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CONFIDENTIALMEMORANDUM

NEWGENAn airline for today

There is now no doubt that an evolution of our industry is occurring both in Canada and the United States, and this change became even more apparent during 2002.

The reality is that airline travel is simply a mode of transportation. The airlines of yesteryear have been slow to realize the direction that air travel has taken, and many have misjudged the significance of the change in airline strategy founded in 1971 with the first flights of low-fare pioneer Southwest Airlines.

The vast majority of air-travel passengers, particularly on short- to mid-haul flights, are not prepared to pay significantly more for a seat in order to obtain points from a reward program and possibly be served a meal, if a more affordable option is available. These additional services weigh heavily on the price of airfares, and the traveling public does not perceive that they provide a proportionate increase in value. Consequently, traditional carriers are scrambling to survive, and are now trying to emulate the efficiencies of their lower-cost rivals.

Clive Beddoe, CEO, WestJet Airlines (Canada).

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This confidential memorandum has been prepared by NEWGEN Airlines, Inc.

This memorandum is provided solely for information purposes to assist prospective investors.

Much of the information herein represents management’s view of the airline industry – which is currently experiencing unprecedented turmoil – and its prospects. It is assumed that the individuals and entities to whom this memorandum is furnished are sophisticated investors able to evaluate this information, including management’s views, and to reach independent judgments about the desirability of investing in NEWGEN.

This memorandum does not purport to contain all of the information that a prospective investor might desire. In all cases, interested parties should conduct their own investigation and analysis.

NEWGEN makes no representations or warranties as to the accuracy or completeness of this memorandum and shall not have any liability for any representation (express or implied) contained in, or for any omission from, the memorandum or any of the written or oral communications transmitted to the recipient in the course of its evaluation of the company.

The only information that will have any legal effect will be that specifically set out in a definitive financing agreement, and under no circumstances will such financing agreement contain representations with respect to financial projections.

By accepting this memorandum, you acknowledge and agree that: (1) all of the information contained herein is confidential and is for your sole use; (2) you will not reproduce this memorandum, in whole or in part; and (3) if you do not wish to pursue this matter, you will return to NEWGEN all material that you may have received from the company.

The company reserves the right to negotiate with one or more prospective investors at any time and to enter into a financing agreement without prior notice. The company also reserves the right to terminate, at any time, further participation in the investigation and proposal process by any prospective investor and to modify any procedures without assigning any reason therefore.

CONFIDENTIAL MEMORANDUM

For further information:

Kenneth D. HollidayPresident and CEO6050 Foxberry LaneRoswell, CA 30075(770) [email protected]

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Executive Summary

Tab A. The Business Opportunity: Now is a great time to start an airline.

We are witnessing the final transition from the legacy-carrier business model to the new-generation airline business model.

High costs have defeated the legacy carriers.

The price premium on which the legacy carriers have depended is rapidly disappearing.

Tab B. The Business Opportunity: Competitive conditions favor the new-generation airlines.

At Charlotte, US Airways dominates the market, currently facing only gentlemanly competition from other members of the legacy carrier club.

At Baltimore, when US Airways encountered head-to-head competition with a new-generation carrier, US Airways was forced out of the market.

NEWGEN will succeed in competition with US Airways and other legacy carriers just as Southwest succeeded at Baltimore.

Tab C. The Business Opportunity: Charlotte is a great place to start an airline.

Charlotte is one of the capital cities of the new South and, after New York, America’s 2nd largest banking center.

The Charlotte airport is at the center of a large and rapidly growing market of 6.1 million people.

US Airways dominates and abuses the Charlotte market.

Charlotte’s airline traffic, suppressed by high fares, will explode upon the introduction of NEWGEN service.

TABLE OF CONTENTS

Tab D. The Business Opportunity: Airport access is possible in today’s environment.

Today there is an historic opportunity to acquire access to heretofore restricted airports New York LaGuardia, Washington National, and Chicago O’Hare.

Tab E. Investors in successful new-generation airlines have done spectacularly well.

Airline stocks a horrible investment? Not Southwest.

And not other new-generation airlines.

The risks of failure are real; in the end, it all depends on management.

Tab F. About NEWGEN: The Company

Tab G. About NEWGEN: The Management

Tab H. Things you should know

Regulation

Risk factors

Financial Statements and Projections

A new generation of airlines is on the brink of rewriting the future of the airline industry.

Commentators who once cheerfully explained why the legacy carriers would defeat the new generation airlines now predict the ultimate demise of the legacy carriers.

The airline crisis of 2001 - 2004 is not over. Just as a slowly rising economic tide began to revive even the sickest of the legacy airlines, increased fuel prices stalled the recovery. In any event the reprieve was only temporary. The future is clear. These “legacy carriers” are unable to reduce costs to acceptable levels and will go the way of the dinosaurs. In the meantime, the “new-generation airlines” are thriving and expanding.

Executive Summary

EX-1

Summary Financials

NEWGEN was formed to develop a new, low-cost commercial airline. It is a new-generation airline based on a proven strategy: low-cost, low-fare airlines are highly profitable and create strong financial returns to investors.

The company will take advantage of a structural change in the airline industry: the collapse of legacy carriers and their replacement with a new generation of cost-efficient, market focused airlines. This strategy has been proven by Southwest Airlines and validated by others, including WestJet (Canada), Ryanair (Europe), and Airtran and jetBlue (US).

NEWGEN will serve short- and medium-haul, high-density markets, initially east of the Mississippi. Presently, NEWGEN plans to initiate operations from a base in Charlotte, North Carolina. Using the formula proven by Southwest and others, NEWGEN will operate at average unit costs significantly lower than legacy carriers. These low costs will enable NEWGEN to offer services at prices 30% - 70% lower than traditionally offered in these markets. Such low fares stimulate demand, increase passenger levels on planes, and heighten profitability.

As shown in the table below, NEWGEN offers compelling financial returns to investors. See Figure EX-1. These financials are an example of the several financing and equipment strategies under consideration.

EXECUTIVE SUMMARY

Figure EX-1. Summary financials, start-up through year 5.

Start-upStart-up Year 1Year 1 Year 2Year 2 Year 3Year 3 Year 4Year 4 Year 5Year 5

Total RevenueTotal Revenue 00 207,847,646207,847,646 446,348,084446,348,084 666,044,967666,044,967 885,260,403885,260,403 1,107,737,5991,107,737,599

Total Operating ExpensesTotal Operating Expenses 10,436,70010,436,700 184,354,851184,354,851 337,533,137337,533,137 499,139,931499,139,931 653,262,427653,262,427 807,410,140807,410,140

Operating IncomeOperating Income (10,436,700)(10,436,700) 23,492,79523,492,795 108,814,948108,814,948 166,905,035166,905,035 231,997,976231,997,976 300,327,459300,327,459

Net IncomeNet Income (5,510,820)(5,510,820) 14,457,20214,457,202 65,763,15165,763,151 100,499,134100,499,134 140,972,636140,972,636 184,385,814184,385,814

EBITDAR*EBITDAR* (8,735,450)(8,735,450) 60,895,29560,895,295 183,668,698183,668,698 279,210,035279,210,035 380,302,976380,302,976 484,632,459484,632,459

*Earnings before interest, taxes, depreciation, amortization and aircraft rent.*Earnings before interest, taxes, depreciation, amortization and aircraft rent.

No credible scenario will produce revenues that will support today’s contractual commitments, either for those legacy networks outside bankruptcy or for those that have already availed themselves of the process but not done what is necessary to become competitive...

Two views of the future... In the first, the legacy network carriers restructure their fixed commitments and achieve competitive costs... In the second, more likely scenario, the legacy network carriers will be unable to reorganize in time to avoid liquidation one by one...

The overall economic environment is irrelevant to the final outcome, only to the pace at which it occurs.

– Michael E. Levine in “Crunch Time,” Airfinance Journal (2003 Guide Edition)(emphasis supplied).

Like other successful new-generation airlines NEWGEN will:

• Οperate a single type of aircraft.

• Αchieve high utilization of employees and assets.

• Οffer a single type of service.

• Focus relentlessly on low costs.

• Commit to low prices without burdensome restrictions.

• Recruit, train and motivate customer-focused employees.

• Market directly through the internet and call centers.

An experienced management team led by Kenneth D. Holliday and John A. MacLeod, II is founding NEWGEN. Members of the team have demonstrated abilities to successfully launch and grow airlines and have strong knowledge of the reasons for airline success (and failure).

Success will require adequate capitalization. We require initial funding of $100 million. This will enable ramp-up to operations, including opening offices and retaining management, acquiring the necessary operating certificates and entering into aircraft acquisition contracts.

Different forms of capital, including debt, equity and mixes thereof, are under consideration. The company’s financial structure will ultimately be determined by negotiations among the company, the investors and the equipment providers. Successful DOT and FAA approval and marketplace viability are dependent upon adequate capital to support the business plan.

The intent will be to launch a successful initial public offering in 3 - 5 years. However, NEWGEN will work with investors to structure investments and ultimate exit strategies to meet their needs.

Executive Summary

EX-2

We are witnessing the final transition from the legacy carrier business model to the new-generation business model.


The price premium once enjoyed by the legacy carriers is rapidly disappearing.

THE BUSINESS OPPORTUNITY: NOW IS A GREAT TIME TO START AN AIRLINE

NEWGEN’s business model is premised on the fact that the legacy carriers are in permanent decline. Their failure is the result of neither cyclical factors nor terrorism. Rather, it is the direct result of airline deregulation and the inability of the legacy carriers to adapt their business model to the realities of a competitive business environment.

The legacy carriers are permanently saddled with costs that are unsustainable in today’s low-price environment. And low prices are here to stay, with the internet facilitating comparison shopping among an ever more savvy public, business as well as leisure travelers.

The traveling public no longer “buys” the value proposition on which the legacy carriers have long relied for extracting premium prices; whatever extra value they once provided has been lost in the transition of a once luxurious service for the wealthy to one of mass transportation. And those who can afford the walk-up fares of the legacy carriers now have the option to obtain truly premium services from on-demand operators of business jets.

Both Southwest and jetBlue have shown that in head-to-head competition with legacy carriers the new-generation airlines prevail. Indeed, jetBlue has become the preferred provider of air transportation in many of its markets and is itself able to extract a price premium versus its legacy carrier competition while operating with higher load factors and winning the largest market share.

A-1

Like the US passenger railroads 50 years ago, the legacy airlines are in a long-term declinefrom which there will be no recovery.

It is scarcely news that the US airline industry is in deep trouble. Over just the two years (2001-2002) the “legacy carriers” (the US major carriers that came into being when the industry was subject to public-utility-like economic regulation) incurred pre-tax net losses of $21 billion on $147 billion in revenues, a return of minus 14.5%. Operating losses were nearly as great. See Figure A-1.

With the announcement of 2nd Quarter 2004 earnings, it is apparent that the industry crisis is not over. While the legacy carriers are making progress in reducing their costs, in several cases with the help of reorganization in bankruptcy, the carriers have failed to scale back their costs to anything approaching the level required for competition with new-generation airlines. And most important for the legacy carriers, the “full fare” business traveler, long an endangered species, is nowhere in sight. Meanwhile, Southwest, jetBlue, and Airtran remain profitable through it all. See page A-3.

But if the problem has worsened in this business cycle, the fundamental cause remains the same. The present distress of the legacy carriers, while exacerbated by cyclical conditions and external shocks, is the result of longstanding structural problems that existed at airline deregulation in 1978 and have never been resolved. Since 1979 the legacy carriers have failed to earn their cost of capital.

This time, as in past crises, the problems are being treated with bandages; they are not being “fixed.”

The business model of the legacy carriers is broken beyond repair.

The Business Opportunity: Now is a great time to start an airline

We are witnessing the final transition from the legacy carrier business model to the new-generation airline business model.

2002 will be remembered as a time when the fundamental flaws of the traditional airline business became glaringly apparent as many major airlines in the United States found themselves facing the prospect of bankruptcy. While traditional airlines in America faced crisis after crisis, low-fare airlines with low-cost structures, like WestJet, continued to post profits, expand services, and prosper during these trying times.


A-2

The collapse of legacy carrier profitability reflects a structural problem, not cyclical conditions.

Figure A-1. Operating Margin (Operating Profit as Percent of Operating Revenues), US Airline Industry, 1938 through 2004 Q2. (From 2002, US Major Carriers Only; some amounts estimated).

Airline deregulation.

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

1938 1946 1954 1962 1970 1978 1986 1994 2002 Data is through 2Q 2004


Meanwhile, new-generation airlines prosper.

While the legacy carriers have been losing unprecedented sums, Southwest was profitable in 2001, 2002, 2003, and so far in 2004. Its 2002 operating profit declined from 2001’s $631 million to $418 million on flat revenue. Accordingly, Southwest’s operating margin declined from 11.4% to 7.6% ( for the first nine months of 2003, 8.4%). But the combined industry has achieved an average operating margin as high as 7.6% only twice in the last 35 years (1997 and 1998). See Figure A-3.

The striking contrast in operating margins between Southwest and the Big 3 is nothing new; over the more than twenty years since US airline deregulation Southwest has bested the current Big 3 by an astonishing margin, averaging 12.2% pretax net on revenues versus 0.1% for the Big 3 combined. See Figure A-4.

Moreover, Southwest is consistent, with profits in good times and bad, compared to the highly cyclical results of the typical legacy carrier, as exemplified by the Big 3. See Figure A-3.

Two other domestic new-generation airlines were also profitable in 2002. jetBlue’s operating profit increased from $26 million to $105 million as revenue doubled to $635 million. With its operating margin increasing from 8.1% to 16.5% (18.2% for nine months, 2003), jetBlue’s net before tax more than doubled, from $42 million (13.1% on revenue) to $95 million (15.0%). Airtran’s operating margin declined from 5.4% in 2001 to 4.2% in 2002, but it improved its net before tax from $1.1 million to $10.0 million and its net margin from 0.2% to 1.4%. Its operating margin for the first nine months of 2003 is 9.6%.

And the phenomenon of new-generation airlines is not confined to the United States. Carriers operating successfully under the new-generation model include WestJet in Canada and Dublin-based pan -European Ryanair.

Only Southwest has been profitable every year,through the last two business cycles.

Figure A-2. Operating Margin (Operating Profit as Percent of Operating Revenues), Big 3 ( American, Delta, and United) together vs. Southwest (1979 through Q2 2004).

Since 1979 Southwest has been highly profitable as the legacy carriers barely broke even.

Figure A-3. Cumulative Net Before Tax as Percent of Revenue, Southwest vs. Big 3 (1979 through Q2 2004).

Southwest has emerged as the clear winner in the industry. Southwest is the only carrier with a robust model that has allowed it to weather downturns.

Only Southwest has created significant shareholder value over time.

