Global Industry Overview

Slide 1

Global Industry Overview

Kye JohanningAir Line Pilots Association, Intl.Utrecht, Kingdom of the NetherlandsOctober 5, 20111Key PointsOctober 5, 2011ALPA - Economic & Financial Analysis21H 2011Industry impacted by natural disasters, political upheaval, an unstable economic environment and fuel price volatility2H 2011Increasing downside risks, but still a profitable year2012Profitable, but lower than 20112Global Economic OverviewALPA - Economic & Financial Analysis3Global Growth Moderately Revised, Increased Risks More ApparentWorld economic growth forecast revised to an estimated 4.0% in both 2011 and 2012Global activity has weakened and become more uneven, consumer confidence has fallen sharply, and downside risks are growingAssumptions to growth forecast depend on several factors:European policymakers will be able to contain the euro area crisis U.S. policymakers can strike a balance between support for the economy and medium-term fiscal consolidationVolatility in global financial markets stabilizesAdvanced economies facing anemic growth of only 1.6% in 2011Shocks including the earthquake and tsunami in Japan and social unrest in some oil-producing countries, major financial turbulence in the euro area, and sell-off of risky assets in global markets all contribute to lower estimate for advanced economiesEmerging economies projected to grow 6.4% growth in 2011Economic growth remains robust, but concerns over inflation and overheated economies October 5, 2011ALPA - Economic & Financial Analysis4Source: IMF, Wall Street Journal, The Economist, OECD, IATA4Global Economic Recovery Slowing; Downside Risks GrowingOctober 5, 2011ALPA - Economic & Financial Analysis5Real GDP Growth and Forecasts (as of September)Source: IMF World Economic Outlook Update (September 20, 2011)Note: (P) Projected200920102011P2012PWorld-0.7%5.1%4.0%4.0%Advanced Economies-3.7%3.1%1.6%1.9%Euro Area-4.3%1.8%1.6%1.1%Canada -2.8%3.2%2.1%1.9%United States-3.5%3.0%1.5%1.8%Japan-6.3%4.0%-0.5%2.3%Emerging & Developing Economies2.8%7.3%6.4%6.1%Emerging Asia7.2%9.5%8.2%8.0%Sub-Saharan Africa2.8%5.4%5.2%5.8%Commonwealth of Independent States -6.4%4.6%4.6%4.4%Middle East /North Africa2.6%4.4%4.0%3.6%Latin America-1.7%6.1%4.5%4.0%Central & Eastern Europe -3.6%4.5%4.3%2.7%5Global Composite Leading Indicators Signal Widespread Slowdown in 2011October 5, 2011ALPA - Economic & Financial Analysis6Source: OECDThese are composite leading indicators and 100 is the long-term trend for each individual area. Thus, 100 for Brazil is not the same as 100 for the U.S.

Therefore, the important thing here is the trend, not necessarily the actual number.6Current Airline Industry Trends & PerformanceALPA - Economic & Financial Analysis7Continued Passenger Demand Strength Buoys the IndustryBut How Long Will It Last?Strong passenger demand, driven by economic optimism earlier in the year, will push revenues up by 9% YOY to $594 billion

YTD capacity growth is outpacing demand a troubling signFrom January-July, total passenger traffic grew 6.4% and capacity grew 6.8% YOY, with international passenger traffic growing 7.8% and capacity growing 9.2%Meanwhile, from January-July, total cargo traffic grew 1.0% and capacity rose 5.6% YOY, with international cargo traffic growing 1.5% and capacity rising 7.3%Premium passenger traffic has increased 8.2% YOY, for January-JulyPremium & economy trends (after weakness at the end of 1Q and beginning of 2Q) rebounded to levels close to average growth trends for the past 20 years

