Airline Current Business Environment Alex Heiter

Network, Fleet and Schedule

Strategic Planning

Module 2: 30 March 2015

Istanbul Technical University

Air Transportation Management

M.Sc. Program

2

The underlying dynamics of our industry

Economic growth

Traffic growth

Fleet Capacity Requirement

Fleet Capacity Growth

Airline Capacity Decisions

Capital intensity to adjust capacity

Utilization

Used Airplanes

New Airplanes

Parked Airplanes

High Low

Short term

Long term

Delayed

Retirement

Exogenous shocks

Airline Profitability

Liberalization

3

World Business Environment

Key Developments

Satisfactory G R Y Cautionary Major Concern

Indicator Key Metrics 2014 2015 2016 Updates

Economic environment

GDP Trade volumes Oil prices Exchange rates Financial markets

Economic growth accelerating into 2015

Brent oil price trading ~$60/bbl, mid-term outlook for price recovery

Heightened geopolitical tensions

Passenger demand

Traffic volumes Yields

Traffic +6.1% YoY in December, 5.9% for full year 2014

At/above long-term average 2015+

Significant variation between regions, business models

Passenger Capacity

Airline schedules Parked fleet Utilization rates Load factors

Global capacity growth stable at ~6%, regional variation

Load factors, utilization near/at record highs

Parked fleet showing typical seasonal trends

Air cargo demand

Traffic volumes Yields

Traffic +4.9% YoY in December, IATA: 4.5% growth for 2014

Demand growth returning to long-term average 2015+

Significant variation between regions, business models

Air cargo capacity

Parked fleet Utilization rates Load factors

Load factors, large freighter utilization recovering

Parked current-generation airplanes, but initial returns to service

Airline financials

Industry profitability Airline performance Airplane financing

Airlines managing uncertainty, volatile fuel prices

Airline industry net margins: 2.7% in 2014, 3.2+% in 2015

4

World Economic Outlook

$0 $2,000 $4,000 $6,000 $8,000 $10,000 $12,000 $14,000 $16,000 $18,000

Australia/NZ

Africa

Canada

India

Other Europe

Russia and CIS

Brazil

MidEast

LatAm ex. Brazil

Other Asia

Japan

China

United States

European Union

2013 GDP, Billions U.S. Dollars

1.3%

2.4%

7.2%

0.2%

3.9%

1.7%

2.8%

-0.1%

0.9%

2.1%

7.4%

2.4%

3.7%

2.7%

World Growth: 2014 2.6%

2015 2.7%

2016 3.2%

2014-2024 3.3%

Based on IHS Monthly Interim Forecast

(February 2015 Update — Annual Real GDP)

2014 2015 2014-24 CAGR

1.8%

3.0%

6.4%

1.0%

4.1%

1.8%

2.3% -0.5%

-3.3%

1.6%

7.9%

1.9%

4.3%

2.6%

1.8%

2.6%

6.5%

1.0%

4.2%

3.6%

4.0%

2.4%

2.1%

2.6%

7.9%

2.3%

4.8%

2.8%

Note: “China” includes Hong Kong and Macau. China’s stand alone growth rates: 2014 7.4%, 2015 6.5%.

Growth accelerating into 2015

5

World GDP Level Index

World

US

EU

Japan

Asia ex-Japan and ex-China

LatAm Middle East

China

90

110

130

150

170

190

210

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Annual Real GDP Level (Index, 2008 = 100)

Emerging markets contribute to global economic recovery

Source: IHS (February 2015 Interim Forecast, world = real GDP growth)

6

World Economic Outlook

Forecast

Global economic growth strengthening in 2015-6

Economic growth below trend since

2011

Accelerating growth and return to

trend in 2016 behind strong US

economy

Trade growth improving, cargo

showing signs of improvement

Real annual GDP Growth (%)

-2

-1

0

1

2

3

4

5

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Long-term

average

Source: IHS (February 2015 Interim Forecast)

7

World Trade

Trade accelerates slightly in 2015

25

50

75

100

125

150

175

1995 1997 1999 2001 2003 2005 2007 2009 2011 2013

Volume Index (s.a. 2005 = 100); indicator of world merchandise trade

Source: Netherlands Bureau for Economic Policy Analysis (http://www.cpb.nl/eng/research/sector2/data/trademonitor.html)

8

Consumer Confidence

Sources: Global Insight, European Commission Consumer confidence around decade-high in US, improving in EU