United Airlines, Plan for Transformation (1/31/03).


Even in a weak economy jetBlue and other low-cost/low-fare carriers continue to make money. The key is low costs, something the major airlines simply don’t understand.

David Neeleman, CEO, jetBlue.

A-3

Southwest

Big 3

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

through 2Q 2004

0.9%

-1.2%

0.8%0.1%

12.2%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

Southwest Big 3 American United Delta

Aver

age

pre-

tax

retu

rnon

reve

nue

The differences between the legacy carriers and the new-generation airlines are reflected in the carriers’ stock-market valuations. The equity of Southwest alone is worth nearly three times the combined equity value of all of the legacy carriers; jetBlue, with a market capitalization of $2.4 billion, is worth 180% as much as the most valuable single legacy carrier, American, a company more than twenty times its size, measured by revenues. See Figure A-6.

Currently new-generation airlines command about 20% of the domestic airline market. No one, certainly none of the legacy carriers, is projecting any scenario other than further market-share growth for the new-generation airlines as they continue to expand and the legacy carriers downsize.

The final battle in the transformation of the airline industry is underway. When the dust settles, new-generation airlines will dominate the domestic industry. See Figure A-5.

Wall Street values Southwest at twice the value of all of the legacy carriers combined.


New-generation airlines are rapidly replacing the legacy carriers.

New-generation airlines have a steadily growing share of the domestic market, now more than 20%.

Figure A-5. Share of total domestic enplanements, by year (1980-2002), New-generation airlines, with Southwest, America West, and all others.

0%0%

5%5%

10%10%

15%15%

20%20%

25%25%

11998800

11998822

11998844

11998866

11998888

11999900

11999922

11999944

11999966

11999988

22000000

Southwest All others America West

The PeoplExpressBubble


We [American] along with the other legacy carriers are competing with low-cost carriers on an ever-increasing portion of our domestic network. In fact, low-cost airlines now impact pricing on some 82% of our flying in the United States.

Don Carty, CEO of American (February 19, 2003).A-4

$0

$2

$4

$6

$8

$10

$12

Southwest Other low-

cost

Legacy

carriers

Equity

Mark

etC

apita

lizatio

nin

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ions

(US

$)

Figure A-6. Prices as of market close 7/28/04.

Southwest 11.0 billion

Frontier 280 million

Airtran 920 billion

jetBlue 2.4 billion

Other low-cost 3.6 billion

United 3 million

US Airways 139 million

America West 196 million

Alaska 534 million

Northwest 717 billion

Continental 580 billion

Delta 620 billion

American 1.3 billion

Legacy carriers 4.1

$

$

$

$

$

$

$

$

$

$

$

$

$

$ billion

The new-generation airlines, led by Southwest, have an enduring cost advantage over the legacy carriers.

The legacy carriers were founded in the early days of commercial aviation. They based their companies on a business model designed to serve the few, with regulated cost-plus prices and price-competition prohibited. No surprise, they saddled themselves with non-competitive cost structures; management and the employees and unions were only too happy to buy in.

In contrast, the new-generation airlines have never been protected from competition and their business models have reflected that fact. To prosper they have always been required to operate at the lowest possible costs consistent with safe and reliable operations.

As a result, the total cost differential between the legacy carriers and the new-generation airlines is huge. If we use Southwest as a measuring rod, the penalty is:

$23 billion annually for the legacy carriers combined (domestic operations only).

$3.4 billion annually for US Airways, the highest-cost legacy carrier, with a distance-adjusted cost per available seat mile (CASM) 178%of Southwest’s.

$3.8 billion annually for Delta, the 2nd lowest-cost legacy carrier, with costs 149% of Southwest’s. See Figures A-7 and A-8.

Since 9/11 Southwest has widened the gap against most of the legacy carriers, including Delta and US Airways. We cite US Airways and Delta because they are the principal legacy carriers in the region on which NewGen intends to focus.

See below for the prospects of significant unit-cost improvements post bankruptcy.


Delta 149%

United 173%

Continental 166%

American 177%

Northwest 158%

Alaska 150%

US Airways 178%

Southwest at

average hop6¢

7¢

8¢

9¢

10¢

11¢

12¢

13¢

14¢

400 500 600 700 800 900 1,000 1,100 1,200

Average stage length in US miles

Ave

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AS

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Figure A-7. Unit Costs Plotted Against Average Length of Hop (Stage Length), Southwest vs. the Legacy Carriers, Domestic Operations; and Southwest’s Distance-related Cost Curve (Year Ended 2nd Quarter 2001).

In fact, Southwest’s advantage over the legacy carriers computes to $23 billion annually, just for their domestic operations.

Figure A-8. Unit Costs for the Domestic Operations of the Legacy Carriers Compared with Southwest’s Unit Costs at Each Carrier’s Average Length of Hop; Total Cost Penalty vs. Southwest (Year Ended 2nd Quarter 2001, TWA omitted).

Adjusted for distance, legacy carrier unit costs are 150% of Southwest’s.

Average stage

length (hop) Actual

Southwest’s at

carrier's hop Difference

as % of

Southwest

Total penalty vs.

Southwest

Southwest 504 7.66¢

US Airways 604 12.96¢ 7.28¢ 5.68¢ 178% $3,415,880,902

American 1,016 11.50¢ 6.48¢ 5.02¢ 177% $5,341,688,575

United 943 11.37¢ 6.58¢ 4.80¢ 173% $5,066,113,592

Continental 1,008 10.77¢ 6.49¢ 4.28¢ 166% $2,675,775,707

Northwest 740 10.91¢ 6.92¢ 3.98¢ 158% $2,204,110,983

Delta 772 10.31¢ 6.91¢ 3.40¢ 149% $3,758,256,559

Alaska 744 10.15¢ 6.86¢ 3.30¢ 148% $546,297,249

Total $23,008,123,567

CASM vs. Southwest

Carrier’s CASM


A-5


Labor accounted for 41% of total airline costs in the year ended June 30, 2001, and 47% of the cost differential between Southwest and the domestic operations of the legacy carriers; Southwest could have operated the same flights with total operating costs $8 billion less. See figures A-9 and A-10.

If these unit costs were adjusted for length of hop, aircraft size, and so forth the differentials would be greater; Southwest’s cost effectiveness is penalized by relatively smaller aircraft and shorter flights.

Part of it is pay: pilots at Delta and US Airways cost more than $400 per block hour per pilot; at Southwest it’s less than $200.

A lot is work rules: pilots at Delta and US Airways produce only 70% as many available seat miles as they would under Southwest’s rules.

Start-up airlines like NEWGEN have even lower labor costs; jetBlue, for example, has unit labor costs significantly lower than Southwest’s.

Now in danger of having new wages/work rules imposed by a bankruptcy judge, airline unions appear to be engaging in serious negotiations even at those carriers fortunate enough to have thus far avoided Chapter 11.

It is clear, as a result, that legacy carrier wages will be rolled back, but back to what level? And work rules will be improved, somewhat. The legacy carriers aren’t trying to roll back wages and increase work hours to the levels of Southwest; they are aiming for much smaller improvements, basically a restoration of conditions in the mid 1990s or, alternatively, best in class, with the “class” defined as the other legacy carriers.

And how could it be otherwise? It’s one thing to ask an employee to forego a raise or even, under dire circumstances, to accept a temporary roll back to last year’s pay level; it’s quite another thing to ask him to accept a significantly lower standard of living.

Labor accounts for 41% of total airline costs . . .

Other Services

15%

Other

1%

Other

Materials

7%

Commissions

4%

Labor

41%

Rentals

9%

Landing Fees

2%

Depreciation

& Amortization

6%

Fuel

15%

Figure A-9. Total Operating Costs by Objective Account, US Major Carriers, Domestic Operations(Year ended 2Q 2001).

and 47% of the operating cost differential between Southwest and the legacy carriers.

Figure A-10. Portion of Operating Cost Penalty Relative to Southwest due to Unit Labor Costs, US Major Carriers, Domestic Operations (Year Ended, 2Q 2001). Costs are not adjusted for stage length or other factors.

2003 should be the year in which labor costs are rolled back because it’s the only math that works.

Sam Buttrick, UBS Warburg (March 7, 2003).

Cost per

ASM % Southwest Actual

At Southwest Unit

Costs Penalty

Southwest 3.03¢ $1,920,809,000

US Airways 5.60¢ 185% $3,366,228,000 $1,821,989,173 $1,544,238,827

United 5.08¢ 168% $5,470,920,000 $3,261,813,092 $2,209,106,908

American 4.58¢ 151% $5,006,254,000 $3,310,797,265 $1,695,456,735

Northwest 4.54¢ 150% $2,806,257,000 $1,870,948,014 $935,308,986

Delta 4.18¢ 138% $4,695,613,000 $3,401,177,585 $1,294,435,415

Continental 3.94¢ 130% $2,206,590,000 $1,698,084,382 $508,505,618

Alaska 3.57¢ 118% $598,611,000 $508,027,364 $90,583,636

Total, excluding Southwest $24,150,473,000 $15,872,836,876 $8,277,636,124

Total cost penalty (not adjusted for stage length) $17,774,834,000

Percent that is labor 47%

Employee Costs, Year Ended June 30, 2001

Almost half of the legacy carrier cost problem is labor.


A-6

Cutting costs to the level of a new-generation airline is not an option for the legacy carriers. As companies age, their unit costs go up, not down; that is why companies normally attempt to move up-market over time; they need higher margins to support their growing overhead, increasing wages, and slackening pace of work and innovation.

In the airline industry, the problem is exacerbated by rigid seniority rules which make replacing older employees essentially impossible; reducing the work force has the perverse result of raising average labor rates as the lowest-seniority, lowest-paid employees are the first to go. And it is worse still: reducing the fleet size causes re-training needs to ripple through the entire pilot workforce as displaced pilots bid-down to positions in other aircraft types. The fact is that cutbacks cause unit costs to rise.

The Air Transport Association recently reported that an overall post-9/11 reduction in capacity of 13% produced total operating expense reductions of only 5%. The math doesn’t work.

On March 31, 2003, US Airways emerged from Chapter 11 with new labor agreements resulting in a substantially more cost-efficient work force. But by its own reckoning, its unit labor costs will still be 157% of Southwest’s on a distance-adjusted basis. See Figure A-11. In no time US Airways was back at the bargaining table. Getting it exactly backward new CEO Bruce Lakefield told employees “we have a cost problem because we have a revenue problem.”

The same approach is being followed by the other major carriers. United hopes to emerge from Chapter 11 with mainline unit labor costs 150% of Southwest’s. See Figure A-12.

Delta hopes to avoid Chapter 11 by negotiating a $900 million annual savings with its pilots. Meanwhile it reported 2Q 2004 losses of nearly $2.0 billion.


US Airways was content to emerge from Chapter 11 with unit labor costs 157% of Southwest’s.

Figure A-11. Stage Length Adjusted Labor Costs per ASM, US Airways, before and after Chapter 11 vs. Southwest.

United hopes to achieve unit labor costs 150% of Southwest’s.

Figure A-12. Stage Length Adjusted Labor Costs per ASM, United, before and after Chapter 11 vs. Southwest.

0¢0¢

1¢1¢

2¢2¢

3¢3¢

4¢4¢

5¢5¢

6¢6¢

United before C11United before C11 SouthwestSouthwest United after C11United after C11

+ 50%+ 50%

+ 109%+ 109%

0¢0¢

1¢1¢

2¢2¢

3¢3¢

4¢4¢

5¢5¢

6¢6¢

7¢7¢

US Airways beforeUS Airways before

C11C11

SouthwestSouthwest US Airways afterUS Airways after

C11C11

+ 117%+ 117%

+ 57%+ 57%

Note that the data in Figures A-11, A-12, A-13, & A-14 is from the published recovery plans of the two airlines. Neither airline provided sources for their own or Southwest’s costs nor described their methodology. We cannot reconcile their data with official data published by the Department of Transportation. The purpose of the figures, however, is not to show absolute numbers but to demonstrate that the two airlines have no intention of achieving costs competitive with new-generation airlines.

The proposed 22% pilot pay cut would move Delta pilots from industry-leading pay to, well, industry-leading pay. . . .We’re unimpressed. . . [It] appears uniquely unambitious.

[For American] we are forecasting an approximate 10.5% improvement in non-fuel unit costs, which should otherwise move American from last place to somewhere between Delta and Northwest.

– Jamie Baker, J.P. Morgan (May 1, 2003 and April 1, 2003).

All [the new labor agreements at the legacy carriers] did was set the clock back on the time bomb.

– David Grizzle, vice president Continental (May 7, 2003).

Investors and analysts intuitively and not illogically think of savings relative to current levels – after all, it is current costs that are too high. It bears reminding therefore that the prevailing practice among many airlines (including apparently United and US Airways) is to measure savings against future projected increases.

– Sam Buttrick, UBS Warburg (June 20, 2002).

High costs have defeated the legacy carriers.The legacy carriers aren’t about to solve their labor cost problems, not even in Chapter 11.

A-7

Rather, the solutions to their current financial distress advanced by the legacy carriers – those in Chapter 11 and those seeking to avoid it – do not involve changing their fundamental conception of the business; rather it is to continue to do what they have always done, but somewhat more efficiently.

This was US Airways’ recovery plan, in its own words:

Notice the absence of anything about changing its business model; it’s all business as usual, at somewhat lower costs.

Specifically, and despite the fact that it “considers the growth of low-fare competition . . . to be [one of] its foremost competitive threats,” US Airways made no attempt in Chapter 11 to become competitive with new-generation airlines. Indeed, it was content to have cut its unit costs by 16%, leaving it with costs 163% of Southwest’s. See Figure A-13.

The arrival of Southwest at its Philadelphia hub was the final wake-up call for US Airways. But although Southwest announced its intentions in December 2003, US Airways is only now getting serious in its labor negotiating.

Similarly, United seeks only “best-in-class costs” by which it means as good as the best legacy carrier today, Delta by its reckoning. United would be content to emerge from Chapter 11 with unit costs of 8.76¢/ASM compared to a distance-adjusted CASM for Southwest of 5.53¢, leaving itself with unit costs 58% higher than Southwest’s. See Figure A-14.

We did not conclude that the full service, large network model was no longer viable. In fact, we continue to believe that running this model creates a lot of value for our customers – value that should enable us to earn a revenue premium somewhere in the neighborhood of 30% over the low-cost carriers.

Don Carty, CEO of American (February 19, 2003).

High costs have defeated the legacy carriers.The other half of the legacy carrier cost problem is their business model; they still don’t get it.


US Airways was content to emerge from Chapter 11 with unit costs 163% of Southwest’s.

Figure A-13. Stage Length adjusted total operating Costs per ASM, US Airways, before and after Chapter 11 vs. Southwest.