Global airlines to post $6.9b in net profits for 2011, down from $15.8b in 2010 as a result of economic uncertainty and volatile fuelOctober 5, 2011ALPA - Economic & Financial Analysis8Source: IATA Financial Forecast (September 2011), Premium Traffic Monitor8Passenger Traffic Slows, But Remains Positive, While Cargo Traffic DeclinesOctober 5, 2011ALPA - Economic & Financial Analysis9World Traffic Growth, % Change YOYSource: IATA Monthly Traffic ReportsCargo traffic trends declined, due to the end of the restocking period and recent declines in world trade

9Premium Volumes & Revenues RecoverOctober 5, 2011ALPA - Economic & Financial Analysis10

Source: IATA Premium Traffic MonitorPremium Ticket Volume & Revenue GrowthPremium travel continues to rebound, but is still 6% below its pre-recession peak

10Global Passenger and Cargo Revenues Trends Shrink, But Remain in Positive TerritorySource: IATA Financial Forecast (September 2011)October 5, 2011ALPA - Economic & Financial Analysis11Breaks revenue improvement down between passenger and cargo11Premium Traffic Improving in Most Regions, But Still Below Pre-Recession Highs-9.1%10.2%8.8%15.4%10.8%3.3%12.4%Source: IATA Premium Traffic MonitorJan-July 2011 Intl Premium Traffic YOY % ChangeTotal Intl Premium Traffic: 8.2%4.2%9.3%14.7%7.6%-58.8%2.9%October 5, 2011ALPA - Economic & Financial Analysis1216.3%Premium travel is still 6% below its pre-recession peak, but economy travel is 6% above its previous high point. As of July, there was no sign yet of the deepening economic gloom discouraging air travel.122011 Expected to Yield Profitable Results, Despite Industry ChallengesDistribution Of Forecasted Global Net Profits of $6.9 Billion In 2011Africa to breakevenSource: IATA Financial Forecast (September 2011)North America$1.5 billionEurope$1.4 billionAsia-Pacific$2.5 billionMiddle East$0.8 billionLatin America$0.6 billionOctober 5, 2011ALPA - Economic & Financial Analysis13Industry ChallengesALPA - Economic & Financial Analysis14Economic Uncertainty Expected to Challenge Passenger Airlines in the Coming MonthsPassenger market is running on fumes of earlier economic optimism Strong passenger demand, driven by economic optimism from earlier this year, was met by increased capacity and intense aircraft utilizationPremium travel remains strong, most likely due to travel plans made earlier in the year as well as travel budgets being set

Fourth quarter and early 2012 may be the weakest timeWeakness in 2H11, but tighter supply/demand conditions will help offsetEconomic challenges may catch up to premium travel and cause a slowdown in 4Q11/1Q12Slippage in load factors expected in 2012, as traffic will struggle to match capacityHistorically, the industry has lost money when GDP dips to 2%October 5, 2011ALPA - Economic & Financial Analysis15Strong passenger demand, driven by economic optimism from earlier this year, was met by increased capacity and intense aircraft utilizationAfter shocks to demand, brought on by natural disasters and political turmoil, passenger load factors returned to 2010 highsThese trends have limited the impact of economic uncertainty on 2011s profitability, but will extend the period of weak profitability into 2012

Historically, the industry has lost money when GDP dips to 2%IATAs current GDP estimates (2.5% growth in 2011 and 2.4% in 2012), put the industry on edge any shock could potentially push the industry into the red

15Passenger Load Factors Rise to 2010 HighsOctober 5, 2011ALPA - Economic & Financial Analysis16Source: IATA Air Transport Market Analysis (July 2011)

Passenger Load Factor on Total MarketSeasonally AdjustedDespite an Increasingly Gloomy Economic Outlook, Air Travel Continued to Expand at a Pace Close to Trend in JulyOctober 5, 2011ALPA - Economic & Financial Analysis17Source: IATA Air Transport Market Analysis (July 2011)Total Passenger Growth by RegionPassenger traffic up 5.9% in July.

