1 air line pilots association, international overview of the global alliance trends cape town, south...

Air Line Pilots Association,

International 1

Overview of the Global Alliance Overview of the Global Alliance TrendsTrends

Cape Town, South AfricaApril 2005


International 2

Global economy saw robust expansion in the past year Estimate is that global economy grew 5% in 2004 and the forecast for 2005 is for

4.3% Inflation appears to be a growing concern for some countries

China takes measures to slow down growth for fear of inflation Despite multiple U.S. Fed lending rate increases, inflation still seen as a threat Energy cost increases are a continuing concern

Impacting consumer confidence Unemployment still remains a concern in many parts of the world Geo-political environment still a threat to global growth

Terrorist act or significant military action would negatively impact current positive trend in growth

Significant halt in oil production could ultimately increase fuel cost to $80/bl

Global Economy Saw Global Economy Saw Growth in 2004 Growth in 2004


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Source: IMF (September 2004)

Real GDP Growth and Forecasts

2002 2003 2004F 2005F

World 1.9% 4.5% 5.0% 4.3%

United States 1.9% 3.0% 4.3% 3.5%

Japan -0.3% 2.5% 4.4% 2.3%

Euro Area 0.8% 0.5% 2.2% 2.2%

Latin America -0.1% 1.8% 4.6% 3.6%

Emerging Asia 6.4% 7.2% 7.3% 6.5%

Economic Expansion Seen in All RegionsEconomic Expansion Seen in All Regions


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Global Industry Global Industry


International 5

Global Airline Industry Global Airline Industry

International traffic for 2004 surpassed 2000 levels Likely to record a 5% increase for the year

2004 ended on a more positive note Traffic has surpassed levels seen in 2001 but pressure on yields have resulted in

challenging revenue environment Asia & Europe show positive results

U.S. losses continue to absorb industry profitability Major swing element is price of fuel now hovering around $55/bl

China’s increased demand for fuel calls for greater production capacity OPEC target price and production policy unclear Cold winter in America puts pressure on supplies and prices

Other significant challenges remain – the unforeseen events Geopolitical concerns (instability of various nations and terrorism threats) Continuous warnings of an Asian flu at a pandemic level threat


International 6

Global Aviation OutlookGlobal Aviation Outlook

IATA I worldwide traffic in 2004 increased 15.3% Not optimistic on profits for 2005

Any anticipated earnings to be wiped out by high fuel costs International traffic forecast to grow 7.2% in 2005 and 6.0% in 2006

Skies to become more congested Recovery in Europe and the US will not be as robust as the rest of the

world Near-breakeven results elevated by the strongly profitable low-cost

carrier segment European industry to continue consolidation LCCs are moving into Asia-Pacific but increased demand can

withstand the near term capacity growth


International 7

Global AlliancesGlobal Alliances


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Airlines Continue to Focus on Airlines Continue to Focus on What Alliances can Provide What Alliances can Provide

Given state of the industry, airlines first priority is their own operations Alliance can enhance operations through revenue and cost sharing

Depressed revenue environment forces management to consider all available sources of revenue

LCC’s driving down yields with increased capacity and low fares Cost savings and enhanced revenues have become the main objective of

alliance members Alliances considered to provide cost-saving benefits of a merger without

the risks and regulatory hurdles Network expansion opportunities are explored

The many partnership changes show how partners are thinking Alliances aim for growth regions in China, Russia and India

Management s believe that passenger loyalty toward alliance will help preserve market share Enhanced by alliance expansion Remains to be seen as passengers’ loyalty seems to gravitate to lowest fares


International 9

Dependence on Global Alliances Continues As Dependence on Global Alliances Continues As Membership Seek New Revenue OpportunitiesMembership Seek New Revenue Opportunities

2003 World Share of Scheduled Traffic2003 World Share of Scheduled Traffic

21.9%

15.4%

19.1%

43.6%

Source: Airline Business, July 2004

Oneworld

Star Alliance

SkyTeam

Unaligned

Increased since last Increased since last year due to tremendous year due to tremendous traffic growth in Asia-traffic growth in Asia-Pacific & Middle East Pacific & Middle East marketsmarkets

Alliances battle to gain members in Asia-Pacific and Middle East as Alliances battle to gain members in Asia-Pacific and Middle East as traffic in those regions are growing faster than anyplace else and traffic in those regions are growing faster than anyplace else and almost all carriers are not formally attached to a specific alliancealmost all carriers are not formally attached to a specific alliance