0¢0¢

2¢2¢

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C11C11

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C11C11

+ 97%+ 97%

+ 63%+ 63%“In order to successfully respond to current industry conditions, [US Airways] initiated a restructuring plan that contains the following major elements:

achieve competitive mainline cost structure, right-sizing the business by reducing mainline fleet count by 13% and by future deployment of 37 - 76 seat regional jets, and execution of a domestic and international code-share alliance with United Airlines and Star Alliance partners.” Quoted from the US Airways reorganization plan.

(i)

(ii)

(iii)

United plans to come out of Chapter 11 with mainline unit costs 158% of Southwest’s.

Figure A-14. Stage Length adjusted total operating Costs per ASM, US Airways, before and after Chapter 11 vs. Southwest.

0¢0¢

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United before C11United before C11 SouthwestSouthwest United after C11United after C11

+ 86%+ 86%

+ 58%+ 58%

A-8

Note that the data in Figures A-11, A-12, A-13, & A-14 is from the published recovery plans of the two airlines. Neither airline provided sources for their own or Southwest’s costs nor described their methodology. We cannot reconcile their data with official data published by the Department of Transportation. The purpose of the figures, however, is not to show absolute numbers but to demonstrate that the two airlines have no intention of achieving costs competitive with new-generation airlines.

On US Network Carriers, No One Pays the ‘Average’ Fare

Passengers

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Percentage of Average Fare Paid

Figure A-15. Percentage of Passengers and Revenues Generated at Various Price Points Relative to “Average,” i.e., Arithmetic Mean, Fares. Source: Proprietary data for a US Network Carrier circa 1997.

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The cost differential between the legacy and new-generation airlines is nothing new; in fact, the relative inefficiency of the regulated legacy carriers was one of the principal arguments in support of deregulation.

In spite of their unit-cost handicap, however, the legacy carriers have thus far survived deregulation primarily because they were able to charge, on average, higher fares than the new-generation airlines.

Historically, that premium was based on a number of factors, including:

The offering of first/business classes of service at higher fares.

A perceived-to-be superior coach product that included amenities such as assigned seating, meals, and in-flight entertainment.

Corporate bribes illegal in any other context (frequent flyer programs).

Substantial protection from competition by new-generation airlines at many airports, sometimes as the result of the development of massive hub and spoke route networks, sometimes as a result of access limited by various slot-allocation schemes or by leasehold arrangements between the operators of airports and the home-town airline.

Legally sanctioned price predation.

In order to extract higher prices, they employed a sophisticated price-structure/revenue-management scheme that segmented passengers according to their price elasticities. (See Price discrimination carried to excess at right.) Indeed, the legacy carriers have long depended for much of their revenues and all of their meager profits on the dwindling handful of customers who fly frequently and are relatively indifferent to price, as depicted in Figure A-15.

Price discrimination carried to excess

In responding to the uniformly low fares offered by new-generation airlines, the legacy carriers discovered that they could segment their customers by price sensitivity. To accomplish this they introduced a complex fare structure under which they offered:

Very low fares, hedged about with restrictions and subject to limits on availability, to price sensitive passengers.

Very high fares with no restrictions, full refundability, and last-minute availability, to those passengers who are relatively insensitive to price.

Under this market segmentation scheme, a large number of passengers pay relatively low fares but generate a surprisingly small percentage of carrier revenues and a small percentage of the passengers pay relatively high fares and generate a surprisingly large percentage of carrier revenue. See Figure A-15.

The problem is that the carriers got hooked on the traffic-stimulating power of the low fares to fill their planes with the result that they were forced continually to increase their full coach and business/first class fares. Eventually, these so-called “premium” fares reached ridiculous levels.

As a result, customers no longer “buy” the value proposition of the legacy carriers. Increasingly they are unwilling to pay full fares for what they perceive as mass-transit service. Thus they either buy down to discount fares (sometimes throwing away return coupons to avoid restrictions) or, when they are willing to pay full fares, they opt into the personalized service now offered by business jets on a time-share and, increasingly, an hourly on-demand basis.

The price premium long enjoyed by the legacy carriers is rapidly disappearing.Historically, the legacy carriers papered over the cost gap by charging premium prices.

A-9


In spite of the foregoing quote from United and the reality it expresses, the legacy carriers are counting on the continuation of a large revenue premium in the future. They are mistaken. The factors that gave rise to the revenue premium are dissipating and will play a much smaller role going forward.

For the legacy carriers the mythical “full fare” business traveler (the “Road Warrior”) is nowhere in sight. And while his disappearance was accelerated by the recent cyclical downturn and fears of terrorism, he is unlikely ever to return in numbers sufficient to support the old fare structures of the legacy carriers.

All Charts, jetBlue vs. Delta Express, New York JFK - Florida Markets (2nd Quarter 2002).

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Ft. Lauderdale Orlando West Palm Beach Tampa


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jetBlue commanded a substantial price premium over Delta Express.

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jetBlue out-carried Delta Express by two to one.

The price premium historically enjoyed by the legacy carriers is rapidly disappearing.Today, new-generation airlines are increasingly able to obtain price premiums over legacy carriers.

Today only 20% of United’s customers agree that it delivers ‘good value for money’. The comparable figure for Southwest is 86%.

United Airlines, Plan for Transformation (January 31, 2003).

All our [market] segments, are declining in value, and our most important business segment, Road Warriors, is declining faster than the others.


Recognizing that the legacy carriers could achieve a fare premium, thirty years ago Southwest positioned itself as “the low-fare airline” and it has maintained costs so low that it was long content to accept lower average fares than the legacy carriers. But the days when the legacy carriers could assume higher average fares in head-to-head competition with new-generation airlines are largely gone. (See what happened to US Airways when it was challenged by Southwest at Baltimore, pages B-3 and B-4, below).

Unlike Southwest, jetBlue deliberately marketed itself as a preferred alternative, the carrier of choice, in its markets. And it has badly beaten Delta’s competitive low-fare product, Delta Express. When jetBlue entered four New York JFK - Florida markets served by Delta, jetBlue:

Achieved a substantial price premium in each market (Figure A-16).

Achieved higher load factors in three of the markets (Figure A-17).

Out-carried Delta by two to one (Figure A-18).


Figure A-16

Figure A-17

Figure A-18

A-10

Delta has responded by introducing a new low-fare product – Song – to compete with jetBlue. Early indicators are that Song is doing OK, while jetBlue claims to be largely unaffected by the newly improved competition. It will be a year or more before sufficient data is available to permit an independent analysis, but jetBlue continues to report

rd record profits (an operating margin of 19.7% in the 3 quarter, 2003); Delta continues to record operating losses ( -2.47% in the same period ).

THE BUSINESS OPPORTUNITY: COMPETITIVE CONDITIONS FAVOR THE NEW-GENERATION AIRLINES

At Charlotte, US Airways dominates the market, currently facing only gentlemanly competition from other members of the legacy carrier club.

At Bal t imore, when US Airways encountered head-to-head competition with a new-generation carrier, US Airways was forced out of the market.


It is often said that the airline industry is highly competitive and in some sense that is true. But, in reality, the industry tends quickly toward single-carrier dominance in individual airport-pair markets. This is true for competition both among legacy carriers, and between legacy carriers and new-generation airlines.

The legacy carriers learned, after years of trial and error, not to compete with one another on price. They are now learning that they cannot compete effectively with new-generation airlines, period.

For years the legacy carriers engaged in legally-sanctioned predatory pricing and other behavior intended to drive new-generation carriers from the market. In those instances where the start-up carrier lacked a sound strategy and good management or was under capitalized the legacy carriers were usually successful; where they encountered a strong, well-funded, truly low-cost airline they were not.

Today legacy carriers such as US Airways and United are in no position to mount sustained money-losing campaigns against profitable new-generation airlines. And the legacy carriers have learned that the new-generation airlines are here to stay.

B-1

At Charlotte, US Airways dominates the market, currently facing only gentlemanly competitionfrom other members of the legacy carrier club.

US Airways’ 11 competitive routes at Charlotte US Airways’ 60 non-competitive routes at Charlotte

Consider Charlotte, site of a major US Airways’ hub and NEWGEN’s tentative choice for its future home and first opportunity. Charlotte generated 5.0 million domestic local passengers in 2001. US Airways carried 66%, 3.3 million.

On no route did US Airways experience competition from a new-generation airline. In fact, in 2001 US Airways had nonstop competition on only 11 routes, all but one of which (Greensboro) is a nearby hub of another legacy carrier. See Figure B-1. On only one route (Chicago O’Hare) did more than one other carrier compete with US Airways.

On average US Airways split the traffic 50 - 50 with the other legacy carrier on these routes. See Figure B-2.

In one market, Cincinnati, a Delta hub, only Delta operated service. It carried on these routes 57% of the 50,000 passengers in the market.

On 60 Charlotte routes US Airways had no nonstop competition. See Figure B-3. In these it had an 85% market share. In all other markets, accounting for 16% of total Charlotte local traffic, US Airways had a 24% share.

Seattle

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CincinnatiServed on ly by Delta, not served by U.S Airways

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Competitive

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US Airways Others

Figure B-1. Competitive nonstop routes at Charlotte (2001). Figure B-2. Market shares at Charlotte, local traffic, 2001.Figure B-3. US Airways' monopoly nonstop routes at Charlotte (2001).

The Business Opportunity: Competitive conditions favor the new-generation airlines

B-2

At Baltimore, when US Airways encountered head-to-head competition with a new-generation carrier, US Airways was forced out of the market.


Competition among the legacy carriers is muted, to say the least. And it does not, in any meaningful sense, include price competition. In markets served only by legacy carriers there is usually no real competition at all.

Introduction of service by a new-generation airline changes the picture dramatically. Competition becomes real and fierce, at least initially. The results are predictable: the carrier with the lower costs, and thus the ability to profit at much lower prices, prevails.

This is precisely what happened at Baltimore-Washington International Airport (BWI), once a US Airways hub, when Southwest invaded.

Prices fell dramatically. See Figure B-5.

Traffic exploded. See Figure B-4.

US Airways was forced to choose between sacrificing price or market share and, generally, was forced to sacrifice both. See Figure B-6.

The new-generation airline (Southwest) gained market share while the legacy carrier (US Airways) lost market share. See Figures B-8 and B-9 on following page.

In mid 2002 US Airways capitulated, withdrawing all company-operated service at Baltimore except for nonstop flights to its three remaining hubs.

US Airways saw its average revenue decline by 42% in BWI airport-pair markets where it went

head to head with Southwest.

Figure B-5. US Airways’ yields (per RPM) and trendline for yields, selected BWI markets (1992 vs. year ended 2Q 2001).

At BWI US Airways was able to maintain a slight price premium over Southwest, but only in short haul markets and at the sacrifice of market share.

Figure B-6. Average Prices per Nonstop Mile, US Airways vs. Southwest, Selected Baltimore - Washington International Airport Markets and US Airways market shares (Year Ended 2nd Quarter 2001).

0%

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Over the last ten years, domestic traffic at BWI nearly tripled while traffic at other US Airways’ hub and

focus cities increased by only about 50%.

Figure B-4. Change in domestic Origin & Destination (O&D) traffic, selected airports served by US Airways (1992 vs. year ended 2Q 2001).

1992

200110¢

15¢

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Average passenger journey in miles (itinerary miles or length of haul)

31%

17%, US Airways’

Market Share

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Southwest

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B-3



Charlotte is currently dominated by the same weak carrier, US Airways, that surrendered its BWI hub to Southwest. It cannot survive competition, even at one of its hubs, from a well-funded challenge by an airline with Southwest’s costs.

On the other hand, Charlotte is a much stronger hub for US Airways with a much higher percentage of connecting traffic than it had at BWI. We have no illusions that US Airways will not fight; it will. This means simply that NEWGEN must approach the Charlotte market strategically and aggressively.

But NEWGEN will be comfortably profitable at the new, lower prices while US Airways will incur substantial losses. See Figure B-7.

In fact, with Southwest’s May 2004 frontal assault on US Airways in Philadelphia, and the announcements of two low cost start-up carriers in Pittsburgh, NEWGEN is poised to open and exploit a third front against a weakened competitor.

Between 1992 and 2002, US Airways lost the battle of Baltimore, losing market dominance in city pair after city pair . . .

Figure B-8. US Airways’ share of O&D traffic, selected BWI markets (1992, year ended 2Q 2001, 1st quarter 2002).

With costs approximating Southwest’s, NEWGEN will make money at the low prices it intends to charge.

US Airways, at the same prices, will lose money.

Figure B-7. Projected average fare curve (for both US Airways and NEWGEN), projected cost per RPM curve for NEWGEN, actual cost curve per RPM for US Airways A319 (Year ended 2Q 2001).

Revenues

NEWGEN

737-700 Costs

US Airways

A319 Costs

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Figure B-9. Southwest’s share of O&D traffic, selected BWI markets (year ended 2Q 2001, 1st quarter 2002).

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B-4

THE BUSINESS OPPORTUNITY: CHARLOTTE IS A GREAT PLACE TO START A NEW AIRLINE

Charlotte is one of the capital cities of the new South and, after New York, America’s

nd2 largest banking center.

The Charlotte Airport is at the center of a large and rapidly growing market of6.1 million people.

US Airways dominates - and abuses - the Charlotte market.

Charlotte’s traffic, currently suppressed by high fares, will explode upon the introduction of NEWGEN’S service.

C-1

Charlotte, North Carolina, is one of the leading cities of the new South, with a rapidly growing population and a vital economy.

With $1.2 trillion in assets, Charlotte’s “hometown” banks make it the nation’s second largest banking city (behind New York). For comparison, total banking assets in Atlanta are only $110 billion and Miami $14 billion. Bank of America ($930 billion,

nd2 in total assets behind Citigroup after the FleetBoston acquisition) and Wachovia th($342 billion, 5 nationally in total assets) are headquartered in Charlotte.

Charlotte is a major manufacturing center and home to 9 Fortune 500 companies.In addition to the two banks, Duke Energy, Sonic Automotive, B. F. Goodrich, Lowe’s, Nucor, SPX, and Family Dollar are headquartered in Charlotte. See Figure C-1.

The Charlotte economy is growing rapidly. 9,000 new firms, creating 77,000 new jobs and investing $7.4 billion in new facilities, opened in the last 10 years

Charlotte is served by a radiating network of interstate highways and is a hub for both the Norfolk Southern and CSX railroads. With its central location along the eastern seaboard, Charlotte has become a major distribution center. Fifty-five percent of the US population, nearly 160 million people, lives within a 650 mile

thradius. In wholesale sales Charlotte ranks 6 after New York, Houston, Los Angeles, Dallas, and Chicago.