Strong domestic air travel in Brazil added to the leading international growth performance of airlines from Latin America in July. The total RPKs carried by these airlines rose 12.1% above a year earlier in July. However, weakness in Japan and sub-par growth in China offset strong Indian domestic growth and depressed the growth of total RPKs carried by airlines based in the Asia-Pacific region. North American airlines performance was also weakened by domestic markets, which represent two-thirds of total RPKs for these airlines. European airlines, with just 10% of their total RPKs coming from domestic markets, are benefiting from their stronger international performance.

17Cargo Already Experiencing the Weight of Economic ChallengesIndicators show economic uncertainty loomingInternational trade essentially stopped growing at the end of 2010Business confidence in manufacturing (a leading indicator for premium travel) has steadily declined and now shows signs that growth is expected to plateau

Air cargo seeing stagnation as a result of economic challengesRestocking cycle drove air cargos post-recession peak in May 2010Since the end of the restocking period, shippers have used more ground transportation causing a decline in air cargo demandCargo load factors are still reasonable by historic standards, but have fallen 4 to 5 percentage points since 2010Second leg of air cargo recovery is not expected until 2012Cargo represents about 12% of airline revenuesOctober 5, 2011ALPA - Economic & Financial Analysis18Cargo load factors are still reasonable by historic standards, but have fallen 4 to 5 percentage points since 2010Growing passenger capacity over 2011 came with increased belly space for cargo, which pushed cargo load factors downFalling load factors will weaken supply/demand conditions and unit revenues, making it more difficult to weather volatile fuel

18Cargo Load Factors Fall But Remain Historically RespectableOctober 5, 2011ALPA - Economic & Financial Analysis19

Freight Load Factor on Total MarketSeasonally AdjustedSource: IATA Air Transport Market Analysis (July 2011)Airlines from Most Regions Have Experienced Weak Air Freight Businesses So Far This YearOctober 5, 2011ALPA - Economic & Financial Analysis20Source: IATA Air Transport Market Analysis (July 2011)Total Freight Growth by RegionDuring the first seven months of 2011 only airlines in the Latin American and Middle East regions have seen volumes grow at a high single figure pace

20Volatile Fuel Still an Industry ChallengeEconomic uncertainty led to a decrease from jet fuels 2011 highsOn September 20, jet fuel prices ($123.73/bbl) decreased 12.7% from 2011s high on April 8 ($141.75/bbl)Increasing crack spreads have stopped jet fuel from falling as much a crude oilFrom January 1 to September 20, crack spreads increased about 2.5 timesFrom January 1 to September 20, NYMEX crude decreased 5.1% Brent has been more volatile due to North Sea supply and turmoil in MENAFrom January 1 to September 20, Brent increased 19.4%. But, as of September 20, Brent decreased 10.7% from 2011s highJapans nuclear outages, geopolitical threats, and absence of Libyan oil could pressure the current trend of falling crude and jet fuel prices2011 fuel costs to rise 27% YOY to $176b, about 30% of expensesFuel hedging expected to delay the benefits of falling fuel prices, as 2012 industry fuel costs are expected to grow 14% YOY

Source: IATA Airlines Financial Monitor, IATA Financial Forecast (September 2011), IATA Press Releases, EIA, NYMEXHowever, average jet fuel prices for September are still up about 42% YOYPrices have been volatile, swinging +/- 10% around the recent downward trend

21Fuel & Revenue To Grow In 2011 & 2012 But, Unlike 2010, Fuel Prices Will Grow FasterSeptember 15, 2010ALPA - Economic & Financial Analysis22Source: IATA Industry Financial Forecast (September 2011)+15%+11%+9%+27%+6%+14%(Numbers are year-over-year change)

In 2010, revenue up 15%, fuel up 11%In 2011, revenue up 9%, fuel up 27%In 2012, revenue up 6%, fuel up 14%