40

50

60

70

80

90

100

110

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

United States

40

50

60

70

80

90

100

110

120

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

-35

-30

-25

-20

-15

-10

-5

0

European Union

20

25

30

35

40

45

50

55

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Japan

70

80

90

100

110

120

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

China

Economic Sentiment Indicator

Consumer Component

9

Exchange Rates

119

0.88

0.60

0.70

0.80

0.90

1.00

1.10

75

85

95

105

115

125

135

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

¥/$ €/$

Monthly Average Exchange Rates

Source: Pacific Exchange Rate Service; Last data point: February 2015

▲ - USD strengthening

▼ - USD weakening

U.S. dollar strengthening significantly

10

Oil and jet fuel prices

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

0

20

40

60

80

100

120

140

160

180

200

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

BOEING PROPRIETARY BOEING PROPRIETARY BOEING PROPRIETARY BOEING PROPRIETARY BOEING PROPRIETARY

$/Barrel (Brent Crude Oil)

Brent Crude Oil

Jet Fuel

Oil price forecasts are nominal annual average prices for 2015-18

Historical data source: EIA

Avg Ann Prices

2007 $72

2008 $97

2009 $62

2010 $80

2011 $111

2012 $112

2013 $109

2014 $99

2015 $50

Oil prices down 50+% since June, mid-term price outlooks $80+/bbl

IHS

PIRA

Forecasts

EIU

$/gallon (US Gulf Coast Jet Fuel)

OxEcon

11

World Passenger Traffic and Capacity

-5%

0%

5%

10%

15%

Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14

BOEING PROPRIETARY BOEING PROPRIETARY BOEING PROPRIETARY BOEING PROPRIETARY

-5%

0%

5%

10%

15%

Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14

-5%

0%

5%

10%

15%

Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14

-5%

0%

5%

10%

15%

Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14

BOEING PROPRIETARY BOEING PROPRIETARY BOEING PROPRIETARY BOEING PROPRIETARY BOEING PROPRIETARY BOEING PROPRIETARY BOEING PROPRIETARY BOEING PROPRIETARY BOEING PROPRIETARY BOEING PROPRIETARY BOEING PROPRIETARY BOEING PROPRIETARY

YoY Growth

YoY Growth

Europe

YoY Growth

YoY Growth

Asia Pacific Int’l

Source: ATA, AEA, AAPA, IATA, ALTA, CAAC, airline reports, Boeing market analysis

ASK

RPK

Traffic growth continues to be above long-term 5% growth rate

World US Domestic

12

Emerging Market Traffic and Capacity

BOEING PROPRIETARY

-5%

0%

5%

10%

15%

20%

25%

Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14

-5%

0%

5%

10%

15%

20%

25%

Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14

BOEING PROPRIETARY BOEING PROPRIETARY BOEING PROPRIETARY BOEING PROPRIETARY BOEING PROPRIETARY BOEING PROPRIETARY BOEING PROPRIETARY BOEING PROPRIETARY BOEING PROPRIETARY BOEING PROPRIETARY BOEING PROPRIETARY BOEING PROPRIETARY BOEING PROPRIETARY BOEING PROPRIETARY BOEING PROPRIETARY BOEING PROPRIETARY BOEING PROPRIETARY

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

Dec-12 Jun-13 Dec-13 Jun-14 Dec-14

BOEING PROPRIETARY

YoY Growth

China

YoY Growth

Latin America

Source: CAAC

Middle East Int’l

Source: ALTA

YoY Growth (Pax)

India

Source: Airports Authority of India

Dom

Intl

Significant variation between regions, emerging markets leading

-5%

0%

5%

10%

15%

20%

25%

Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14

YoY Growth

Source: IATA

ASK

RPK

13

0

50

100

150

200

250

300

-10%

-5%

0%

5%

10%

15%

20%

199

0

199

1

199

2

199

3

199

4

199

5

199

6

199

7

199

8

199

9

200

0

200

1

200

2

200

3

200

4

200

5

200

6

200

7

200

8

200

9

201

0

201

1

201

2

201

3

201

4F

201

5F

0

1

2

3

4

5

6

7

-15%

-10%

-5%

0%

5%

10%

15%

20%

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014F

2015F

Near-term Traffic Outlook Passenger and Cargo

Annual Growth Annual RPKs (trillions)