The population growth has been accompanied by even more rapid economic development. Thirty years ago the South (except Florida) lagged the nation in economic development, as reflected in per capita personal income, typically at about 75% - 80% of national levels. Atlanta, leading the march toward parity with the rest of the United States was at 90%. Thirty years of above-average economic growth have all but eliminated the gap. Like Atlanta before it, Charlotte’s trajectory of economic growth will see it pull ahead of national averages, likely in the next decade.See Figure C-2.

Charlotte is one of the capital cities of the new South and, after New York, America’s 2nd largestbanking center.

Nine Fortune 500 companies are Headquartered in Charlotte.

Charlotte’s per capita income has been growing much more rapidly than the national average.

Figure C-2. Growth in per capita income, Charlotte and Atlanta economic areas (as defined by BEA) compared with the United States.

Charlotte

Atlanta

the Nation

80%

85%

90%

95%

100%

105%

1970 1980 1990 2000

The Business Opportunity: Charlotte is a great place to start a new airline

Figure C-1. The Charlotte-based Fortune 500 companies.

C-2

Fortune 73

$24.5 billion revenue

Fortune 75


Fortune 15


Improving Home Improvement

Fortune 50


Fortune 365


Fortune 344


Fortune 297


Fortune 394



Fortune 264

GOODRICHGOODRICH

Greenville

Spartanburg

Columbia

Winston - Salem

Charlotte

High Point

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Durham

Hickory

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CharlotteAirport

Raleigh-DurhamAirport

Charlotte-Gastonia-Rock Hill 2,041,792

Asheville 445,975

Greenville-Spartanburg-Anderson 1,252,298

Hickory-Morganton 520,544

Columbia 934,303

Core catchment area 5,194,912

Greensboro-Winston-Salem-Highpoint 1,858,947

@ 50% 929,474

Total available population 6,124,386

Population (2000)

With service by a new-generation airline, the Charlotte airport’s catchment area will encompass a population of 6.1 million. See Figure C-4.

* The reach of an airport served by a new-generation airline far exceeds the reach of legacy carrier airports . Based on a drive-time analysis the catchment area for NEWGEN’S services at Charlotte will include all of five BEA (US Department of Commerce, Bureau of Economic Analysis) economic areas with a population of 5.2 million; NEWGEN will also share the 1.9 million people of the Greensboro-Winston-Salem-Highpoint economic area with Southwest’s services at Raleigh-Durham.

Like most of the “new South” NEWGEN’s core catchment area has experienced rapid population growth over the last 30 years with a total increase of 58%, from 3.3 million in 1969 to 5.2 million in 2000. Growth in the region outstripped national population growth by nearly 50%. See Figure C-3.

The Charlotte economic area is the star of the region, having seen its population grow since 1969 from 1.2 million to more than 2.0 million, an increase of 68%, exceeding national population growth over the period by 71%. More recently the growth has accelerated; just since 1991 its population grew at 193% of the national rate. See Figure C-3.

The Charlotte airport is at the center of a large and rapidly growing market of 6.1 million people.

* For example, Southwest’s services at Omaha draw substantial amounts of traffic from Des Moines, 133 miles away; Southwest's services at Kansas City draw many passengers from Wichita, 212 miles distant.(According to a study by Sabre, 34% of all air trips booked within the Wichita catchment area initiate travel at the Kansas City airport.) The population centers within NEWGEN’s Charlotte catchment area are mostly between 70 and 100 miles from the Charlotte airport.

The population of the Charlotte catchment area is growing half again as fast as the nation’s;

in the last decade the core Charlotte economic area has grown nearly twice as fast as the nation.

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Figure C-3. Population Growth for Charlotte and nearby economic areas (as defined by the US Bureau of Economic Analysis) as percent of population growth for the United States.


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Figure C-4.

C-3

Charlotte is one of the largest legacy carrier monopolies in the country; no new-generation carrier serves any Charlotte market.

US Airways operates a hub at Charlotte and has direct competition (from other legacy carriers) on only a handful of routes to/from the other carriers’ nearby hubs (Atlanta, Chicago, Dallas, and so forth). US Airways carries two thirds of all local traffic (i.e., passengers traveling to and from Charlotte) and, because it alone operates through and connecting service at Charlotte, US Airways enplanes more than 85% of total Charlotte passengers.

As a result of Charlotte’s total reliance on legacy carriers for air service and its domination by US Airways - the least-efficient, highest-cost legacy carrier - it has the highest average airfares of any major US city, followed closely by Cincinnati, a similar legacy-carrier-dominated city (Delta).

On average, Charlotte’s distance-adjusted fares are 40% higher than the average large US city; Oakland, a city with a similar average length of journey but one that receives most of its service from new-generation airlines has fares 20% below the US average, or about 57% of Charlotte’s fares. See Figure C-5.

In Figure C-6 we show fares in actual Charlotte markets compared with Southwest fares in markets of comparable distance. Charlotte’s current fares range:

From 20% - 30% above competitive fare levels in the long-haul markets (the West coast).

To as much as 80% above in the short-haul markets (Atlanta, Washington DC, Richmond, Norfolk, Raleigh-Durham).

With fares 50% - 60% above competitive levels the norm (New York, Miami, St. Louis, Chicago, Tampa)

.

While US Airways has been introducing new “GoFares” in markets entered by Southwest, it continues to extract the last dollar of revenue from its captive Charlotte customers.

US Airways dominates – and abuses – the Charlotte market.

Charlotte has the highest average air fares of any major city in the United States.

US Airways’ Charlotte fares are as much as five times fares in competitive markets.

Figure C-6. Actual average fares in Charlotte’s top-60 domestic markets compared with fares based on average fares charged by Southwest at Baltimore Washington International Airport(year ending, 2Q 2002).

Oakland -20%

Charlotte + 40%

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Average distance traveled

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Figure C-5. Average fares in top 1,000 US city-pairs, by city (US DOT, Domestic Airline Fares Consumer Report, 2Q 2002).

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C-4

New-generation airlines restore the value proposition to the airline business. Whenever a new-generation airline enters a market with significant fare reductions and substantial levels of service, traffic doubles, triples, or more.

High fares retard traffic development; conversely, the introduction of low fares stimulates traffic, causing it to double, triple, or more in a short time. The current high fares at Charlotte give ample room for development by a new-generation airline.

When introduced in a specific market, low prices dramatically stimulate traffic. The introduction of low fare service by Southwest between Baltimore-Washington International Airport (BWI) and Cleveland caused traffic to increase by 550%. Southwest brought the average one-way price down from $193 to $56; traffic increased from 63,000 annual passengers to 478,000. See Figure C-8. Where we also present two other examples of Southwest-competitive airport pairs and three examples of BWI markets not served by Southwest. As the charts show, even in business markets travel is highly responsive to price reductions.

There is nothing unusual about BWI. In the early 1980s, PeoplExpress began operations at New York City's third airport, Newark. It ultimately entered a total of 36 of New York City's largest markets. (In total these markets accounted for roughly 70% of New York City's domestic traffic in 1980.)

Charlotte’s airline traffic, currently suppressed by high fares, will explode upon the introduction of NEWGEN’S service.


The low-fare, high-frequency service introduced by PeoplExpress, combined with the price and schedule responses of the existing carriers (primarily for services at New York City's other two airports), stimulated traffic by more than 60%, producing nearly 14 million additional passengers annually. To be sure, some of the increased traffic was the result of normal market growth; but when PeoplExpress failed and withdrew from the markets most of the new traffic disappeared.See Figure C-7.

In precisely this way, the introduction of new-generation airfares at Charlotte will cause Charlotte's traffic to increase dramatically.

BWI - Cleveland

Price -64%

Traffic +659%

BWI - Albany

Price -61%

Traffic +641%

BWI - Raleigh/Durham

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Traffic +431%

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Dramatic Price Reductions Generate Dramatic Traffic Increases . . . While Rising Prices Suppress Demand.

BWI - Pittsburgh

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BWI - Norfolk

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Traffic +6%

BWI - Newark

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Traffic -29%

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Figure C-7. O&D Traffic in 36 New York City Markets Before, During, and After PeoplExpress.

Figure C-8. Changes in Average Price per Nonstop Mile and Total Origin & Destination Traffic, Selected Baltimore-Washington International (BWI) Markets Entered by Southwest Compared with Markets Not Affected by Southwest (1992 vs. Year Ending 2Q 2001).

The Entry of PeoplExpress Into 36 New York City Markets

Increased Annual Traffic by 14 Million O&D Passengers

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C-5

THE BUSINESS OPORTUNITY: FOR THE FIRST TIME IN DECADES NEW-GENERATION AIRLINES CAN GAIN ACCESS TO RESTRICTED AIRPORTS

Today there is an historic opportunity to acquire access to heretofore restricted airports – New York LaGuardia, Washington National, and Chicago O’Hare.

God did not create airlines slots; [government] did. Slots came into existence because politicians were unwilling to let the marketplace solve the congestion problem. Absent the imposition of slots, travel delays and financial losses would ultimately have driven the carriers serving congested airports to reduce the number of flights offered to whatever number the air traffic control system could accommodate.

Robert Crandall, CEO American Airlines (October 27, 1998).

D-1

In general, access to commercial airports in the United States is unrestricted, that is, any airline can fly to/from any airport without first seeking permission to do so; it need only comply with local noise and other regulations and pay the required landing fees and other charges.

Slots

Four airports in the United States – New York LaGuardia (LGA), New York Kennedy (JFK), Washington Reagan (DCA), and Chicago O’Hare (ORD) – are subject to an access-limiting “slot” regime under the so-called High Density Rule administered by the Federal Aviation Administration (FAA). A slot is a permission to land or takeoff at a particular airport at a particular time.

The rule was imposed in the late 1960s in response to a temporary air traffic congestion problem. As is the way with such regulations, the High Density Rule quickly became more or less permanent.

The principal result of the maintenance of this rule has been to protect the legacy carriers holding slots at these airports from the level of competitive challenge they would have faced had new-generation airlines been free to serve the airports with the schedules and at the prices dictated by their market plans. A secondary effect has been to deprive many communities of services to/from these airports even though their potential markets are more than large enough to support service.

Not surprisingly, average air fares at High-Density-Rule airports tend to be higher than at other major US airports and, in particular, than at airports served by new-generation airlines.

In the early 1990s new-generation airlines and the communities they serve began to use the political process to seek slots at High-Density-Rule airports. Initially they met with limited success but, importantly, as part of the debate the intellectual case for the slot regimes was largely discredited.

Slowly the slot regimes began to be whittled away.

In 1994 Congress authorized limited exemptions from the slot restriction for new-generation airlines to fill voids in underserved markets and provide price competition in specific markets to the legacy carriers.

Today there is an historic opportunity to acquire access to heretofore restricted airports – New York LaGuardia, Washington National, and Chicago O'Hare.

The Business Opportunity: Airport Access

In 1999 the FAA “created” 75 new slots so that jetBlue could inaugurate service at JFK.

Finally, in April 2000, Congress passed legislation phasing out the slot regimes at LGA, JFK, and ORD.

In the aftermath of 9/11 the FAA imposed additional limitations on operations at Washington Reagan because of its proximity to possible terrorist targets such as the Pentagon and the Capitol. In terms of total slots these limitations applied only to non-scheduled and general aviation activities. However, because passenger traffic was heavily affected by 9/11, scheduled flights were also substantially scaled back by the carriers themselves and today, more than two years after 9/11, total operations at DCA remain well below allowable capacity.

The cutbacks in service, both the number of seats and the number of flights, affected most major airports, including all of the slot-controlled airports. Whatever validity there might have been to the claim that the airports were overcrowded evaporated in the aftermath of 9/11.

Meanwhile, except for the jetBlue operations at JFK, fare levels at these airports have remained typically high because of the dominant position of the legacy carriers.

This is the historic opportunity.

NEWGEN believes that nonstop and connecting services between points in its catchment area and the restricted airports in the New York, Washington, and Chicago areas represent a tremendous opportunity for developing heretofore underserved, overpriced markets.

Accordingly, NEWGEN intends to seek slots at three High-Density-Rule airports, using whatever forums are available and enlisting whatever support that might further our goal.

One method of acquiring slots, heretofore prohibitively expensive, is to buy them.

(continues)

D-2

Today there is an historic opportunity to acquire access to heretofore restricted airports – New York LaGuardia, Washington National, and Chicago O'Hare (continued).

The Business Opportunity: Airport Access

Although technically the slots are not the property of the airline to which they are assigned they are routinely sold, leased, rented and pledged. In today’s difficult financial climate, one or more of the legacy carriers might be willing to part with some of its slots for a reasonable price.

In addition, developments over recent years have intensified the incentives of airport owners and municipalities to pursue means of increasing passenger volumes because of their dramatic effect on passenger-facility-charge revenues, as well as revenues from hotels, car rentals, and myriad other businesses and vendors. Trends toward smaller aircraft, the inability of the legacy carriers to offer reasonable fares, and increasing price sensitivity by business travelers have combined to dampen significantly the airports’ passenger headcounts. The logical remedy is to enable new-generation, low-fare airlines to gain reasonable access to heretofore legacy-carrier-dominated airports. Thus, the time is ripe to approach airport owners, civic officials, and congressional representatives to find ways finally to open up the marketplace to those entrepreneurs.

Our Board of Advisors, especially Washington-based Messrs. Lachter and Coleman, have extensive experience with airport-access issues. We believe that the current high propensity for airports to have excess capacity will facilitate our negotiations.

Facilities.

Slots are only half the battle. An airline planning to enter a new market must also find facilities: gates, check-in counters, ramp space, back offices, and so forth. At many airports these are in short supply because airport operators typically enter into long term leases with airlines which then control the facilities. Typically, legacy carriers have been reluctant to make sufficient facilities available to new-generation airlines to permit them to conduct operations on an economical level; when they have subleased facilities they have often charged exorbitant rents and/or imposed onerous conditions.

We believe that in today's climate it will be less difficult for NEWGEN to obtain adequate facilities at the airports it desires to serve.

D-3

INVESTORS IN SUCCESSFUL NEW-GENERATION AIRLINES HAVE DONE SPECTACULARLY WELL

It was straight of out Ripley's. When Money Magazine asked Ned David Research this summer to compile a list of the 30 best performing stocks since our debut in 1972, it seemed obvious that the No. 1 performer would reflect the brawn-to-brains transformation of the US economy. Probably a technology stock. Or maybe a big name in pharmaceuticals.

What we were not expecting was an airline, Southwest Airlines to be precise. Since August 1972, Southwest has produced annualized returns of 25.99%, which means that had you invested $10,000 in Southwest 30 years ago, your stake would be worth a little over $10.2 million today. Southwest, of course, is not your typical airline.

“The 30 Best Stocks,” Money Magazine (September 2002).

Airline stocks a horrible investment? Not Southwest.

And not other new-generation airlines.

In the end, it all depends on management; execution is the key.