22From Jan. 1 to Sept. 20, Crude Oil Prices Fell 1.8%, While Jet Fuel Prices Rose 14.3%October 5, 2011ALPA - Economic & Financial Analysis23Source: EIA, NYMEXJet fuel on Sept. 20 at $2.95/gallon23Higher Crack Spreads Have Stopped Jet Fuel Prices from Falling as Fast as Crude OilOctober 5, 2011ALPA - Economic & Financial Analysis24Source: Calculations based on NYMEX Crude Oil, Gulf Coast Jet Fuel (EIA)From January 1 to September 20, crack spreads for Gulf Jet Fuel increased 84.7% and Gulf Jet Fuel prices increased 14.3%

24Regional FocusALPA - Economic & Financial Analysis25Gyrating Profit Forecasts Tell the Story of Uncertainty and ShocksALPA - Economic & Financial Analysis26Source: IATA, September 2011, CAPAOctober 5, 2011Can see how the 2011 forecast for industry has changed over time.

Global profit forecast has gone from $5.3 to $9.1 to $8.6 to $4.0 to $6.9

Biggest improvement from beginning of year is for Europe26European Trends Slightly Up, But Comparisons to a Difficult 2010 MisleadingEuropean airlines now forecast profits of $1.4 billion, up from $500m earlier this yearEuropean airlines doing better than expected in recent months, despite weakening economy and being the source of global economic problemsA weak Euro has stimulated more inbound travel and boosted exportsCurrent improvement is not considered sustainable and 2012 profits forecasted to drop to only $300mTraffic up compared to depressed 2010 levels, expect some slowdown in months aheadTraffic was up nearly 10% in the first five months, while capacity grew 10.9%Capacity cuts have been announced for Lufthansa and Air Berlin, while IAG is studying reductions for the winterAir France expects its long haul capacity to be slightly less this winter than originally planned

Source: AEA, IATA, Morgan Stanley, UBS, Wall Street Journal, Airline Business, ATW, Aviation Daily, ATI, BAA, ACIALPA - Economic & Financial Analysis27October 5, 2011Profits - 2012 profits at European airlines will also be impacted by the Emissions Trading Scheme (ETS) to be implemented in Jan 2012.

Traffic growth skewed by YOY comparison due to volcanic ash effects last year. Stripping out effects of volcanic ash, traffic growth is more realistically 6%

27North American 2011 Profitability Dependent on Interplay Between Fuel and CapacityNorth American airlines expect profits of $1.5 billion in 2011 and $1.2 billion in 2012 Renewed risks of recession as global economy softensRevenue levels will slow as output contractsRisks to profitability include rising fuel prices, capacity growth, and high unemployment ratesCapacity discipline will be vital to profitabilityThru July YTD, system passenger traffic was up 3.5% and capacity up 4.1%Revenue growth has subsided slightly in recent months, but the nine fare increases early in the year, coupled with a two week tax benefit (for most carriers), has helped offset the fuel increases earlier in the yearSeveral carriers have again cut capacity for the 4th quarter and into 1Q2012 due to softening economic situation

October 5, 2011ALPA - Economic & Financial Analysis28Sources: IATA, ATA, JP Morgan, UBS, Morgan Stanley, Bank of America, Barclays, CAPASofter revenue trends believed to be caused by weaker Consumer Confidence

Intl travel was up 6.0% thru July with an 8.6% capacity increase

28Asia Pacific Airlines Expected to Contribute 46% of the Total Industry ProfitsAsia Pacific airlines forecast $2.5b in profits for 2011, down from profits of $7.6b in 20102011 profitability to decrease due to higher fuel costs as well as inflation controlling measures in China which are owing trade and cargo demandDespite current challenges, optimism about future growth opportunities remains positiveGrowth to continue but seemingly at a slower paceThru July, passenger traffic was up 4.1% YOY, with capacity jumping 6.8%Thru July, air freight markets were down 3.5% YOY and remain about 10% lower than pre-recession levelsIndia's airlines reported continued strong domestic pax growth of 22.3% in Jul-2011, following on from an 18% expansion in 1H11While India is now the 9th largest and fastest growing domestic market in the world, its carriers struggle financially Sources: IATA, AAPA, Wall Street Journal, ATW, Airline Business, Reuters, AP, Air Transport Intelligence, International Business Times, Aviation Daily, BusinessWeek, Bloomberg Businessweek, CAPAOctober 5, 2011ALPA - Economic & Financial Analysis29Reasons for optimism - ambitious fleet expansion plans, as well as the establishment of intl partnerships and JVs