Passenger traffic Air cargo traffic

Annual Growth Annual RTKs (billions)

Passenger traffic resilient, cargo market recovering

14

Passenger Capacity

Global passenger capacity growing broadly in balance with traffic

Airlines adjusting capacity in response

to demand, route profitability

Load factors are at or near record

highs throughout the year; March

should just be an anomaly due to

Easter timing

Parked fleet - typical seasonal trends

Utilization near peaks, single aisle

more seasonal

60%

65%

70%

75%

80%

85%

90%

J F M A M J J A S O N D

World Load Factor

2000

2010

2011 2012 2013 2014

15

0

1

2

3

4

5

6

7

-15%

-10%

-5%

0%

5%

10%

15%

20%

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014F

2015F

Passenger demand

Passenger traffic resilient due to multiple factors

Emerging markets – GDP, middle

class growth

New airline business models

Demographics support leisure travel

Air travel relative affordability

Business travel – revenue focus, travel

intensive sectors outperforming

Annual Growth Annual RPKs (trillions)

Passenger Traffic

Source: ICAO, BCA

16

Passenger Load Factors

60%

65%

70%

75%

80%

85%

90%

J F M A M J J A S O N D

60%

65%

70%

75%

80%

85%

90%

J F M A M J J A S O N D

60%

65%

70%

75%

80%

85%

90%

J F M A M J J A S O N D

60%

65%

70%

75%

80%

85%

90%

J F M A M J J A S O N D

World

Europe

US Domestic

Asia Pacific Int’l

Load Factor

Load Factor

Load Factor

Load Factor

2008

Record high load factors from traffic growth, capacity discipline

2011

2012

2013 2014

17

Commercial parked fleet trends

January 2015

0%

3%

6%

9%

12%

15%

0

500

1,000

1,500

2,000

2,500

Jan-11 Jan-12 Jan-13 Jan-14 Jan-15

# of Aircraft % of Fleet

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

0

50

100

150

200

250

300

350

400

450

Jan-11 Jan-12 Jan-13 Jan-14 Jan-15

# of Aircraft % of Fleet

AC Types Included: All Western-built Jets > 90 seats

Total Parked Fleet

9.9% of total fleet parked and 2.9% of in-production fleet parked

In-Production Parked Fleet

AC Types Included: 737NG, 747-8, 767, 777, 787, A320,

A330, A380

18

Airplane Utilization Trends

9.0

9.5

10.0

10.5

11.0

11.5

12.0

12.5

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Large Freighters include 777Fs and 747 Fs (all models) Source: BCA RM&T Fleet Reliability Statistics (subject to reporting revisions)

Flight Hours Per Day (12-month moving average)

Passenger at record levels, large freighters continue to rebound

Single Aisle Twin Aisle

Passenger

Large Freighter

7.0

7.5

8.0

8.5

9.0

9.5

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

19

0

50

100

150

200

250

300

-10%

-5%

0%

5%

10%

15%

20%

199

0

199

1

199

2

199

3

199

4

199

5

199

6

199

7

199

8

199

9

200

0

200

1

200

2

200

3

200

4

200

5

200

6

200

7

200

8

200

9

201

0

201

1

201

2

201

3

201

4F

201

5F

Air cargo demand

Near-term cargo market challenges, long-term growth market

Air cargo traffic

Annual Growth Annual RTKs (billions) No volume growth 1Q11 through 1Q13

– Shocks, slow economic growth

– Weak consumer markets – Europe, US

– High fuel prices

– Containership competition

Growth resumed in 2Q2013

4.5% YTD growth in 2014 through

December according to IATA & A4A

20

-30%

-20%

-10%

0%

10%

20%

30%

40%Mo. % Change - History

12-Mo. Avg. History

World air cargo traffic recovering since

2Q2013 M

on

thly

Pe

rce

nta

ge

Cha

ng

e o

ve

r P

rio

r Y

ea

r

Sources: IATA Carrier Tracker (industry international scheduled freight) and A4A US domestic cargo traffic.

21

The strength of the air cargo recovery varies by

region of airline domicile and/or business model

Sources: IATA Carrier Tracker (Industry international scheduled freight), A4A US domestic cargo traffic, and Boeing analysis

* Fedex and UPS freighter flown statistics only per A4A

World air cargo grew 0.9% in 2013

Air cargo traffic up 4.5% YTD

through December 2014 per IATA

and A4A statistics.