E-1

As shown by the long term success of Southwest and the more recent experiences of jetBlue, WestJet (Canada), and Ryanair (Europe), the successful execution of the low-cost strategy can bring handsome financial returns.

Conventional wisdom holds that airline stocks are good only as trading vehicles; they make lousy investments and would never be suitable for a buy-and-hold strategy. Conventional wisdom is correct: for the legacy carrier segment.

Airline stocks a horrible investment? Not Southwest.The trust fund that put $10,000 in Southwest in 1972 would have about $15 million today.

Investors in successful new-generation airlines have done spectacularly well

Airline industry has delivered the worst shareholder performance of any industry. McKinsey and Co. quoted in United Airlines, Plan for Transformation (January 31, 2003).

But then there is Southwest. As Money Magazine reported, Southwest Airlines was the best performing publicly-traded US stock, bar none, over the last thirty years with a compound annual growth rate of 26%.

Our stock-price data, charted in Figure E-1, only goes back to 1975, but you get the idea ( if no other way, than by the logarithmic scale we had to use ). It is true, of course, that the last several years have been tough; Southwest is off from its pre- 9/11 high. But the legacy carriers have lost 80% to 100% of their market values.

Southwest is certainly not your typical airline; but neither is it unique.

The results of investments in Ryanair, the Dublin-based nemesis of British Airways, and Calgary-based WestJet have been similar.

And then there is jetBlue. In the spring of 2002, seven months to the day after 9/11, it launched a very successful IPO at a heavily-over-subscribed price of $27 per share. The stock rose almost immediately to well over $55 per share, giving it a stock market capitalization of more than $2 billion. Split three-for-two in December, the stock now trades in the mid $20s and has a market capitalization of $2.4 billion.

But so far we have been talking only about returns to mid-stage investors in the companies’ IPOs. Their early-stage investors did far better; unfortunately we cannot reconstruct their early-stage investments so as to compute exactly how well they did. jetBlue’s prospectus, however, tells us that its pre-IPO investors averaged a split-adjusted price of about $3.50 per share; since jetBlue followed a phased investment approach, with each subsequent round coming in at a higher price, the earliest investors paid substantially less. Assuming the investment came in two years prior to the IPO, jetBlue’s early-stage investors have seen a better than eightfold return, an average annual growth of about 110%.

Southwest’s publicly traded shares have enjoyed a compound annual growth rate of 25.99% over the last 23 years.

Figure E-1. Southwest: High-low-close, last day of each month, split adjusted (logarithmic scale).

E-2

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The list of failed start-up airlines is long, far longer than the list of success stories. On the other hand, if it were easy there wouldn’t be any money in it.

The failures include spectacular collapses of initially successful companies such as PeoplExpress and ValuJet* as well as the failures of dozens of companies that never had a prayer.

But Southwest’s 31-year string of industry-leading profitability cannot be dismissed as an anomaly; it has been confirmed by the success of other carriers in other markets. And, indeed, there are few remaining in the legacy carrier segment that would deny it.

Professional investors know that three ingredients, and only three ingredients, determine the success of a new business enterprise:

1. The quality of the opportunity/strategy.

2. The quality of the people.

3. The adequacy of the capitalization.

Southwest’s success is not a mystery. It is based on faithful adherence to a business concept that meets the needs of a huge and growing market, near-flawless execution by outstanding people at all levels of the organization, and the steady accumulation of a strong balance sheet based on continuous profitability combined with carefully managed growth.

The ingredients of failure are also well known:

Poor or flawed strategies:

-Pursuit of non-existent market niches such as all first or business class service.

- Ill-advised acquisitions.

- Too-rapid growth.

Poor execution.

- Paying lip service to low costs but not really meaning it.

- Failure to select routes based on competitive opportunity.

Inadequate capitalization.

Investors in successful new-generation airlines have done spectacularly well

* Early stage investors in PeoplExpress and ValuJet did remarkably well.

In the end, it all depends on management; execution is the key.As in most businesses, start-up airlines that fail suffer from self-inflicted wounds.

Just as with success, the most important ingredient of failure is management.

Management that doesn’t get it (achieving and maintaining low costs isn’t magic; it’s just hard work).

Management that’s in it for a quick buck.

Management overcome by hubris following initial success.

Note that we do not cite predation or competition from the legacy carriers as causes for failure; while both exist, in our 25-year study of the failures of start-up airlines, we have seen no case in which failure was not self inflicted.Our industry is cyclical, energy intensive, labor intensive, and, finally, capital

intensive. Operating costs are mostly fixed, and operations are subject to weather conditions and federal oversight. In short, it’s a risky business. To “be prepared,” we maintain healthy cash reserves, low levels of indebtedness, and ready access to more financing.

Southwest Airlines 2002 Annual Report.

E-3

THE COMPANY

The “NEWGEN” Doctrine

Plan of operation

Route structure

Costs, costs, costs

Value, value, value

Marketing

Technological advantage

The time is now

Start-up plan

F-1

While our strategy of creating a strong, low-cost, low-fare, high-profit airline will remain inviolate, there are significant strategic variables which will ultimately depend on financing sources, market conditions at time of financing, and availability of aircraft. A brief discussion of these strategic variables appears below.

“Building” an airline from scratch versus “buying” an operating airline

Buying presents several attractive attributes, including (if the target acquisition has the right aircraft) dramatic reduction in time-to-market/certification. Challenges to buying are added due diligence time, and assimilation of the target’s workforce into the NEWGEN culture.

Brand New versus Pre-owned aircraft

While use of ancient, decrepit aircraft is not under consideration, the new mid-size aircraft market has recently bounced sharply off its bottom of a couple years ago. There are attractions to using 8-12 year-old aircraft including significantly lower ownership/leasing costs, and ability to spend some of that difference on differentiation of the seating product. Cons include higher fuel burn, maintenance costs, and reliability (spare requirements).

Markets and Routes

NEWGEN has performed an exhaustive research process reviewing city pair data for population, O&D and connecting passengers, fares and traffic stimulation potential, levels of service, current and future/potential competitors, etc., to select routes and potential focus cities. In addition, we have researched which of these cities (and others) would present an attractive place at which to base our corporate headquarters. The results of this research lead us to Charlotte, NC, both as our first “focus city” and as our HQ city-of-choice. Assuming a cordial reception from city, county and state officials, this choice appears solid. But management has additional cities in reserve should market or other forces make Charlotte impractical.

As for route structure, many individual city pairs have been analyzed, scored and prioritized with the most current data available. Final selections and announcements will be made as we get closer to launch, and have even more current pricing, service and competitor data.

Succeeding Tabs and Exhibits

Rather than present multiple strategic scenarios in all our financial, timeline and regulatory exhibits, we have chosen one representative scenario. The succeeding pages (and all time and money-sensitive exhibits herein) reflect a “Build/New/Charlotte” strategic scenario. It is management’s view that this presents the most conservative outlook from the standpoint of both time-to-market and financial risk/return. Management has endeavored to analyze each possible scenario and is actively pursuing potential alternatives to the strategy reflected herein.

The “NEWGEN Doctrine” - Rigid Strategy/Flexible Response

The Company

F-2

THE TASK: CREATE A NEW-GENERATION AIRLINE TO BRING LOW-PRICE SERVICE TO MAJOR CITIES THROUGHOUT THE EASTERN UNITED STATES.

The “secret formula” for creating a successful new-generation airline is no secret. Year after year Southwest has laid it out in its annual report; year after year observant commentators have explained it. And yet few have been able to implement it successfully.

The truth is that while the concept is simple, the secret is in the implementation.

In broad strokes, our implementation of the formula looks like this:

Operate a single class of service (coach).

Operate a single aircraft type (for example, the Boeing 737-700 or Airbus A 319).

Provide multiple daily frequencies in dense markets.

Avoid costly frills such as meal service and airport clubs.

Produce services at the lowest possible costs per seat/passenger mile consistent with a safe, reliable operation.

Build a spider web network, connecting all the cities served, rather than a hub-and-spoke network of the sort operated by the legacy carriers.

Emphasize local traffic while carrying some connecting and through traffic between major cities in the North and Florida.

Achieve high utilization of aircraft, people, and other resources.

Utilize the latest technology (reservations systems, customer check-in kiosks, cockpit management, maintenance, and so forth) to provide convenient, hassle-free service, and real-time management information.

Grow at manageable levels.

Manage for profit.

Maintain a strong balance sheet.

Plan of operation

The Company

Our formula is simple, but not easily replicated: we provide an affordable, convenient, enjoyable travel experience, with the support of a low-cost structure.


Over the years, major airlines have improved just enough for most to survive, to limp from crisis to crisis, to turn a small profit occasionally, but not to build lasting equity. And increasingly they are haunted by Southwest, haunted because they can never match it. Southwest is in a different business from United, and its model is infuriatingly simple: it flies a single aircraft type, greatly reducing the cost of training pilots and mechanics, with no frills or first class, mostly on point-to-point routes and usually from secondary, less congested airports. It’s Boeing 737’s land and take off in only 20 minutes – unthinkable for planes connecting through hubs – and its pilots usually fly more than 70 hours a month, far more than at American, Delta and United.

Roger Lowenstein, “Into Thin Air,” The New York Times (2/17/02).

F-3

RIGID STRATEGY, FLEXIBLE RESPONSE

Our route strategy is to bring high-frequency, low-fare service to markets presently dominated by a legacy carrier offering, on average, very high fares. Our target airport pairs will be dense markets capable of supporting a pattern of service by NEWGEN that includes multiple nonstop flights each day. See Figure F-1.

Although we expect ultimately to prevail – becoming the carrier of choice – in every market that we enter, we will only enter markets that are large enough so that the total amount of traffic, after the stimulation from our low-fare services and the incumbent carrier’s pricing response, will be sufficient to support service by both carriers.

Our expectation is that the legacy carrier, even though it will likely be carrying more traffic than before NEWGEN’s entry, will not be profitable in the local market because of the lower fares. NEWGEN will be solidly profitable at the low fares, because NEWGEN will have still lower operating costs.

In implementing our route strategy we must be flexible, taking advantage of opportunities as they arise.

We have identified US Airways-dominated Charlotte, which has the highest average air fares of any major US city, as our preferred location for the launch of NEWGEN’s services.

Our financial model, as summarized in this business plan, is based on a specific set of routes, a specific aircraft type (the B 737-700), a specific flight schedule, and a “build” ( as opposed to a “buy” ) strategy.

We are engaged in on-going analyses of all these factors. Still other opportunities will emerge over the next several months as the industry continues to evolve on a weekly basis. And ultimate choice of build/buy, aircraft, and initial routes may differ.

Depending on the circumstances our focus might shift to opportunities different from the ones we are presently planning to exploit. Selection of our first routes will be based on our on-going analyses of a variety of markets, considering such factors as current fares, service levels, and the expected behavior of incumbent carriers (as influenced, in part, by their then-current financial condition). Likewise choice of aircraft and build vs. buy will be driven by market availability and negotiations.

Since we do not intend to replicate the hub and spoke route structure of a legacy carrier, we are not dependent on any particular route or hub city.

Route structure

The Company

Figure F-1. Charlotte’s 50 largest domestic markets. (Some of the cities are served by multiple airports.)

WITH LOW FARES, CHARLOTTE’S TRAFFIC WILL MORE THAN TRIPLE.

Charlotte’s top 50 domestic markets generated 4 million passengers in 2001, 80% of Charlotte’s total domestic traffic.

If all of these received nonstop service from new-generation airlines, Charlotte would generate more than 14 million annual passengers, 350% as much traffic as with US Airways.

DallasDenverLas VegasHoustonSeattlePhoenixLos AngelesSan FranciscoSan Diego

Plus:

Chicago

MiamiFt. Lauderdale

Orlando

Tampa

Jacksonville

Ft. MyersWest Palm Beach

New Orleans

St. Louis

Kansas City

Minneapolis

Milwaukee

Charlotte

Boston

Nashville

Memphis

AtlantaBirmingham

Detroit

Cleveland

Columbus

Cincinnati

Louisville

Indianapolis

Richmond

RochesterSyracuse

Baltimore

Washington

Pittsburgh

Buffalo

Norfolk

Allentown New York / Newark

Philadelphia

HartfordAlbany Providence

F-4

Costs, costs, costs

The Company

IN THE AIRLINE INDUSTRY – AS IN ALL COMMODITY BUSINESSES – LOW OPERATING COSTS ARE THE KEY TO LONG-TERM SUCCESS.

We know from the experience of other new-generation airlines that we can produce our service at costs equal to or below those of Southwest Airlines; that is, at unit costs about 60% of US Airways’ pre-Chapter 11 average costs.See Figure F-2.

Costs, high or low, come from culture.

NEWGEN pledges to all of its constituents – its investors, employees, and customers – that it will produce the service called for by its marketing strategy at the lowest possible costs consistent with safe and reliable operations.

To make that promise a reality, NEWGEN’s senior management team will include a unique position, Chief Performance Officer, whose job will be to establish and continually refine an active and integrated performance management regime incorporating all operational, financial, and constituent satisfaction measures.

NEWGEN, like Southwest, intends to make proactive use of a Balanced Scorecard to ensure that every activity, at every level of the company, is aligned with its core principles and strategy; and to create and perpetuate a strong, motivated workforce through highly selective recruiting and constant two-way communication.

Charging low fares [is] the easy part . . . achieving low costs requires real work.

Sam Buttrick, UBS Warburg (March 7, 2003).

US Airways

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NEWGEN will have a compelling cost advantage over US Airways.

Figure F-2. US Airways’ cost per RPM in its three principal narrow-body aircraft (year ended 2Q, 2001) vs. projected costs for NEWGEN 737-700 aircraft (fuel at assumed price of 75¢ per US gallon).

Costper

RP

M

F-5

In a commodity business, price and availability count for everything.

NEWGEN will introduce a simple fare structure with few restrictions and very low prices compared with the fares of the legacy carriers; average prices in some markets would be as low as 30% - 40% of US Airways’ average fares.

For example, the current average fare between Charlotte and New York LaGuardia would decline from $227 one way (42¢ per mile) to $77 (14¢ per mile), a reduction of two thirds. Equally important, the lowest fares offered would be $49, less than 10% of today's walkup coach fare of $540.

The introduction of low-fare services in Charlotte’s principal markets will cause traffic to increase dramatically; it will double or triple in two years.

For example, Charlotte - LaGuardia traffic can reasonably be expected to increase by 220%, from 240,000 annual passengers at current prices to 760,000 passengers at NEWGEN’s prices.

Value, value, value

NEWGEN’s prices and the low prices offered by US Airways and other legacy carriers in response will generate more new traffic than NEWGEN itself can carry.