India - Since the start of the year, high fuel prices and fare discounting in the domestic market (led by Air India) have combined to weaken financial performance

29Latin America to Generate the Highest Profit Margin in 2011Latin American carriers to post $600m in profits in 2011 and $500m in 2012Net profit margin expected to be 3.5% in 2011, compared to 2.5% for globalDemand growth to continue in Latin America, driven by economic activity, income growth, and less exposure to volatilityDelta invests in Aeromexico $65m for Board seat and 3.5% stakeAeromexico and Delta will expand existing codeshares to include all trans-border flights as well as some additional domestic and intl flightsStrong domestic air travel in BrazilDomestic passenger traffic up 18% on 11% additional capacity thru JulyIntense competition led to a sharp drop in yields in 2Q2011 LAN/TAM merger Approval with conditionsOctober 5, 2011ALPA - Economic & Financial Analysis30Sources: ALTA, IATA Financial Forecast, CAPA, Bank of America, Airline BusinessFor LatAm market, thru July, traffic was up 5.3% YOY, on just 0.3% increase in capacity (figures are not adjusted for Mexicanas exit, which would put increases even higher); load factors have jumped 3.6 percentage points to 75.6%

Lan/Tam merger - 11 mitigation measures the TDLC is requiring include "exchanging four pairs of daily slots" at the Guarulhos intl airport in Sao Paulo, Brazil with other "airlines that are interested in starting or increasing regular air transport service on the Santiago-Sao Paulo route

30Mideast and African Markets to Grow in 2011, But Carriers Will Struggle With Unrest and CompetitionMiddle East forecasts holding steady, still expecting to post profits of $700m in 2011Traffic was up 8.3% thru July, while capacity was up 9.0%Traffic holding up better than expected in the aftermath of political unrestSome Middle East airlines will benefit from economic growth and a growing share in long-haul markets in 2011, while others are hurt by political unrestAfrican Airlines expect to breakeven in 2011Traffic levels were down during the summer, compared to a year-ago, when the World Cup boosted traffic resultsThru July, total passenger traffic was slightly down compared to last year, with capacity up 2.5%.International passenger traffic was up 1.0%, with a 4.7% increase in capacity.Real opportunity for African airlines to grow the intra-African market

October 5, 2011ALPA - Economic & Financial Analysis31Sources: IATA Financial Forecast, IATA Traffic Releases, Yahoo Finance, CAPA, Airline Business, Arab Air Carriers Association, Wall street JournalAfrica - Tourism and business traffic is down as foreign carriers have not brought back all their African capacity taken down during the conflict

31Global AlliancesALPA - Economic & Financial Analysis32Alliance Overview2011 marks the 14th year of major global airline alliancesAlliances comprise 63% of global airline traffic and roughly 55% of passengers travel on an alliance carrierStructure of alliances change as airlines move toward greater cooperationExpanding cooperation with ATIs and JVsAnti-trust immunity allows carriers to form joint ventures as well as coordinate schedules, pricing, yield management and other functionsJVs allow carriers to gain merger-like benefits while keeping separate operations: revenue/profit sharing and cost cutting measuresDue to ATIs and JVs, alliances become an alternative to cross-border mergersConsolidation trends impact alliance membership

October 5, 2011ALPA - Economic & Financial Analysis33Source: Star, SkyTeam, oneworld , UBS Global AviationATIs and JVs allow carriers to work around foreign ownership restrictions that hamper intl mergers

