Where Are We Going From Here Presentation to Small Airports Conference, Victoria BC

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Where Are We Going From Here?Presentation to
Small Airports Conference, Victoria BC

• Mike TrethewayVice President Chief
  EconomistInterVISTAS Consulting Inc.

6 April 2004
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Industry Pressures for Change

• Low Cost Carriers
• have irrevocably undermined the revenue base of
  legacy air carriers
• Regional Jets
• have expanded market reachopened secondary
  routesbut also expanded hubs
• 100 seat RJs will now appear at low cost
  carriersputting new pressures on legacy carriers
• Will complicate the air space

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Industry Pressures for Change

• Full Service Carriers
• have irrevocably suffered yield loss
• will be forced into a smaller market share
• will face competition in thinner markets thought
  to be safe
• one time cost reductions do not make them
  competitive with LCCs
• are being forced backward up the unit cost curve

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Low Cost Carriers
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LCCs Today A Global Phenomena
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Sustained Rapid LCC Growth
Note Other U.S. Major air carriers include
American Airlines, Continental Airlines, Delta
Airlines, Northwest Airlines, United Airlines and
U.S. Airways.
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Sustained Rapid LCC Growth
Note AEA (Association of European Airlines)
include the following airlines Adria Airways,
Aer Lingus, Air France, Air Malta, Icelandair,
Jugoslav Airlines, KLM, Lufthansa, Luxair, Malev
Hungarian Airlines, Olympic Airways, Sabena, SAS,
Spanair, Swissair, TAP Air Portugal, Tarom -
Romanian Air Trans and Turkish Airlines.
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88 cities133 non-stop routes
Irish ownedRyanair has been accepted byNorway
fordesignationfrom UK
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Contrast in Financial PerformanceNet Profit as
of Revenue1993-2001

• Average Min (93-00)
• SW 8.9 6.1
• NW 2.4 -4.4
• AA 1.9 -9.5
• DL 1.9 -8.4
• UA 1.1 -13.1
• CO 0.0 -17.1
• US -2.2 -24.1

LCClow cost carrier
FSNCFull Service Network Carrier
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Ryanair
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WestJet
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Southwest Airlines
10 point gap until 2001
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JetBlue Airways
8 point gap
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Future Growth

• Fleet expansion plans
• firm orders options
• Southwest 430
• JetBlue 361
• EasyJet 240
• Ryanair 150
• Air Tran 110
• WestJet 94
• Virgin Blue 50
• 1435

Some aircraft have been delivered
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Future Share of LCCs

• US currently
• 24 of dom. passengers carried by LCCs
• These carriers will grow
• to 35-40 in 3-5 years
• 50 within 10 years
• an inevitable consequence of their
• growth
• aircraft on order
• financial strength

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Regional Jets
Front and Rear Doors !
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Conventional Wisdom

• LCCs focus on only one aircraft type
• Regional Jet seat costs too high for LCC
  operation
• Regional routes are safe for FSNCs

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Where we are going

• New 90-100 seat RJs have attractive economics for
  LCCs
• CRJ-900
• ERJ 190
• LCCs will deploy 500-1000 100 seat RJs

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Small Jet Choices for LCCs
Existing LCCs
LCC RJs
Current RJs(55 seats)
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LCC Economics of RJs

• New RJs have lower seat costs
• attractive vs narrowbodies

A-320
ERJ-900
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LCC Economics of RJs

• ERJ-190, CRJ-900 can be operated by LCCs in
  markets 30 smaller than 737/A320
• ERJ-190 capable of rapid turn
• Smaller markets will support a yield premium for
  LCC
• at least 650 small markets in U.S. are now
  viable for LCC service

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Full Service Network Carriers
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Network CarriersAs FSNCs lose market share,
they are moving Backward, UP the Unit Cost Curve
traffic
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Changes Needed to the FSNC

• Will need to reduce costsand redefine service
• labour and supplier cost reductions
• Wages and productivity
• but 25 cost reduction will still leave LCCs with
  25 cost advantage
• But, they are not achieving these cost reductions

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US Carrier Cost Changes, 2003
Change in cost per ASK
Source Airline Business March 2004
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The FSNC Business Model

• An amazing product
• high connectivity and convenience
• built a global industry
• facilitated economic growth
• But
• the business model is no longer viable
• substantive and continuing change is required
• cost reduction
• service definition
• marketing its value added features

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Changes Needed to the FSNC

• Focus on markets LCCs will not serve
• international
• thin markets
• feed smaller hubs from more modest sized cities
  that the low fare carriers may choose not to
  serve Jon Ash GA2
• connecting serviceswhere high frequency through
  hub is passenger choice
• convert all other markets to true LCC

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Changes Needed to the FSNC

• FSNC market share will be reduced
• consolidation will be necessaryif rising unit
  cost is to be avoided
• outside of USconsolidation will need to cross
  borders

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Government Policy is Obstacle

• Antiquated merger assessment fails to see the
  changes taking place in this industry
• attempts to preserve the status quo will only
  make the FSNC problem worse

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Government Policy is Obstacle

• Foreign ownership policies are obstacles to
  rationalization
• All that is important is that the carrier is
  based in home country, with home country employee
  base, home country registered and regulated
  aircraft etc.
• Right of Establishment is NOT
• cabotage
• flag of convenience
• It is a home country staffed and regulated
  airline

IATAForeign Ownership laws are an impediment
to restructuring the airline industry
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International Precedents

• European Union
• No foreign ownership restrictions among the
  nations of the EU
• a few outside EU provisions as well
• Result several successful airlines with
  extensive operations out of countries which are
  not their their home base
• profitable

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Are Ownership Rules Obsolete

• Yes
• they reduce access to equity capital
• and do not support job generation
• they constrain the return to home country
  investors
• they are an entry barrier when all other
  regulatory entry barriers have been removed
• they are an impediment to needed consolidation
  and rationalization in the Full Service segment
  of the industry

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Where Are We Going?

• Larger LCCs, with 35-50 market share
• will deploy 100 seat RJs
• FSNCs will be forced to smaller market share
• government policy needed to facilitate
  consolidation
• FSNCs are only at the beginning of the
  restructuring process
• lower cost, redefined services, more focus on
  selling network value added

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Thank You !www.InterVISTAS.com