In the Charlotte - LaGuardia market we expect to achieve an initial market share of about 43%, carrying 330,000 annual passengers; US Airways’ own traffic would nearly double from today’s levels, but with a price decline of 66% US Airways would receive significantly less total revenue from carrying twice as many passengers. See Figure F-3.

NEWGEN intends initially to schedule service only in dense markets (such as Charlotte - LaGuardia) able to support both US Airways and itself.

We will offer frequent service so as to accommodate the needs of both business and personal travelers. Our initial Charlotte - LaGuardia service, for example, would include five roundtrips per day.

The Company

New York LaGuardia

Price - 66%

Traffic + 220%

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rn

on

sto

pm

ile

Figure F-3. Before: actual average fares and annual traffic in 2001. After: average fares based on NEWGEN's business plan; traffic stimulation based on a conservative Coefficient of Elasticity of -1.2; market shares based on share of seats available for local market: NEWGEN proposed schedule; legacy carrier schedule as published for August 2003.

F-6

We have spent more than 30 pages telling you that airlines are a commodity business; given that we would be foolish to try to convince you that we have a clever marketing plan that will enable us to differentiate NEWGEN from the competition. After all, what we offer the public is simply a safe, reliable service; the same product offered by any other competent airline. NEWGEN will, of course, be offering very low prices, but we expect the legacy carriers with whom we compete to match those prices, although probably with more restrictions and a limited inventory of the lowest-priced seats.

Since the legacy carriers against which NEWGEN will be competing have near-universal brand recognition in their markets and have enrolled virtually every frequent traveler in their mileage programs, they start with an advantage.

On the other hand, the legacy carriers have a powerful disadvantage as well: they are widely perceived by the traveling public as being untrustworthy and not offering value. The endless cycle of news stories about their financial distress, over-paid and under-worked employees and, most recently, over-paid senior management, create a backdrop against which new-generation airlines become the “good guys.”

Our greatest marketing strength will be the restoration of the value proposition to air travel. We intend to earn the trust of our customers.

The key elements of our service offering include:

New, full-sized aircraft (not regional jets).

Frequent schedules.

Low prices with few restrictions and wide availability.

Large overhead bins to facilitate carry-on baggage.

Ease of reservations, with emphasis on the internet.

Customer-friendly service.

The challenge for NEWGEN is to create market awareness and generate consumer trial. To that end, like Southwest, we will spend more on advertising and promotion, relative to NEWGEN's size, than legacy carriers spend. And NEWGEN will take advantage of the newsworthiness of a new-generation airline’s arrival in a market to generate “free” publicity.

As with the details of our route planning, we do not intend to publish our still-developing marketing plans in advance of the inauguration of service. We will be pleased to discuss them with interested investors.

Marketing Technological advantage

Not only are the pre-deregulation carriers appropriately called “legacy carriers” but also the information technology systems of the legacy carriers are “legacy systems.” As early adopters of information technology in the 1960s, the old airlines have saddled themselves with expensive, difficult to maintain, and not very useful technology long since outmoded by modern desktop and mini-computer based systems and software designed around a service business core, not a manufacturing one.

New-generation airlines have become the industry leaders in technology.

It was a new-generation airline (Morris Air, acquired by Southwest) that brought e-ticketing to the industry.

It was new-generation airlines (easyJet, among others) that first capitalized on the internet and that today lead the industry in the percentage of their business done via company-owned web-sites.

It was a new-generation airline (jetBlue) that brought personal computer automation to the cockpit.

The Company

NEWGEN intends to bring new technology to every area of its information management – maintenance, flight operations, reservations and customer relationships, as well as finance – through a comprehensive performance management system designed for NEWGEN by CMS Solutions, the leader in integrated airline management software.

This fully-integrated package will provide NEWGEN with real-time financial and operational reporting, enabling management to make real-time decisions. John MacLeod, NEWGEN’s President and Chief Performance Officer, will employ this integrated software system to provide all NEWGEN employees with the tools and information to manage for performance.

For the year ended December 31, 2002, 63% of our sales were booked on www.jetblue.com, our least expensive form of distribution, and 33% were booked through our reservation agents.

jetBlue, Annual Report for 2002.

The majority of the tickets for travel on American are sold by travel agents.

AMR Corp., Annual Report for 2002.

F-7

Since airline deregulation in 1978 there has not been a better time to start an airline than right now: 80% of the industry is still in the hands of companies that have already failed and will slowly be swept from the playing field. The opportunity is enormous.

With hundreds of aircraft orders deferred or canceled, manufacturers are willing to do more today to keep production lines busy than ever before.

Hundreds of late-model jet aircraft sit idle in the desert, exerting a powerful downward pressure on prices.

Thousands of airline pilots, furloughed from the legacy carriers, have no hope of ever returning to their high-paid, low-effort jobs.

Municipalities have finally recognized that their communities thrive with frequent low-fare service, not with the “prestige” from being the site of a legacy carrier hub.

Airport operators need to find new ways to bring passengers to their facilities to generate the revenue needed to meet their debt obligations.

The internet has exposed the pricing structure of the legacy carriers; high fares are a thing of the past.

Experienced airline employees in every discipline are eager to be part of the new-generation industry.

New-generation technology is available to provide the management tools.

NEWGEN is ready with an experienced management team, able to exploit these opportunities.

The time is now.

The Company

Narrowbodies make up nearly two-thirds of the 487 jets airlines have deferred – 25% are Airbus A320 family aircraft and 38% are next-generation Boeing 737’s.

Aviation Daily (April 14, 2003).

Increased price transparency facilitated by Internet bookings [are] adding to downward yield pressure.


F-8

The operations of the company are assumed to commence January 1, 2004 which would coincide with the closing of the transaction. Barring the acquisition of an operating airline, and its FAA certificate, the initial flight of the company would be anticipated on September 1, 2004. During the start-up phase the primary objectives are to obtain regulatory approval from the DOT and FAA, bring onboard the management team, recruit and train qualified operating personnel, develop corporate systems and infrastructure, negotiate and lease aircraft, acquire assets necessary to conduct operations, advertise for initial operations and prepare for the initial flight. Given the capital intensive nature of an airline, the regulatory financial suitability r e q u i r e m e n t s a n d e x p e c t e d competitive responses from legacy carriers, significant capital is necessary to sustain the start up phase.

The company initially intends to lease six aircraft with one held in reserve. While the ultimate decision on the type of aircraft to lease remains subject to negotiations with potential suppliers, the company has projected costs based upon the Boeing 737-700. As noted earlier, one of the key components of the business strategy is to operate a single class of aircraft. The selection of the aircraft will ultimately be determined based upon a variety of economic fac tors and market availability.

Start-up plan – Representation of the “Build” strategy

The Company

InitialFunding.

BUSINESS OPERATIONS DEVELOPMENT – “Build”

Aircraft, Station, Insurance Negotiations.

H.O. Build-out / Move-in.

Management and Website Software Dev't. & Implementation.

RES CenterSet-up & Open.

Advertising & P/R Blitz.

NOW MONTH1

MONTH2

MONTH3

MONTH4

MONTH5

MONTH6

MONTH7

MONTH8

MONTH9

CERTIFICATION AND FLIGHT OPERATIONS DEVELOPMENT – “Build”

InitialFunding.

First Flight9 months after

initial founding

First Flight9 months after

initial founding

H.O. Build-out/Move-inGround Equipment

& Station Construction

Flight Attendant Hiring & Training

ProvingRuns

First Aircraftw/ 5 more on 3/15

Hiring of Key Management & Personnel.

Hiring of Key Management & Personnel.

Pilot Hiring and Training.

Obtain DOT Economic Authority (CC&N).

Obtain FAA Certification (Operating Authority)

Lease H.O. Space.

Lease H.O. Space.

F-9

“Buy” strategy could reduce this time to effectively zero

NOW MONTH1

MONTH2

MONTH3

MONTH4

MONTH5

MONTH6

MONTH7

MONTH8

MONTH9

Management is everything

The team

Organization Chart

MANAGEMENT

G-1

NEWGEN’s management team is made up of seasoned professionals who:

Have strong business skills and a demonstrated ability to achieve low costs.

Have strong professional skills and the specialized knowledge required tolaunch a new airline.

Understand the economics of the industry, the new-generation airline business model, and the reasons for the failure of the legacy carrier model.

Have up-to-date knowledge of the airline industry’s rapidly developing technology.

Know that this is a people business and that the company’s most important constituents, by far, are its employees.

Have the leadership skills necessary to inspire loyalty and motivate the team.

We know that the infrastructure, policies, and procedures that we establish at the company’s foundation will set the stage for its enduring success.

Management is everything. The team.

See page G-7, below, for an organization chart.

Key members of the team who have been identified to date are:

Kenneth D. Holliday, Chief Executive Officer

Mr. Holliday is a co-founder of NEWGEN.

Mr. Holliday is a veteran of the airline industry. Currently he is president of Avcon, Inc., an air transportation consulting firm that he founded. Avcon assists start-up airlines with fleet planning, aircraft acquisition, insurance, regulatory matters and sales & marketing.

Prior to forming Avcon, Mr. Holliday was the president of Transmeridian Airlines, currently one of the largest US charter airlines. Under his leadership, Transmeridian’s revenues grew from $26 million to over $70 million and the fleet increased from 3 aircraft to 12 Airbus A320s.

Previously, Mr. Holliday was president and CEO of Private Jet Expeditions also a large charter airline. At Private Jet he directed the transformation of a struggling airline with a single B 727 into a profitable carrier with a fleet of 15 MD-80s. During his tenure the company successfully implemented a new business plan, achieving profitability in only 12 months.

Mr. Holliday has also held key management positions with Aero Corporation, an aircraft maintenance facility and Connie Kalitta Flying Services. He was a line pilot for the original Braniff Airways and served as a pilot in the US Air Force. Mr. Holliday holds a BS in Industrial Management from Clemson University.

Mr. Holliday was recognized in 1993 by Inc. Magazine as a nominee for entrepreneur of the year in transportation.

Management

The North American industry has been overtaken by a group of new carriers who understand that earnings, rather than revenue, create investor wealth; that prices must be higher than costs; that consumers will go where they receive value; that cost structures must be flexible; and that employees must be rewarded for productivity, not years of service.

“The Economics of Restructuring Air Canada,” Strategic Analysis Corporation (Toronto, 4/25/03).

G-2(continues)

John A. MacLeod, II, Chief Performance Officer

Mr. MacLeod is a co-founder of NEWGEN and has personally underwritten the venture to date.

Mr. MacLeod’s areas of expertise include performance management, cost control, and general administration. In his role as NEWGEN’S Chief Performance Officer, Mr. MacLeod will focus on execution of the company’s strategy, through implementation of an integrated performance management and compensation process with accents on low costs, high reliability, and customer satisfaction. He will, in addition, manage the administrative functional groups. We believe the position of Chief Performance Officer is an industry first.

Management believes it essential to bring perspective from outside the industry to this key role. Prior to co-founding NEWGEN, Mr. MacLeod spent seven years in contract oversight, financial management and expense control at John Hancock Financial Services, a newly public mutual insurer ( a situation not too dissimilar to turning a legacy carrier into a low-cost carrier).

Prior to John Hancock, he held real estate finance positions with developers Trammel Crow Company and Commonwealth Associates, and ran wholesale/group distribution for sporting goods company TSI, Inc.

He has a BSE and BA from Duke University and an MBA in Finance from the Cox School of Business at Southern Methodist University.

Mark T. Anderson, Vice President Investor Relations

Mr. Anderson has served as a senior executive, Board Member and management advisor to both private and publicly held passenger and cargo aviation and airline companies. With a broad range of experience in operations, airline management, finance, private capital management and the equity markets, Mr. Anderson posses a management skill set that is invaluable to .

Most recently, Mr. Anderson successfully completed the acquisition of Alpine Air, Inc. by Alpine Air Express, Inc. with oversight of a successful securities registration and issuance of Alpine's shares to the public.

NEWGEN

As a consensus builder Mr. Anderson's guided International Technical Consultants, Inc., an aviation consulting and management firm in the on time and under budget FAA sanctioned inspection and recertification of jet engine and aircraft parts ultimately returning inventory to Fairchild Industries Dallas Aerospace Division valued at $130,000,000. While at ITC Mr. Anderson also successfully completed the acquisition and conversion of a Boeing 727-200 Advanced from passenger to a cargo configuration, including Stage III compliance modifications.

Mr. Anderson has worked closely with Mr. Holliday for more than a decade and together successfully completed the addition of MD-80 passenger operations at Eagle Airlines where Mr. Anderson served as an Executive Vice President and Member of the Board of Directors. With 20 years of valuable experience with airline regulatory matters, and aviation management Mr. Anderson brings a wealth of knowledge and a professional management style that has proven to be successful.

Mr. Anderson holds a Bachelor of Science in Economics and Finance from Brigham Young University where he continued graduate academic pursuits at the Marriott School of Management.

James M. Isaacson, Vice President Finance/Treasurer

Mr. Isaacson is currently chief financial officer for BBB Service Company, Inc., a $45 million revenue operator of 39 Wendy’s franchises.

But for his current job, Mr. Isaacson has worked exclusively in aviation finance. From 1996 to 2002 he was CFO for International Airline Support Group, a $35 million revenue parts distribution company traded on the AMEX.

In the mid 1990s he was director, corporate finance/assistant secretary with ValuJet Airlines. Previously, he had an eleven-year career in corporate finance at Delta Air Lines; his final position was manager, capital markets and analysis.

He holds a BA in Business Administration and Economics from Vanderbilt University.

Management

(continues)

The team (continued).

G-3

Ralph S. Nelson, General Counsel & VP Human Resources

Mr. Nelson has 27 years experience in the transportation industry. From 1996 he served as senior vice president, human resources and general counsel to Trism, Inc. a nationwide truckload motor carrier engaged in transporting over-dimensional and hazardous materials. In December of 2001, he was promoted to president of Trism with a mandate to sell the company’s assets and liquidate the business, a task nearly completed.

From 1985 to 1996 Mr. Nelson was involved in the start-up of Burlington Motor Carriers as general counsel and senior vice president human resources. Burlington became the fifth largest dry-van truckload motor carrier in the country. Previously he was senior corporate counsel to Burlington Northern Inc. and related entities.

Mr. Nelson served as a pilot in the US Marine Corps. He holds a law degree from Drake University and a BS in Business Administration from the University of Minnesota.

Matthew C. Holliday, Vice President Marketing/Planning

Mr. Holliday has worked in aviation marketing since 1991. He is skilled both in the details of market analysis and planning and in the hands-on work of product design, positioning, and sales. Presently he is the vice president, planning of Flightserv Inc., where his duties include route development, charter- and scheduled-airline pricing, contract negotiations, and execution. He also oversees the company's passenger reservation system.