33Big 3 Alliances Continue to Expand MembershipStar AllianceoneworldSkyTeamAdria AirwaysAegean AirlinesAir CanadaAir ChinaAir New ZealandAll NipponAsiana AirlinesAustrian Air GroupBlue1BmiBrussels AirlinesContinentalCroatia AirlinesEgyptAirLOT PolishLufthansaScandinavianSingaporeSouth AfricanSpanairSwissTAMTAP Air PortugalThai AirwaysTurkishUnited AirwaysUS AirwaysEthiopian (2012)Avianca-TACA (2012)Copa (2012)Shenzhen (2012)Air India (suspended)American AirlinesBritish AirwaysCathay PacificClick MexicanaDragonairFinnairIberiaJapan AirlinesLAN AirlinesMalevMexicanaQantasRoyal JordanianS7 AirlinesAir Berlin (2012)Kingfisher Airlines (2012)Malaysia Airlines (2012)Aeroflot AeromexicoAir EuropaAir France/KLMAlitaliaChina AirlinesChina EasternChina SouthernCSA Czech AirlinesDeltaKenya AirwaysKorean AirTaromVietnam AirlinesAerolineas Argentinas (2012)Garuda Indonesia (2012)Saudi Arabian (2012) Middle East AirlinesNote: Green indicates airlines that are possible future members/members elect. Source: Airline Business, Aviation Daily, ATW, Air Transport Intelligence News, Star Alliance, oneworld, SkyTeamOctober 5, 2011ALPA - Economic & Financial Analysis34Unaligned News: Air India integration into Star suspended, now eyed by SkyTeam. Virgin Atlantic eyes alliance membership

34Alliance Financial SummaryAllianceRevenue ($M)Operating Profit ($M)Net Profit ($M)Star174,36810,1086,839SkyTeam112,0435,8083,839oneworld91,9335,5762,022October 5, 2011ALPA - Economic & Financial Analysis35*Financial detail does not include future membersSource: Airline Business (September 2011), Figures based on Airline Business World Airline RankingsAlliance Financials For Existing Members, 2010*Star operating margin = 5.8%; pre-tax margin = 3.9%

Sky operating margin = 5.2%; pre-tax margin = 3.4% (not updated for China Air would boost revenues to $116.4B)

One operating margin = 6.1%; pre-tax margin = 2.2%35Alliances Comprised About 63% of Global Traffic in 2010October 5, 2011ALPA - Economic & Financial Analysis362010 World Share of Passenger Traffic (RPKs)*Adjusted For Future Confirmed MembersSource: Airline Business (September 2011), Figures based on Airline Business World Airline Rankings36Aligned Carriers Accounted for 69% of Revenues in 2010October 5, 2011ALPA - Economic & Financial Analysis372010 World Share of Revenues*Adjusted For Future Confirmed MembersSource: Airline Business (September 2011), Figures based on Airline Business World Airline RankingsAlliances Carried About 55% of Global Passengers in 2010October 5, 2011ALPA - Economic & Financial Analysis382010 World Share of Passengers Carried*Adjusted For Future Confirmed MembersSource: Airline Business (September 2011), Figures based on Airline Business World Airline RankingsDifference between Sky and StarRPKs Sky behind by 4.5 pts.Rev Sky behind by 9.0 pts.Pax Sky behind by 0.7 pts.38

Alliances Continue to Focus on Gaining Market Share in White Spot AreasOctober 5, 2011ALPA - Economic & Financial Analysis39Alliance Current Capacity Market Share of Existing Members, By Route (Based on September 2011 data)Source: Airline Business (September 2011)Differences in 2011 (2010 in parenthesis):Europe-Asia Sky is behind Star by 14.4 pts. (17.2) and ahead of oneworld by 2.5 pts. (0.3)North America-Asia Sky is behind Star by 13.5 pts. (16.6) and behind oneworld by 1.6 pts. (3.0)Europe-North America Sky is behind Star by 13.8 pts. (12.8) and ahead of oneworld by 6.3 pts. (7.0)North America-Latin America Sky is behind oneworld by 17.3 pts. (25.4) and behind Star by 12.3 pts. (12.7)39Global Alliance Anti-Trust Immunities and Joint VenturesStar (Approved)SkyTeam (Approved)oneworld (Approved)Continental, United, BMI, Air Canada, Austrian, Lufthansa, LOT, SAS, Swiss, TAPAir France/KLM, Alitalia, CSA Czech Airlines, DeltaAmerican, British Airways, Finnair, Iberia, Royal JordanianTransatlantic JV:Air Canada, Lufthansa, United, Continental