Growth was likely 5% or better in

2014; complete statistics will be

available in the coming months.

Express carriers (FDX, UPS only)

volumes down slightly, possibly due

to competition with DHL

Middle East, PRC, and European

carriers adding capacity to capture

emerging opportunities (200,000)

300,000

800,000

1,300,000

1,800,000

2,300,000

2,800,000

Africa AsiaPacific

PRCCarriers

Europe ExpressCarriers*

LatinAmerica

MiddleEast

NorthAmerica

December 2014 year-to-date

16.9%

0.9%

-1.4%

7.7%

11.2%

0.6%

3.0% 20.2%

22

Airline revenues and costs

0

100

200

300

400

500

600

700

800

Fuel Exp

Non-Fuel Exp

Revenues

$ (billions) $/ATK

$0.30

$0.35

$0.40

$0.45

$0.50

$0.55

$0.60

$0.65

$0.70Unit Revenue

Unit Cost

Unit Cost ex Fuel

Source: IATA, December 2014 Financial Forecast & BCA Market Analysis

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015F 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015F

Improving financial outlook – rising economic outlook, lower fuel prices

23

International Fare Development

BOEING PROPRIETARY BOEING PROPRIETARY BOEING PROPRIETARY

$600

$650

$700

$750

$800

$850

$900

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2011 2012 2013 2014 2015

Data source: ARC Settlements and Operations statistics http://www.arccorp.com/news/sales-document-statistics-archive.jsp

International Fare Per Transaction ($)

Average international fares at lowest level in 4 years

2013 $3.09

2014 $2.92

2015 $1.80

USGC Jan Jet Fuel Price

24

($20)

($15)

($10)

($5)

$0

$5

$10

$15

$20

$25

$30

$35

$40

$45

$50

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014E

2015F

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

..

Airline industry operating profitability

Net Profit (Loss) Billions Operating Margin

Airlines managing economic uncertainty, volatile fuel prices

Source: ICAO (1980 – 2013) and IATA December 2014 (2014-15)

25

Regional profitability outlook

13.2

4.0

5.0

1.61.0 0.2

-2

0

2

4

6

8

10

12

14

N. Amer Europe Asia MidEast LatinAm Africa

2013 2014E 2015F

Net Profit (billions $)

Source: IATA, December 2014

North America leading industry profitability

26

Regional margin performance

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

N. Amer Europe Asia MidEast LatinAm Africa

2013 2014E 2015F

Net Margin, % revenues

Americas leading industry profit margins

Source: IATA, December 2014

27

Airline Operating Profitability

Company Name 2013 2014Q1 2014Q2 2014Q3 2014Q4 2015 2016

DELTA 10.07 6.98 15.15 12.57 12.60 17.07 18.34

AMERICAN 7.32 5.97 14.55 13.30 13.05 19.64 18.45

UNITED 4.62 (3.42) 10.41 11.68 8.63 14.14 13.73

JETBLUE 7.87 3.04 9.44 10.73 11.69 17.47 17.14

SOUTHWEST 7.71 5.59 16.22 13.27 14.43 20.37 19.86

ALASKA 16.25 11.54 19.13 21.57 16.23 23.60 22.02

HAWAIIAN 6.20 1.91 8.96 16.60 13.45 15.44 15.31

REPUBLIC 15.76 16.03 18.37 17.39 17.67 16.57 16.31

SPIRIT 17.11 13.72 21.20 19.43 19.25 26.55 24.85

ALLEGIANT 15.53 18.93 19.42 10.89 5.30 28.01 25.38

WESTJET 10.91 12.63 8.43 12.46 14.04 15.84 14.75

AIR CANADA 5.00 (2.02) 7.41 13.85 3.41 9.74 8.89

AEROMEXICO 6.39 0.20 1.99 4.40 8.00 6.26 7.12

AVIANCA TACA 8.37 4.55 4.35 5.77 9.43 11.91

COPA 21.07 24.80 19.48 16.73 18.29 18.68

GOL 2.97 5.79 1.59 6.17 8.21 8.32

LATAM 4.53 1.02 0.07 3.63 6.69 7.58

CEBU 5.86 4.36 16.38 (0.92) 12.20 11.00

THAI 0.28 (4.13) (14.07) (8.13) 3.16 4.28

MALAYSIAN (3.87) (9.56) (7.68) (11.67)