Previously he was vice president of Roberts, Roach & Associates (now Unisys R A), a transportation and management consulting firm. At R A he was heavily 2 2

involved in market analysis and helped to develop the publication Unisys R A 2

Scorecard.

Mr. Holliday has also worked for World Technology Systems as director of product development, Eagle Airlines as manager of charter sales, and Private Jet Expeditions as market analyst.

Mr. Holliday holds a BA from the University of Georgia. He is the son of Kenneth D. Holliday, NEWGEN’s President/CEO.

C. Greer Parramore III, Vice President of Operations

Mr. Parramore is retired from Airtran Airways where he was a line captain with additional maintenance test program responsibilities.

Mr. Parramore has long experience working with Ken Holliday. He served as vice president of operations at both Transmeridian Airlines and Private Jet Expeditions, the same position he holds at NEWGEN. His responsibilities included oversight of all flight operations, stations, and flight crews. Previously he served as chief pilot at Connie Kalitta Flying Services and was a captain with Delta Air Lines. Mr. Parramore served as a pilot in the US Air Force and is a graduate of Georgia Military College.

Gregory A. Van Brunt, Vice President of Safety

Mr. Van Brunt has spent over 30 years in the aviation industry. He currently works with Spirit Airlines as vice president of system operations responsible for day-to-day operations of the airline. He has also held positions as vice president of maintenance control, vice president of flight operations, director of operations and chief pilot with Spirit.

Prior to working with Spirit Mr. Van Brunt held positions as aviation manager for The Singer Co., chief pilot and director of operations for Aircraft Trading Center, Inc. and chief pilot with S.B.A. Corporation.

Mr. Van Brunt holds a BS in aviation management from Southeastern State University (Oklahoma).

Salvatore A. D’Amico, Vice President of Maintenance

Mr. D’Amico has a 27-year career in aircraft maintenance. He currently serves as director/general manager, business aviation services for Bombardier, the Canadian manufacturer of business and regional jets. He has served in the maintenance

Management


G-4(continues)

organizations of a number of airlines: Transmeridian, Airtran/ValuJet, Nations Air, Continental, Emerald, Northeastern International, and American, among others.

He began his career in aircraft maintenance with the US Air Force, graduating with honors from its Technical School at Sheppard Air Force Base. He has continued his technical education with a variety of schools and manufacturer-sponsored courses.

Board of Directors

In addition to Messrs. Holliday and MacLeod, the Board of Directors will include a majority of outside directors, including representatives of early-stage investors.

Board of Advisors

We are establishing a Board of Advisors to be composed of individuals from aviation, government and politics, business, and the communities we serve to provide us with counsel in areas where our need for expertise goes beyond the range of our employee/management team. At present, membership includes:

Michael Roach

Mr. Roach is an aviation consultant doing business as R A Group and an associate 2

of Unisys/R A, transportation and management consultants. Mr. Roach is the 2

senior editor of Unisys R A Scorecard, a monthly publication about the airline 2

industry.

Mr. Roach was co-founder and first president of America West Airlines, the only US airline to have started operations in the early years of US deregulation that has survived to this day. America West is currently the eighth largest US passenger airline, measured by revenue. Prior to founding America West, Mr. Roach played a leading role in the struggle to bring about airline deregulation, working in the Executive Offices of both Presidents Ford and Carter. In addition, Mr. Roach has been a senior executive at Continental Airlines.

Mr. Roach’s experience and background in aviation covers the entire spectrum of the industry. He was retained by the office of Mexican President Zedillo and by Cintra (the government-controlled holding company that owns México’s principal airlines) to develop for México a national air transport competition policy and strategies for returning Aeromexico and Mexicana to the private sector. Mr. Roach has expertise in cost control, scheduling, pricing, operations, financial planning, marketing, regulatory affairs, management recruitment and corporate strategy. His list of clients is a “who’s who” of airlines, airports, financial institutions, and governments around the world.

Mr. Roach is a graduate of the law school of Harvard University.

John Coleman

John Coleman is widely recognized throughout the airline industry as a leading authority on all aspects of commercial aviation regulation. He retired from government in 2000, after 37 years at the US Department of Transportation and the Civil Aeronautics Board.

From 1985 Mr. Coleman was principal advisor to the Secretary of Transportation on domestic air transportation issues and at the DOT he was responsible for all economic regulatory oversight of the domestic airline industry, as well as analysis of international competition matters.

Mr. Coleman’s participation in, and influence on, airline deregulation initiatives, both before and after deregulation became law in 1978, are unsurpassed among aviation practitioners. During the mid-1970s he engineered a major initiative to remove regulatory constraints over charter airline service. As a key advisor to the five Civil Aeronautics Board members, headed by Dr. Alfred Kahn during the Carter administration, he was also influential in the formulation of CAB actions to open scheduled route entry to the maximum extent possible under then-existing laws. At the same time, he was a key advisor to Chairman Kahn and other Board members in their efforts to promote legislation, culminating in the historic enactment of the Airline Deregulation Act of 1978.

Mr. Coleman has received numerous awards. Foremost among them are the Civil

Management


G-5(continues)

Aeronautics Board’s Silver Medal in 1982 and the Department of Transportation's Gold Medal in 1988, the most prestigious awards given by the CAB and DOT, in recognition of his outstanding leadership and achievements.

Mr. Coleman is a graduate of Pennsylvania State University where he received a Bachelor’s Degree in Trade and Transportation. He has lectured widely, testified before congressional committees and subcommittees and state legislative bodies, and has been the Department of Transportation’s spokesman on many controversial issues.

Stephen Lachter

Stephen Lachter has specialized in national transportation policy and regulation for more than 25 years. After a 16 year public service career starting in 1969 with the Civil Aeronautics Board, and later in senior posts with the Departments of Justice and Transportation, Mr. Lachter entered private law practice. In June 1994 he established his own firm, now know as Lachter & Clements LLP.

Mr. Lachter has represented a broad range of aviation interests: domestic carriers, including US Airways, Frontier, DHL Airways, and Reno Air, foreign airlines, including Japan Airlines, Cargolux, and Luxair, airports and communities, including Hawaii, Puerto Rico and Reno/Tahoe, and corporations and trade associations.

Mr. Lachter has been personally involved in most major airline issues of the past two decades. He participated fully in the development of US international and domestic aviation policy, airport and capacity problems, labor relations, antitrust, and international legal issues.

A graduate of Georgetown Law Center and Syracuse University, Mr. Lachter was adjunct professor of law at American University Law School from 1983 to 1985. He has written numerous articles on aviation and antitrust issues

Management


G-6

NEWGEN Airlines – Our Management Team

Management

VP SafetyGregory A. Van Brunt

Security

VP OperationsC. Greer Parramore

Operations

Stations

Training

VP MaintenanceSalvatore D’Amico

Quality Control& Compliance

Maintenance

Purchasing

VPChief Performance Officer

John A. MacLeod II

ManagementReporting

BSC &Performance Design

Dir. of Info.Tech

VP Marketing/PlanningMatthew Holliday

Advertising& Public Relations

Schedules& Planning

Reservations

Administration

Financial Reporting& Control

A/P & A/R

VP Finance/TreasurerJames Isaacson

VP Investor RelationsMark T. Anderson

G-7

President & CEOKenneth D. Holliday

General Counsel and VPHuman Resources

Ralph S. Nelson

Payroll &Benefits

Recruiting& Culture

EmploymentRelations

Regulation

Risk Factors

THINGS YOU SHOULD KNOW

H-1

Like any business, NEWGEN will be subject to extensive federal, state, and local regulation and will be subject to a variety of fees, charges, and taxes imposed by governments and quasi-governmental agencies.

Like any business, NEWGEN’s ability to conduct profitable operations could be affected by many of these regulations as well as by the fees, charges, and taxes.

Regulations to which NEWGEN will be subject include, among many others, corporate and securities regulation, health and safety regulation, wage & hour and labor regulation, environmental regulation (e.g., aircraft noise and exhaust emissions), and antitrust regulation.

As an airline, NEWGEN will also be subject to a regulatory regime, largely federal, specific to the airline industry. The areas regulated include economic licensing, safety and operational licensing, and security. We discuss these below as well as the fees, charges, and taxes specific to the airline business to which NEWGEN will be subject.

Economic licensing

In order to engage in common carriage, an airline must obtain a Certificate of Public Convenience and Necessity from the US Department of Transportation (DOT).

The DOT’s review of our application will focus on the feasibility of NEWGEN’s plans and the fitness, compliance disposition, and citizenship of its management team. NEWGEN anticipates no difficulties in receiving DOT approval.

Safety and operational licensing

An airline must also obtain an Operating Certificate from the Federal Aviation Administration (FAA). A new airline cannot obtain this certificate until it has received a provisional grant of its DOT Certificate of Public Convenience and Necessity (see above).

NEWGEN’s management team has the experience and professionalism to run a safe and reliable airline. In addition, members of the team are experienced in dealing with all aspects of FAA regulation including the licensing of new airlines.

NEWGEN will begin the certification process, whether the buy or build scenario is ultimately selected, as soon as possible. We believe that the build scenario would

take approximately six to ten months; the buy scenario somewhat less. NEWGEN does not anticipate any unusual difficulty in obtaining the FAA certificate.

In addition to licensing airlines, the FAA engages in continual oversight of all aspects of airline operations. It has extensive regulatory power to assess fines and other punishments and to suspend, modify, or revoke an airline’s operating authority. In recent years, the FAA has focused additional attention on start-up carriers and monitors their growth carefully so as to insure their continuing fitness.

Security

Subsequent to the terrorist events of September 11, 2001, the federal government imposed new security regulations on the airline industry. In general these are now managed by the newly created Transportation Security Administration (TSA). Aviation security is nothing new, and the NEWGEN team includes individuals experienced in handling all aspects of airline security.

As a traveler, you are almost certainly familiar with the inconvenience and additional time imposed by these measures; they, along with the fear of terrorism, have depressed airline travel and are likely to continue to do so. The security measures also have substantial direct and indirect costs to airlines.

Things you should know –– Regulation

Regulation

H-2

All investments in start-up companies are risky and any investment in the airline business in its current state of chaos is highly risky. As we have attempted to show you throughout this document, however, investors should distinguish between investments in the legacy carriers and investments in new-generation airlines.

The success of an early-stage investment in NEWGEN will depend on:

The quality of the company’s strategy which, in turn, depends on management’s understanding of the current state of the US airline industry.

The quality of the management team, both as reflected in that strategy and in its ability to implement the company’s business plan.

Capitalization sufficient to carry the company through on-going phases of development and to present the company as a credible competitor with staying power.

Since this memorandum is not an offering document, it does not include the elaborate list of “risk factors” customarily appended to offering documents and prospectuses by securities lawyers. Nonetheless, we list below some of the factors that potential investors should carefully consider while contemplating an investment in NEWGEN.

Company Risk Factors.

NEWGEN is a start-up with no operating history.

There is no guarantee that the company will be able to complete the critical steps necessary in order to implement its business plan successfully. Major steps include:

Obtaining development stage and start-up financing and additional rounds of debt, lease, and equity financing to fund the company’s growth.

Obtaining and maintaining DOT and FAA licenses.

Obtaining access to the airports we wish to serve, including slots, gates, and other facilities.

Attracting and retaining qualified personnel and creating a corporate culture that enlists the employees in the company’s goals.

Securing aircraft, facilities, and other equipment on satisfactory terms.

Achieving safe, reliable, and on-time operations with an initially small aircraft fleet.

Successfully establishing and marketing our brand.

Competition.

One of the principal challenges faced by NEWGEN will be withstanding competition, including likely predatory competition, from legacy carriers and, perhaps, other new-generation airlines. Regardless of their financial condition, our competitors will all be far larger than NEWGEN and will have greater financial resources. Many of them have histories of predatory competition when faced with new-generation airlines and there is no legal protection from such conduct. Our success in competing with these carriers depends on the key factors outlined above: strategy, management, and capitalization.

Dependence on key personnel, one aircraft type.

Like every small company NEWGEN will initially be dependent on a handful of key individuals. In addition, we plan to operate a single aircraft type. This might make the company vulnerable to any problems associated with that type regardless of whether the problems involve NEWGEN.

Safety.

In the early stages of our operation, our success in the market place is more dependent on public perception of our safety and reliability than is the case with older, more established airlines.

Industry Risk Factors.

Additional Regulation, Re-regulation, or Financial Bailouts of the Legacy Carriers.

In management’s view, the single greatest risk to the success of a start-up is possible meddling by the federal government in the airline industry to protect the legacy

Things you should know –– Risk Factors

Risk Factors

H-3

(continues)

carriers in order to “stabilize” the industry. The behavior of Washington is entirely unpredictable and possible changes include more burdensome regulatory measures, the return of the industry to the sort of public-utility-like regulation that prevailed before airline deregulation in 1978, and the further financial bailout of our competitors.

Fees, charges, and taxes.

In recent years the federal government has imposed and sanctioned various fees that are assessed on a per passenger basis. These fees have a disproportionate impact on the final price to the customer of short haul air travel as compared with the price of longer flights. The fees have included passenger facility charges imposed by airports, a per segment fee as part of the federal excise tax on air travel, and some security charges. Continued imposition of fees and taxes could reduce the attractiveness of the value proposition offered by new-generation airlines operating in short haul markets and reduce, on a percentage basis, the price spread between traditional legacy carriers and new-generation airlines.

Other factors.

In addition, you should be aware of the following characteristics of the airline industry.

It is highly sensitive to business cycles, although we hasten to add that in management’s view the industry’s current woes are primarily the result of structural issues facing the legacy carriers.

It is highly sensitive to fuel prices which themselves are extremely volatile.

It is highly sensitive to safety and security issues, real and perceived.

It is characterized by high operating leverage in that, once a schedule is published, most costs are fixed so that increases/decreases in traffic or average prices have a disproportionate impact on profitability.

It is subject to many operational factors beyond the control of individual airlines. These include weather, air traffic control, and acts of terrorism.

In the current climate of threatened terrorism, the availability and cost of insurance has become more uncertain.

Things you should know –– Risk Factors

Risk Factors (continued).

H-4

FINANCIAL STATEMENTS AND PROJECTIONS

Statements of Earnings & Retained Earnings

Balance Sheets

Statements of Cash Flows

Statistical Summary

Initial Sources of Capital

Notes to the financial statements

These financial projections are based on the Build/New/Charlotte scenario. See The “NEWGEN Doctrine” - Rigid Strategy/Flexible Response, Page F-2.

The financial projections have been prepared by the company for informational purposes only. The information has been prepared to assist interested parties in making their own evaluation of the company and does not purport to be all-inclusive or to contain all of the information that a prospective investor might desire. In all cases, potential investors should conduct their own investigation and analysis of the company and the data set forth below. The only information that will have any legal effect will be that specifically represented in a definitive agreement between the company and an investor, and under no circumstances will such agreement contain representations with respect to financial projections.