*Trans-border JV: planned for United and Air Canada, but recently blocked by Canadian regulatorsTransatlantic JV:Air France, KLM, Delta and AlitaliaTransatlantic JV:American Airlines, British Airways and Iberia Trans-AtlanticStar (Approved)Delta-Virgin Blue (Approved)oneworldUnited, Continental, ANA create transpacific JVDelta and Virgin Blue Group, joint services between U.S. and AustraliaAmerican and JAL create transpacific JV (approved)*Air Canada aims to establish a JV with AsianaAmerican aims to create joint business agreement with Qantas (DOT hasnt ruled on it yet)Trans-Pacific October 5, 2011ALPA - Economic & Financial Analysis40Largest Unaligned CarriersCarrierMain BasesRPK (m)Revenue ($m)EmiratesUAE146,13414,807SouthwestUSA125,60412,104RyanairUK, Germany, Italy, Ireland, Spain83,7004,807EasyJetUK, Germany, Italy, Spain56,1284,632QatarQatar55,1395,381jetBlueUSA45,5113,779Air BerlinGermany45,2544,915Virgin AtlanticUK38,1584,171MalaysiaMalaysia37,8384,237Saudi ArabianSaudi Arabia34,0605,300EtihadUAE33,4002,951AlaskaUSA32,7503,832Hainan AirlinesChina32,1613,211GOLBrazil31,3673,972Jet AirwaysIndia26,9722,844Virgin AustraliaAustralia26,8952,625TransaeroRussia26,2931,999EVATaiwan23,6253,327October 5, 2011ALPA - Economic & Financial Analysis41Includes airlines that are future members of alliances, but are currently not in any alliance

Of the carriers listed here, Air Berlin and Malaysia are future oneworld; Saudi Arabian is future SkyTeam.41Air France-KLM & Delta Account for About 50% of SkyTeams RevenuesOctober 5, 2011ALPA - Economic & Financial Analysis42Source: Airline Business (September 2011), Figures based on Airline Business World Airline RankingsIndustry OutlookALPA - Economic & Financial Analysis4343 Cautious in the Short-Term, Growth Expected in the Long-TermVolatile fuel costs, political upheaval in the Middle East and North Africa, and unresolved government debt in many industrialized economies create risk of a renewed downturn

Although global airline profitability is expected to decline from last years record levels, its expected to still remain positive

Airlines will need to maintain a close vigilance on capacity, by being able to quickly react to short-term shocks to the industry

Source: IATA, analyst reportsOctober 5, 2011ALPA - Economic & Financial Analysis44Industry Challenges Over the Last DecadeProfitabilityProfitabilityLimited Windows of Industry ProfitabilityWeaker ProfitabilityOctober 5, 2011ALPA - Economic & Financial Analysis4545Industry Expected To See Profits In 2011 and 2012 October 5, 2011ALPA - Economic & Financial Analysis46Global Industry Net Profits (Losses)2000 Actual 2012 ForecastSource: IATA Financial Forecast (September 2011)46But Regions Will See Varying Degrees of ProfitabilityOctober 5, 2011ALPA - Economic & Financial Analysis47Source: IATA Financial Forecast (September 2011)Capacity Is Re-entering the Market and Is Forecasted to Outpace Demand in 2011October 5, 2011ALPA - Economic & Financial Analysis48Source: IATA Financial Forecast (September 2011)Increasing fuel prices have already caused some airlines to decrease capacity plans in 2H11 continued pressure from volatile fuel could lead to additional capacity discipline48Despite Current Caution, Long Term Growth Expected in the Global Airline IndustryNew business models and rapid growth in emerging markets should contribute to continued expansion in the global industry3.3% worldwide GDP growth expected for the next 20 yearsWorldwide passenger traffic expected to grow 5.1% annually, with cargo traffic expected to grow 5.6% annuallyOver the next 20 years, 78% of demand for new airplanes will come from outside North America, with about 34% of deliveries going to the Asia Pacific regionFastest growing market will be for twin-aisle airplanesThe single-aisle fleet is forecast to more than double and will be 70% of the total fleet by 2030Growth in air cargo will retreat toward the long-term trend in 2011