ASIANA AIRLINES (0.20) (0.15) 0.21 4.31 6.94 6.57

GARUDA INDONESIA 1.52 (23.86) (4.40) (1.55) 5.51 5.59

KOREAN (0.17) 0.73 (0.68) 7.60 7.21 7.17

SINGAPORE 1.93 (1.47) 1.07 3.37 3.57 6.42 7.00

PHILIPPINE AIRLINES (10.25) (4.00) 6.52 (0.50)

ANA 4.05 (0.79) 0.09 12.31 7.09 6.55 7.03

JAPAN AIRLINES 13.57 9.17 6.06 19.71 13.41 14.90 14.84

QANTAS* (0.46) 9.73 9.53

VIRGIN AUSTRALIA* (5.14) 5.04 5.74

AIR NEW ZEALAND* 7.86 11.99 10.27

JET AIRWAYS** (4.57) (18.01) (1.33) (0.48) 4.84 5.09

SPICEJET-B (13.11) (20.02) (5.43) (0.40) 3.08

(8.71)

(11.15) (0.07)

7.84 9.78

No

rth

Am

eri

ca

LA

TA

MA

sia

Pa

cif

ic

< 0% Profit > 0 - < 3% Prof > 3% Prof Excluding unusual items

* 6-month results

28

Airline Operating Profitability

< 0% Profit > 0 - < 3% Prof > 3% Prof Excluding unusual items

* 6-month results

AIR CHINA 4.51 (0.31) (0.95) 12.10 9.46 8.52

CHINA SOUTHERN 2.08 (1.86) (6.88) 9.27 7.14 7.06

HAINAN 7.64 2.01 (0.15) 18.19 13.56

SHANDONG 3.18 4.51 (2.38) 11.32

CHINA AIR (0.54) (2.48) (0.54) 4.21 8.33 5.62

EVA 2.79 (0.56) 3.46 6.01 7.98 7.19

CHINA EASTERN* 1.79 (1.32) 5.26 7.49 7.03

CATHAY PACIFIC* 3.74 7.56 8.47

AIR FRANCE / KLM 0.51 (8.00) 2.25 7.04 (2.72) 2.18 3.72

IAG 3.58 (3.57) 7.47 13.94 9.38 10.77

LUFTHANSA 3.93 (3.02) 5.02 8.00 5.23 5.97

TURKISH 6.60 (3.53) 8.10 16.13 8.01 6.66

NORWEGIAN 6.22 (21.80) (1.69) 8.40 (23.51) 6.27 7.44

AIR BERLIN (5.59) (24.04) (0.79) 5.62 (1.55) 1.05

ICELANDAIR 7.14 (16.00) 8.68 24.48 (9.13)

AEROFLOT 6.80 15.61 4.24 6.25

TRANSAERO 1.45 0.81 0.41 0.06 8.13

Utair* 8.71

RYANAIR 13.23 (4.35) 15.50 34.36 6.32 18.88 21.51

SAS 4.43 (7.78) 8.74 4.62 5.31

EASYJET* 11.67 (3.11) 14.07 15.19

AER LINGUS* 4.29 (19.00) 9.00 5.88 7.87

JAZEERA AIRWAYS 3.58 21.40 24.38 40.34 29.69 28.55

EL AL 1.66 (12.50) 4.31 4.83

ROYAL JORDANIAN (6.46) (12.87) 3.86

COMAIR* 8.23

KENYA AIRWAYS* (0.88) (86.32) 7.37

FEDEX 7.53 5.67 9.99 8.45 8.48 9.98 10.82

DHL 5.63 5.51 5.90 5.31 5.48 5.93

UPS 12.69 10.98 5.24 13.67 4.74 12.61 13.14

ATLAS AIR 12.42 8.96 9.70 13.11 13.45 12.29 12.19

22.22

5.45

(8.89)

3.10

ME

/Afr

/

Ca

rgo

Eu

rop

eC

hin

a

29

Baseline outlook for improving global economic 2015+

High oil price volatility returns, price outlook for recovery into mid-

term

Global passenger traffic growing at/above long-term average rate;

emerging markets leading

Airlines adding capacity in response to traffic growth; adjusting

networks with focus on profitability

Air cargo traffic recovering, market capacity metrics improving

Airline profit outlook rising, North American airlines leading

Airlines restructuring networks, fleets, partnerships, and driving

down controllable costs

Business Environment – Summary

Industry is healthy despite ever-present challenges