/1Q12 • Slippage in load factors expected in 2012, as traffic will struggle to match capacity • Historically, the industry has lost money when GDP dips to 2% ALPA - Economic & Financial Analysis

  16. Passenger Load Factors Rise to 2010 Highs Passenger Load Factor on Total Market Seasonally Adjusted Source: IATA “Air Transport Market Analysis” (July 2011) ALPA - Economic & Financial Analysis

  17. Despite an Increasingly Gloomy Economic Outlook, Air Travel Continued to Expand at a Pace Close to Trend in July Total Passenger Growth by Region Source: IATA “Air Transport Market Analysis” (July 2011) ALPA - Economic & Financial Analysis

  18. Cargo Already Experiencing the Weight of Economic Challenges • Indicators show economic uncertainty looming • International trade essentially stopped growing at the end of 2010 • Business confidence in manufacturing (a leading indicator for premium travel) has steadily declined and now shows signs that growth is expected to plateau • Air cargo seeing stagnation as a result of economic challenges • Restocking cycle drove air cargo’s post-recession peak in May 2010 • Since the end of the restocking period, shippers have used more ground transportation – causing a decline in air cargo demand • Cargo load factors are still reasonable by historic standards, but have fallen 4 to 5 percentage points since 2010 • Second leg of air cargo recovery is not expected until 2012 • Cargo represents about 12% of airline revenues ALPA - Economic & Financial Analysis

  19. Cargo Load Factors Fall But Remain Historically Respectable Freight Load Factor on Total Market Seasonally Adjusted Source: IATA “Air Transport Market Analysis” (July 2011) ALPA - Economic & Financial Analysis

  20. Airlines from Most Regions Have Experienced Weak Air Freight Businesses So Far This Year Total Freight Growth by Region Source: IATA “Air Transport Market Analysis” (July 2011) ALPA - Economic & Financial Analysis

  21. Volatile Fuel Still an Industry Challenge • Economic uncertainty led to a decrease from jet fuel’s 2011 highs • On September 20, jet fuel prices ($123.73/bbl) decreased 12.7% from 2011’s high on April 8 ($141.75/bbl) • Increasing crack spreads have stopped jet fuel from falling as much a crude oil • From January 1 to September 20, crack spreads increased about 2.5 times • From January 1 to September 20, NYMEX crude decreased 5.1% • Brent has been more volatile due to North Sea supply and turmoil in MENA • From January 1 to September 20, Brent increased 19.4%. But, as of September 20, Brent decreased 10.7% from 2011’s high • Japan’s nuclear outages, geopolitical threats, and absence of Libyan oil could pressure the current trend of falling crude and jet fuel prices • 2011 fuel costs to rise 27% YOY to $176b, about 30% of expenses • Fuel hedging expected to delay the benefits of falling fuel prices, as 2012 industry fuel costs are expected to grow 14% YOY Source: IATA Airlines Financial Monitor, IATA “Financial Forecast” (September 2011), IATA Press Releases, EIA, NYMEX

  22. Fuel & Revenue To Grow In 2011 & 2012 But, Unlike 2010, Fuel Prices Will Grow Faster +15% +9% +6% +27% +14% +11% Source: IATA Industry Financial Forecast (September 2011) ALPA - Economic & Financial Analysis

  23. From Jan. 1 to Sept. 20, Crude Oil Prices Fell 1.8%, While Jet Fuel Prices Rose 14.3% Source: EIA, NYMEX ALPA - Economic & Financial Analysis

  24. Higher Crack Spreads Have Stopped Jet Fuel Prices from Falling as Fast as Crude Oil Source: Calculations based on NYMEX Crude Oil, Gulf Coast Jet Fuel (EIA) ALPA - Economic & Financial Analysis

  25. Regional Focus ALPA - Economic & Financial Analysis

  26. Gyrating Profit Forecasts Tell the Story of Uncertainty and Shocks Source: IATA, September 2011, CAPA ALPA - Economic & Financial Analysis

  27. European Trends Slightly Up, But Comparisons to a Difficult 2010 Misleading • European airlines now forecast profits of $1.4 billion, up from $500m earlier this year • European airlines doing better than expected in recent months, despite weakening economy and being the source of global economic problems • A weak Euro has stimulated more inbound travel and boosted exports • Current improvement is not considered sustainable and 2012 profits forecasted to drop to only $300m • Traffic up compared to depressed 2010 levels, expect some slowdown in months ahead • Traffic was up nearly 10% in the first five months, while capacity grew 10.9% • Capacity cuts have been announced for Lufthansa and Air Berlin, while IAG is studying reductions for the winter • Air France expects its long haul capacity to be slightly less this winter than originally planned Source: AEA, IATA, Morgan Stanley, UBS, Wall Street Journal, Airline Business, ATW, Aviation Daily, ATI, BAA, ACI ALPA - Economic & Financial Analysis