October 5, 2011ALPA - Economic & Financial Analysis49Source: 2011 Boeing Market ForecastSingle-aisle fleet growth will be 70% of total fleet by 2030 (is about 62% of total fleet currently); largely reflecting the rapid expansion of air services in Asia, the rise of intraregional air travel in emerging economies, and the growth and geographic expansion of the low-cost-carrier model

Cargo growth will revert back to the long-term trend rates, as moderating economic growth, rising fuel prices and supply chain disruptions from the Japan earthquake work affect the industry

49Forecasted Annual Traffic Growth Rates From 2011-2030 For Passenger & CargoOctober 5, 2011ALPA - Economic & Financial Analysis50

Asia PacificPassengerCargo6.7%6.3%Russia & Central AsiaPassengerCargo4.3%5.4%EuropePassengerCargo4.3%4.7%Middle EastPassengerCargo6.6%6.2%AfricaPassengerCargo5.1%5.2%Source: Boeing Current Market Outlook (2011-2030) , 2011North AmericaPassengerCargo2.9%4.8%Latin AmericaPassengerCargo6.9%6.1%WorldPassengerCargo5.1%5.6%Growth rates are slightly lower than they were in Boeings 2010-2029 outlook50Expanding Global Fleet Could Lead to a Pilot Shortage Difficult to SubstantiatePilot Hiring for 2011-2030Needed for Fleet Growth and RetirementsSource: 2011 Boeing Market Forecast,460,000PilotsOctober 5, 2011ALPA - Economic & Financial Analysis51Total PilotsAre Airlines Better Able to Deal with Challenges in this Decade?Seems like some lessons have been adoptedRestructuring has taken place at many mature airlinesEngaging in more strategic fuel hedging strategies Managing cash better, resulting in stronger liquidity balancesTaking a more conservative approach to capacity growthFocusing more on alliances, anti-trust immunity, joint ventures, and, where possible, consolidationFare competition has diminished What about management??? Professional managers????A wide disparity among global carriers exists:Mature markets of Europe and North AmericaDeveloping industry of the Middle East and AsiaStill focusing more on short-term outlook and cost controls

October 5, 2011ALPA - Economic & Financial Analysis52Are Pilot Groups Better Able to Deal with Challenges in this Decade?We would hope so but we need to do moreChallenges to industry and profession will continueSome are challenges that we can deal with in partnership with managementsOthers we have to tackle on our ownNeed to continue to be proactiveStrategic planning is essentialNeed to focus beyond just the CLAStay informed on industry and company trendsWork together to deal with the many challenges to our profession FAAC and IATA Vision 2050Need to take a long-term view and stay unifiedNeed to recognize that you are not competitors and thus, by working together, become true advocates of the pilot professionOctober 5, 2011ALPA - Economic & Financial Analysis53IATA put together a group of industry leaders to focus on the industry in 2050 and their report lacked mention of two significant things: safety and labor. We have to make ourselves relevant in the world arena.

Future of Aviation Advisory Committee U.S. committee on aviation it was hard to get labor issues heard and appreciated.53QuestionsALPA - Economic & Financial Analysis54