Unaligned shareUnaligned sharewas 28.5% last yearwas 28.5% last year


International 10

Today's Major Global Systems MembersToday's Major Global Systems Members

… And then there were three


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Alliance MembersAlliance Members

Adria AirwaysAir Canada

Air New ZealandAll Nippon

AsianaAustrian Air Group

Blue1bmi british midland

CroatiaLOT PolishLufthansa

oneworldAer Lingus

American Airlines

British Airways

Cathay Pacific

Finnair

Iberia

LAN Chile

Qantas

SkyTeamAeroMexico

Air France

Alitalia

Continental

CSA Czech

Delta Air Lines

Korean Air Lines

KLM

Northwest

Malev

Aeroflot

China Southern

Air Europa

SAS

Singapore Airlines

Spanair

TAP Air Portugal

Thai Airways

United Airlines

US Airways

Varig

South African

Air China

Star Alliance


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Star AllianceStar Alliance

Includes South African Airways

Source: OAG data February 2005


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oneoneworldworld Alliance Alliance

Source: OAG data February 2005


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SkyTeam Alliance SkyTeam Alliance

Source: OAG data, February 2005Includes prospective members: Aeroflot, Malev, China Southern


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Alliance UpdateAlliance Update


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SkyTeam boosted to a close second vs. Star Alliance The smallest of the 3 alliances in 2002, now it’s competing for top spot KLM, Northwest and Continental became members in September

Make up 43% of 2003 alliance RPKs Closest to enlisting a Chinese partner

China Southern, China’s largest airline, has signed membership agreement

Breaking into Russia Aeroflot, country’s biggest international and domestic carrier signs

MOU Malev and Air Europa seeking associate membership

Members expecting delivery of more than 160 aircraft over next 5 years Airlines which have orders and will accept aircraft are AeroMexico, Air

France, Continental, CSA Czech, KLM, Korean Air and Northwest

SkyTeam Experiences Strong GrowthSkyTeam Experiences Strong Growth


International 17

SkyTeam is Looking for Group BenefitsSkyTeam is Looking for Group Benefits

Purchasing power of large group used to negotiate with suppliers at SkyTeam airports in Latin America AeroMexico, Delta, Air France and Alitalia worked together to negotiate

ground handling contracts at five airports resulting in a 40% overall cost reduction

Secured more competitive rates for fuel SkyTeam has expressed interest in other joint initiatives and has not

ruled out coordinated purchasing Interline ticketing across all carriers to be implemented by end of 2005 Alliance has developed transatlantic network revenue-sharing program

Estimates a revenue increase of $100M for first year members


International 18

Star Alliance Remains Largest Alliance Star Alliance Remains Largest Alliance

Star Alliance edges out SkyTeam as largest alliance in 2003 Portugal’s leading airline, TAP Air Portugal, joins alliance Network grows as Star begins adding regional airlines

Blue1, Croatia Airlines and Adria Airways Future members

Swiss to join as a result of merger with Lufthansa South African Airways to become member in 2005 Air China membership is also expected in 2005

Regions targeted for additional alliance growth include China, Middle East and Eastern Europe High growth areas to provide benefits to alliance


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Star Members Capitalize Star Members Capitalize on Alliance for Cost Savingson Alliance for Cost Savings

Star Alliance to establish mini-hub at Paris CDG Will allow all Star Alliance members to be located in Terminal 1 Effort designed to offer an alternative to SkyTeam hub at CDG

Technology cost structure is focus Aman Khan appointed VP of Information Technology Launched global interline e-ticket product in December

Roll-out to be completed by August 2005 Star Alliance increases initiative to create joint commercial ventures

Decided to move ahead with a complete analysis and comparison of the B787 and the A350 for alliance members

Several airlines may delay potential orders while waiting for study results Formally established a joint company in 2004 to buy jet fuel more cheaply

Signed 5 year corporate agreement with Chevron USA to improve travel management and substantially reduce its annual travel bill

Expanding on current ad-hoc practices of joint purchases at various airports


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Oneworld Expected to Expand as wellOneworld Expected to Expand as well Oneworld looking for partners offering expansion opportunities

Finds prospective Mexican partner, Mexicana Continues to woo Japan Air Lines

Launches website for its Japanese customers Looks for a potential China airline partner Will not rule out the addition of a low cost carrier