  28. North American 2011 Profitability Dependent on Interplay Between Fuel and Capacity • North American airlines expect profits of $1.5 billion in 2011 and $1.2 billion in 2012 • Renewed risks of recession as global economy softens • Revenue levels will slow as output contracts • Risks to profitability include rising fuel prices, capacity growth, and high unemployment rates • Capacity discipline will be vital to profitability • Thru July YTD, system passenger traffic was up 3.5% and capacity up 4.1% • Revenue growth has subsided slightly in recent months, but the nine fare increases early in the year, coupled with a two week tax benefit (for most carriers), has helped offset the fuel increases earlier in the year • Several carriers have again cut capacity for the 4th quarter and into 1Q2012 due to softening economic situation Sources: IATA, ATA, JP Morgan, UBS, Morgan Stanley, Bank of America, Barclays, CAPA ALPA - Economic & Financial Analysis

  29. Asia Pacific Airlines Expected to Contribute 46% of the Total Industry Profits • Asia Pacific airlines forecast $2.5b in profits for 2011, down from profits of $7.6b in 2010 • 2011 profitability to decrease due to higher fuel costs as well as inflation controlling measures in China which are owing trade and cargo demand • Despite current challenges, optimism about future growth opportunities remains positive • Growth to continue but seemingly at a slower pace • Thru July, passenger traffic was up 4.1% YOY, with capacity jumping 6.8% • Thru July, air freight markets were down 3.5% YOY and remain about 10% lower than pre-recession levels • India's airlines reported continued strong domestic pax growth of 22.3% in Jul-2011, following on from an 18% expansion in 1H11 • While India is now the 9th largest and fastest growing domestic market in the world, its carriers struggle financially Sources: IATA, AAPA, Wall Street Journal, ATW, Airline Business, Reuters, AP, Air Transport Intelligence, International Business Times, Aviation Daily, BusinessWeek, Bloomberg Businessweek, CAPA ALPA - Economic & Financial Analysis

  30. Latin America to Generate the Highest Profit Margin in 2011 • Latin American carriers to post $600m in profits in 2011 and $500m in 2012 • Net profit margin expected to be 3.5% in 2011, compared to 2.5% for global • Demand growth to continue in Latin America, driven by economic activity, income growth, and less exposure to volatility • Delta invests in Aeromexico – $65m for Board seat and 3.5% stake • Aeromexico and Delta will expand existing codeshares to include all trans-border flights as well as some additional domestic and int’l flights • Strong domestic air travel in Brazil • Domestic passenger traffic up 18% on 11% additional capacity thru July • Intense competition led to a sharp drop in yields in 2Q2011 • LAN/TAM merger – Approval with conditions Sources: ALTA, IATA “Financial Forecast”, CAPA, Bank of America, Airline Business ALPA - Economic & Financial Analysis

  31. Mideast and African Markets to Grow in 2011, But Carriers Will Struggle With Unrest and Competition • Middle East forecasts holding steady, still expecting to post profits of $700m in 2011 • Traffic was up 8.3% thru July, while capacity was up 9.0% • Traffic holding up better than expected in the aftermath of political unrest • Some Middle East airlines will benefit from economic growth and a growing share in long-haul markets in 2011, while others are hurt by political unrest • African Airlines expect to breakeven in 2011 • Traffic levels were down during the summer, compared to a year-ago, when the World Cup boosted traffic results • Thru July, total passenger traffic was slightly down compared to last year, with capacity up 2.5%. • International passenger traffic was up 1.0%, with a 4.7% increase in capacity. • Real opportunity for African airlines to grow the intra-African market Sources: IATA “Financial Forecast”, IATA Traffic Releases, Yahoo Finance, CAPA, Airline Business, Arab Air Carriers Association, Wall street Journal ALPA - Economic & Financial Analysis

  32. Global Alliances ALPA - Economic & Financial Analysis

  33. Alliance Overview • 2011 marks the 14th year of major global airline alliances • Alliances comprise 63% of global airline traffic and roughly 55% of passengers travel on an alliance carrier • Structure of alliances change as airlines move toward greater cooperation • Expanding cooperation with ATIs and JVs • Anti-trust immunity allows carriers to form joint ventures as well as coordinate schedules, pricing, yield management and other functions • JVs allow carriers to gain merger-like benefits while keeping separate operations: revenue/profit sharing and cost cutting measures • Due to ATIs and JVs, alliances become an alternative to cross-border mergers • Consolidation trends impact alliance membership Source: Star, SkyTeam, oneworld , UBS Global Aviation ALPA - Economic & Financial Analysis