The financial projections and assumptions contain forward looking assumptions that involve risks and uncertainties, such as certain plans, objectives, expectations, and intentions. The cautionary statements made in this document should be read as being applicable to all related forward looking information wherever they appear in this document. The actual results could differ materially from those discussed throughout this document.

The projected financial information is based upon certain assumptions and estimates of the company. The company has not commenced operations and therefore has no operating history to substantiate its assumptions. The company has developed its operating assumptions based upon available market data and the experience of other companies. There can be no assurances of the company's ability to generate results at market or achieve similar successes of other airlines used as the basis of the projections. Additionally, while the proposed financial projections assume a conservative capital structure, the particular timing of funding and ultimate structure may differ from the one proposed in the forecast. The company has assumed the financing of its aircraft with off-balance sheet leases. The ultimate type of financing may differ based upon a variety of market and company specific criteria.

FS-1


Statement of Earnings & Retained Earnings

Start-up Year 1 Year 2 Year 3 Year 4 Year 5

Revenue

Passenger Revenue -

199,853,444

428,867,004

639,583,350

849,854,015

1,063,386,439

Cargo Revenue -

1,998,550

4,370,270

6,615,404

8,851,597

Other Revenue -

5,995,651

13,110,810

19,846,212

26,554,791

Total Revenue -

207,847,646

446,348,084

666,044,967

885,260,403

1,107,737,599

Aircraft Rent 250,000$

34,500,000$

70,500,000$

106,500,000$

142,500,000$

$

Depreciation 1,451,250

2,902,500

4,353,750

5,805,000

5,805,000

Operating Expenses 8,735,450

146,952,351

262,679,387

386,834,931

504,957,427

Total Operating Expenses 10,436,700

184,354,851

337,533,137

499,139,931

653,262,427

Operating Income (10,436,700)

23,492,795

108,814,948

166,905,035

231,997,976

11.3% 24.4% 25.1% 26.2%

Other Income / (Expense)

Interest Income 2,626,667

2,719,529

1,697,533

1,261,094

3,140,012

Interest Expense -

-

-

-

-

Total Other Income / (Expense) 2,626,667

2,719,529

1,697,533

1,261,094

3,140,012

Income before Taxes (7,810,033)

26,212,324

110,512,481

168,166,129

235,137,988

Income Taxes (3,124,013)

10,484,930

44,204,992

67,266,452

94,055,195

Net Income (4,686,020)$

15,727,394$

66,307,489$

100,899,678$

141,082,793$

$

7.6% 14.9% 15.1% 15.9%

Retained Earnings, Beginning (1,500,000)

(31,186,020)

(40,458,626)

848,863

76,748,540

Accrued and Paid Preferred Dividends 25,000,000 25,000,000 25,000,000 25,000,000 25,000,000

Retained Earnings, Ending (31,186,020)$ (40,458,626)$ 848,863$ 76,748,540$ 192,831,333$ $

11,087,790

33,263,370

178,500,000

5,805,000

623,105,140

807,410,140

300,327,459

27.1%

6,670,232

-

6,670,232

306,997,691

122,799,076

184,198,614

16.6%

192,831,333

25,000,000

352,029,947

FS-2


Balance Sheet

FS-3

Initial First Flight Year 1 Year 2 Year 3 Year 4 Year 5

Assets

Current Assets

Cash & Cash Equivalents 98,500,000$ 67,988,217$ 42,438,330$ 31,527,353$ 78,500,289$ 166,755,790$ 298,127,533$

Accounts Receivable, net - - - - - - -

Inventory - 6,000,000 9,000,000 12,000,000 15,000,000 18,000,000 21,000,000

Prepaid Expenses - 9,348,000 19,296,000 37,992,000 56,688,000 75,384,000 94,080,000

Deferred Tax Benefit - 3,124,013 - - - - -

Deposits - 3,000,000 9,000,000 15,000,000 24,300,000 32,400,000 40,500,000

Total Current Assets 98,500,000 89,460,230 79,734,330 96,519,353 174,488,289 292,539,790 453,707,533

Property & Equipment

Property & Equipment, gross - 5,805,000 11,610,000 17,415,000 23,220,000 29,025,000 34,830,000

Less: Accumulated Depreciation - (1,451,250) (4,353,750) (8,707,500) (14,512,500) (20,317,500) (26,122,500)

Total Property & Equipment - 4,353,750 7,256,250 8,707,500 8,707,500 8,707,500 8,707,500

Total Assets 98,500,000$ 93,813,980$ 86,990,580$ 105,226,853$ 183,195,789$ 301,247,290$ 462,415,033$

Liabilities & Equity

Liabilities

Current Liabilities

Accounts Payable -$ -$ 2,449,206$ 4,377,990$ 6,447,249$ 8,415,957$ 10,385,086$

Accrued Dividends - 25,000,000 25,000,000 - - - -

Total Current Liabilities - 25,000,000 27,449,206 4,377,990 6,447,249 8,415,957 10,385,086

L-T Liabilities

Notes Payable - - - - - - -

Total L-T Liabilities - - - - - - -

Total Liabilities - 25,000,000 27,449,206 4,377,990 6,447,249 8,415,957 10,385,086

Equity

Common Stock - - - - - - -

Preferred Stock 100,000,000 100,000,000 100,000,000 100,000,000 100,000,000 100,000,000 100,000,000

Additional Paid-in Capital - - - - - - -

Retained Earnings (1,500,000) (31,186,020) (40,458,626) 848,863 76,748,540 192,831,333 352,029,947

Total Equity 98,500,000 68,813,980 59,541,374 100,848,863 176,748,540 292,831,333 452,029,947

Total Liabilities & Equity 98,500,000$ 93,813,980$ 86,990,580$ 105,226,853$ 183,195,789$ 301,247,290$ 462,415,033$


Statement of Cash Flows

FS-4

Beginning Start Up Year 1 Year 2 Year 3 Year 4 Year 5

Operating Activities

Net Income (Loss) (1,500,000)$ (4,686,020)$ 15,727,394$ 66,307,489$ 100,899,678$ 141,082,793$ 184,198,614$

Adjustments for non-operating items:

Depreciation & Amortization - 1,451,250 2,902,500 4,353,750 5,805,000 5,805,000 5,805,000

Accounts Receivable, net -

-

-

-

-

-

-

Inventory -

(6,000,000)

(3,000,000)

(3,000,000)

(3,000,000)

(3,000,000)

(3,000,000)

Prepaid Expenses -

(9,348,000)

(9,948,000)

(18,696,000)

(18,696,000)

(18,696,000)

(18,696,000)

Accounts payable -

-

2,449,206

1,928,784

2,069,259

1,968,708

1,969,129

Accrued Preferred Dividends -

25,000,000

-

(25,000,000)

-

-

-

Deferred Tax Benefit -

(3,124,013)

3,124,013

-

-

-

-

Deposits -

(3,000,000)

(6,000,000)

(6,000,000)

(9,300,000)

(8,100,000)

(8,100,000)

Net Cash Provided by (Used in) Oper. Activities (1,500,000)

293,217

5,255,114

19,894,022

77,777,937

119,060,501

162,176,743

Investing Activities

Additions to Property, Plant & Equipment -

(5,805,000)

(5,805,000)

(5,805,000)

(5,805,000)

(5,805,000)

(5,805,000)

Net Cash Used in Investing Activities -

(5,805,000)

(5,805,000)

(5,805,000)

(5,805,000)

(5,805,000)

(5,805,000)

Financing Activities

Common Stock -

-

-

-

-

-

-

Preferred Stock 100,000,000

-

-

-

-

-

-

Preferred Stock Dividend -

(25,000,000)

(25,000,000)

(25,000,000)

(25,000,000)

(25,000,000)

(25,000,000)

Net Cash Provided by Financing Activities 100,000,000

(25,000,000)

(25,000,000)

(25,000,000)

(25,000,000)

(25,000,000)

(25,000,000)

Increase (Decrease) in Cash 98,500,000

(30,511,783)

(25,549,886)

(10,910,978)

46,972,937

88,255,501

131,371,743

Cash, Beginning of Year -

98,500,000

67,988,217

42,438,330

31,527,353

78,500,289

166,755,790

Cash, End of Year 98,500,000$

67,988,217$

42,438,330$

31,527,353$

78,500,289$

166,755,790$

298,127,533$


Statistical Summary

FS-5

Year 1 Year 2 Year 3 Year 4 Year 5Revenue Passengers 2,968,143 6,490,499 9,824,855 13,145,933 16,467,011Revenue Passenger Miles (000) 1,253,793 2,741,695 4,150,183 5,553,061 6,955,940Available Seat Miles [ASM] (000) 1,697,507 3,468,818 5,240,129 7,011,441 8,782,752Load Factor 73.9% 79.0% 79.2% 79.2% 79.2%Break-even Load Factor (Op Income) 41.6% 41.2% 42.4% 42.5% 42.4%Break-even Load Factor (Net Income) 68.7% 69.7% 70.5% 70.5% 70.3%Aircraft Utilization (hours per day) 10:09 11:41 12:00 12:00 12:00Average Fare 67$ 66$ 65$ 65$ 65$ Yield per Passenger Mile (cents) 15.94¢ 15.64¢ 15.41¢ 15.30¢ 15.29¢Passenger Revenue per ASM (cents) 11.77¢ 12.36¢ 12.21¢ 12.12¢ 12.11¢Operating Revenue per ASM (cents) 12.24¢ 12.87¢ 12.71¢ 12.63¢ 12.61¢Operating Expense per ASM (cents) 10.69¢ 10.25¢ 10.33¢ 10.27¢ 10.23¢Departures 28,531 56,217 82,597 109,096 136,378Average Stage Length (miles) 423 440 453 459 460Average # of Operating Aircraft during Period 12 24 36 48 60Average Fuel Costs per Gallon (cents) 80¢ 80¢ 80¢ 80¢ 80¢Fuel Gallons Consumed (000) 22,812 46,097 69,040 92,008 115,179Percent of Sales through Company Website 34.4% 53.3% 68.9% 70.0% 70.0%


Initial Sources of Capital

Issuance of preferred stock $100,000,000

Closing fee @ 1.5% $1,500,000Placement fees $0Legal and other $0

Net proceeds $98,500,000

Fees and other expenses $1,500,000

FS-6

A. Start-up Phase ( Build / New / Charlotte scenario ).

The operations of the company are assumed to commence with the closing of the transaction. The initial flight of the company is scheduled eight months later. Under the buy scenario less time is required. During the start-up phase the primary objectives are to obtain regulatory approval from the DOT and FAA, assemble the management team, recruit and train qualified operating personnel, develop corporate systems and infrastructure, negotiate for and lease aircraft, acquire assets necessary to conduct operations, advertise for initial operations and prepare for the initial flight. Given the capital intensive nature of an airline, the regulatory financial suitability requirements, and expected competitive responses from legacy carriers, significant capital is necessary to sustain the start up phase.

The company initially intends to lease six aircraft with one held in reserve. While the ultimate decision on the type of aircraft to lease remains subject to negotiations with potential suppliers, the company has projected costs based upon the Boeing 737-700. As noted earlier, one of the key components of the business strategy is to operate a single class of aircraft. The selection of the aircraft will ultimately be determined based upon a variety of economic factors and market availability.

B. Revenues.

Revenues consist of passenger revenue, cargo revenue and other revenue. Passenger revenue was developed based upon certain selected origins and destinations. Passenger revenues were based upon an estimated fare structure based upon existing prices, available seats per plane, expected loaded factors, route length, number of aircraft and number of flights. The company utilized Southwest’s price per non-stop mile adjusted for trip lengths. The company has assumed that competitors in the target markets will match all of our proposed fares and maintain or increase capacity in those markets. Accordingly, the company has estimated its market share to remain relatively flat in those markets. The competition currently in existence in Charlotte is expected to operate at current frequency and service throughout the projected periods. No effects were given to any retrenchments by US Air.

The projections are based upon the addition of one plane per month after the

initial lease of six planes. The addition of airplanes will be dependent upon a variety of factors including approval from the FAA.

Cargo revenues exclude US mail, and were estimated at one percent of passenger revenues. Other revenues (liquor sales, excess baggage fees, etc.) were assumed to equal three percent of passenger revenues. These factors are consistent with the experience of other new-generation airlines.

Also see the statistical summary for more detailed revenue and operating assumptions.

C. Operating Expenses Excluding Aircraft Rent and Depreciation.

Operating expenses include such key items as labor, fuel, insurance, maintenance, operating taxes and selling, general and administrative costs. The aircraft operating costs were determined based upon the Southwest Boeing 737-700 costs per available seat miles as contained in publicly filed DOT data, adjusted for the company’s shorter length of haul. Additionally, the company excluded the cost of insurance of Southwest and inserted a much higher cost based upon preliminary market conditions.

Also see the statistical summary for more detailed revenue and operating assumptions.

D. Aircraft Rent.

The company has assumed that all of its planes are leased throughout the forecast period. The actual form of financing of the aircraft may vary depending upon a variety of factors which may include the cost of the aircraft, the effective cost of financing, security and collateral deposits and availability of alternative vendor finance programs.

The projections assume a monthly lease cost including maintenance reserves of $300,000 per plane. The lease assumption was based upon preliminary discussions with suppliers, lease finance companies and other potential financing sources.

E. Depreciation.

Depreciation expense primarily relates to property and equipment such as ground support equipment, information systems, computers, office equipment and


Notes to the financial statements

(continues)

FS-7

telephones. Depreciation was based upon an estimated four year life of the related asset, and that these assets were acquired with the use of the proceeds from the initial financing. The actual form of financing may differ depending upon the effective cost and availability.

F. Current Assets and Current Liabilities.

Inventory for aircraft parts was based upon the number of planes at $1 million per plane. Prepaid expenses primarily relate to advance premium payments necessary to secure the company’s insurance program including liability, cargo, hull and other necessary lines. The company assumed that advance deposits equal to three months of lease payments per plane were required to secure lease financing. The company assumed cash basis on collection of fares from customers. Trade accounts payable were estimated at 20% of operating expenses.

G. Capital Structure.

The company has simplified the capital structure to allow potential investors to evaluate the opportunity under a basic capital structure. Different forms of capital including debt and equity and the related mix thereof will ultimately be determined by the investors and availability of capital. The actual timing of the financing may differ depending upon the requirements of the investors. However, successful DOT and FAA approval and marketplace viability is dependent upon adequate capital to support the business plan.

The initial capital raised was assumed to be $100 million. Transaction expenses were estimated at 1.5%. The projections assume the issuance of cumulative preferred stock with coupon of 25%. Dividends were accrued and paid in those periods where cash availability was adequate for funding.


Notes to the financial statements (continued).

FS-8