Route network grew 5% in 2004 Aggressively targeting French business travel market for growth

Offering Alliance fares with greater flexibility and schedule options Alliance revenues rise by a third in 2004 to $600M

Amost two-thirds considered incremental revenue-money that would not have been earned had it not been for oneworld

The only alliance whose members earned a combined profit in 2004 Oneworld: $1.5B profit Star: $2.2B loss SkyTeam: $7B loss


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Oneworld Also Seeking Joint Purchasing Oneworld Also Seeking Joint Purchasing and IT Efficienciesand IT Efficiencies

Iberia President and Executive Chairman Fernando Conte appointed to serve as Chairman of oneworld Governing Board

First alliance to complete roll-out of interline electronic ticketing across entire network

Could potentially cut costs $60m annually Carriers are aligning their “policies and processes” to promote

cooperation and the ability to share best practices Develop common specifications for engineering and maintenance

activities Reduced costs to be recognized through plans for centralized purchasing

Joint aircraft purchasing Cooperation with spare parts storage

Partners have saved $300M through joint purchasing during the first three years of cooperation


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Even Smaller Carriers and LCC’s are Forming Even Smaller Carriers and LCC’s are Forming AlliancesAlliances

“Starlet Alliance” includes LCC’s owned by Star Alliance Partners Centralwings – LOT Polish bmibaby - bmi Germanwings – Eurowings, 49% owned by Lufthansa

Agreements include sales and marketing cooperation Germania Express (Gexx) and Deutche BA plan to merge

Will create the 3rd largest airline carrier in Germany Specifics of the deal are not available

Air Wales marketing agreement allows it to operate flights under bmibaby’s code


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There are Two Significant Cargo AlliancesThere are Two Significant Cargo Alliances

Sky Team Cargo AllianceAeroMexicoAir France

AlitaliaCSA

Delta Air LogisticsKorean Air

WOW

Lufthansa

Japan Airlines

Singapore Airlines

SAS


International 24

Cargo Carriers Look for Benefits in Cargo Carriers Look for Benefits in AlliancesAlliances

SkyTeam Cargo offers the largest global cargo network Carried 21.1B freight ton kilometers throughout the world in 2003 Efficiencies offered by the alliance include

• Efficient regional trucking network in U.S., Europe, and Asia• 72% of freight through common SkyTeam cities are processed through

integrated warehouse operations or by common ground handlers Enhances the convenience, reliability and benefits for customers

WOW provides service by the largest airfreight carriers Carried 19.3B freight ton kilometers in 2003

Alliances would benefit from a “storefront” concept vs. current situation Right now customers must deal with individual carriers for service SkyTeam Cargo currently working toward this strategy

Debate on need to join into an alliance relationships Currently the alliances have not impacted market share positively

• No real perceived benefits American Airlines places no value on them as it can form side relationships

with alliance members as well as other airlines


International 25

Alliances’ Key Focus Alliances’ Key Focus Will Be Cost ManagementWill Be Cost Management

Airlines will continue to rely on alliances Airlines will continue to seek alignment with strong partners while

concentrating on regional coverage – emphasis on Asia and the Middle East Focus on cost containment and revenue enhancement Alliance activity picking up strength as carriers strive to provide regional

diversity and seek cost efficiencies Continued effort to encourage unaligned carriers to join, particularly in

Asia SkyTeam opting for a second tier membership to maintain the current

information management structure Star incorporating regional airline partners

Financial instability may continue to result in re-alignments/defections/mergers

Alliance oversight structures becoming somewhat becoming formalized but no real effort being seen in that direction Structure is needed to oversee revenue enhancement and cost containment

efficiencies Managements still unwilling to concede decision-making


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Global Alliance ConcernsGlobal Alliance Concerns

Airline managements beginning to focus more on what alliances can provide: Revenue enhancement Cost efficiencies Network expansion

More aggressive pursuit of non-aligned members, particularly in Asia and Middle East

Organizational structures mostly in place Will facilitate implementation of various programs First step towards centralization – another word for consolidation?

Industry stabilization will require: Stabilized fuel costs Decreased capacity to counter continuing yield decline Consolidation

Alliances going forward will be focusing on achieving some form of consolidation Regulatory limits Financial constraints Labor laws

We need to focus on how these changes will affect all our pilot groups


International 27

QuestionsQuestions

1 air line pilots association, international overview of the global alliance trends cape town, south...

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