  34. “Big 3” Alliances Continue to Expand Membership Star Alliance SkyTeam oneworld Adria Airways Aegean Airlines Air Canada Air China Air New Zealand All Nippon Asiana Airlines Austrian Air Group Blue1 Bmi Brussels Airlines Continental Croatia Airlines EgyptAir LOT PolishLufthansa Scandinavian Singapore South African Spanair Swiss TAM TAP Air Portugal Thai Airways Turkish United Airways US Airways Ethiopian (2012) Avianca-TACA (2012) Copa (2012) Shenzhen (2012) Air India (suspended) Aeroflot Aeromexico Air Europa Air France/KLM Alitalia China Airlines China Eastern China Southern CSA Czech Airlines Delta Kenya Airways Korean Air Tarom Vietnam Airlines Aerolineas Argentinas (2012) Garuda Indonesia (2012) Saudi Arabian (2012) Middle East Airlines American Airlines British Airways Cathay Pacific Click Mexicana Dragonair Finnair Iberia Japan Airlines LAN Airlines Malev Mexicana Qantas Royal Jordanian S7 Airlines Air Berlin (2012) Kingfisher Airlines (2012) Malaysia Airlines (2012) Note: Green indicates airlines that are possible future members/members elect. Source: Airline Business, Aviation Daily, ATW, Air Transport Intelligence News, Star Alliance, oneworld, SkyTeam ALPA - Economic & Financial Analysis

  35. Alliance Financial Summary Alliance Financials For Existing Members, 2010* *Financial detail does not include future members Source: Airline Business (September 2011), Figures based on Airline Business World Airline Rankings ALPA - Economic & Financial Analysis

  36. Alliances Comprised About 63% of Global Traffic in 2010 2010 World Share of Passenger Traffic (RPKs) *Adjusted For Future Confirmed Members Source: Airline Business (September 2011), Figures based on Airline Business World Airline Rankings ALPA - Economic & Financial Analysis

  37. Aligned Carriers Accounted for 69% of Revenues in 2010 2010 World Share of Revenues *Adjusted For Future Confirmed Members Source: Airline Business (September 2011), Figures based on Airline Business World Airline Rankings ALPA - Economic & Financial Analysis

  38. Alliances Carried About 55% of Global Passengers in 2010 2010 World Share of Passengers Carried *Adjusted For Future Confirmed Members Source: Airline Business (September 2011), Figures based on Airline Business World Airline Rankings ALPA - Economic & Financial Analysis

  39. Alliances Continue to Focus on Gaining Market Share in “White Spot” Areas Alliance Current Capacity Market Share of Existing Members, By Route (Based on September 2011 data) Source: Airline Business (September 2011) ALPA - Economic & Financial Analysis

  40. Global Alliance Anti-Trust Immunities and Joint Ventures Trans-Atlantic Trans-Pacific ALPA - Economic & Financial Analysis

  41. Largest Unaligned Carriers ALPA - Economic & Financial Analysis

  42. Air France-KLM & Delta Account for About 50% of SkyTeam’s Revenues Source: Airline Business (September 2011), Figures based on Airline Business World Airline Rankings ALPA - Economic & Financial Analysis

  43. Industry Outlook ALPA - Economic & Financial Analysis

  44. Cautious in the Short-Term, Growth Expected in the Long-Term • Volatile fuel costs, political upheaval in the Middle East and North Africa, and unresolved government debt in many industrialized economies create risk of a renewed downturn • Although global airline profitability is expected to decline from last year’s record levels, it’s expected to still remain positive • Airlines will need to maintain a close vigilance on capacity, by being able to quickly react to short-term shocks to the industry Source: IATA, analyst reports ALPA - Economic & Financial Analysis

  45. Industry Challenges Over the Last Decade Limited Windows of Industry Profitability Profitability Weaker Profitability Profitability ALPA - Economic & Financial Analysis

  46. Industry Expected To See Profits In 2011 and 2012 … Global Industry Net Profits (Losses) 2000 Actual – 2012 Forecast Source: IATA “Financial Forecast” (September 2011) ALPA - Economic & Financial Analysis

  47. …But Regions Will See Varying Degrees of Profitability Source: IATA “Financial Forecast” (September 2011) ALPA - Economic & Financial Analysis

  48. Capacity Is Re-entering the Market and Is Forecasted to Outpace Demand in 2011 Source: IATA “Financial Forecast” (September 2011) ALPA - Economic & Financial Analysis

  49. Despite Current Caution, Long Term Growth Expected in the Global Airline Industry • New business models and rapid growth in emerging markets should contribute to continued expansion in the global industry • 3.3% worldwide GDP growth expected for the next 20 years • Worldwide passenger traffic expected to grow 5.1% annually, with cargo traffic expected to grow 5.6% annually • Over the next 20 years, 78% of demand for new airplanes will come from outside North America, with about 34% of deliveries going to the Asia Pacific region • Fastest growing market will be for twin-aisle airplanes • The single-aisle fleet is forecast to more than double and will be 70% of the total fleet by 2030 • Growth in air cargo will retreat toward the long-term trend in 2011 Source: 2011 Boeing Market Forecast ALPA - Economic & Financial Analysis

  50. Forecasted Annual Traffic Growth Rates From 2011-2030 For Passenger & Cargo Source: Boeing Current Market Outlook (2011-2030) , 2011 ALPA - Economic & Financial Analysis

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