Cape Town, South Africa

1
Overview of the Global Alliance Trends

• Cape Town, South Africa
• April 2005

2
Global Economy Saw Growth in 2004

• 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

3
Economic Expansion Seen in All Regions
Real GDP Growth and Forecasts
Source IMF (September 2004)
4
Global Industry
5
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
• Chinas 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

6
Global 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

7
Global Alliances
8
Airlines Continue to Focus on 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
• LCCs 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

9
Dependence on Global Alliances Continues As
Membership Seek New Revenue Opportunities
2003 World Share of Scheduled Traffic
Unaligned share was 28.5 last year

SkyTeam
Unaligned Increased since last year due to
tremendous traffic growth in Asia-Pacific
Middle East markets
Oneworld
Star Alliance
Alliances battle to gain members in Asia-Pacific
and Middle East as traffic in those regions are
growing faster than anyplace else and almost all
carriers are not formally attached to a specific
alliance
Source Airline Business, July 2004
10
Today's Major Global Systems Members
And then there were three
11
Alliance Members

• SkyTeam
• AeroMexico
• Air France
• Alitalia
• Continental
• CSA Czech
• Delta Air Lines
• Korean Air Lines
• KLM
• Northwest
• Malev
• Aeroflot
• China Southern
• Air Europa

• oneworld
• Aer Lingus
• American Airlines
• British Airways
• Cathay Pacific
• Finnair
• Iberia
• LAN Chile
• Qantas

Star Alliance

• Adria Airways
• Air Canada
• Air New Zealand
• All Nippon
• Asiana
• Austrian Air Group
• Blue1
• bmi british midland
• Croatia
• LOT Polish
• Lufthansa

SAS Singapore Airlines Spanair TAP Air
Portugal Thai Airways United Airlines US
Airways Varig South African Air China
12
Star Alliance
Source OAG data February 2005
Includes South African Airways
13
oneworld Alliance
Source OAG data February 2005
14
SkyTeam Alliance
Source OAG data, February 2005
Includes prospective members Aeroflot, Malev,
China Southern
15
Alliance Update
16
SkyTeam Experiences Strong Growth

• SkyTeam boosted to a close second vs. Star
  Alliance
• The smallest of the 3 alliances in 2002, now its
  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, Chinas largest airline, has
  signed membership agreement
• Breaking into Russia
• Aeroflot, countrys 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

17
SkyTeam 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

18
Star Alliance Remains Largest Alliance

• Star Alliance edges out SkyTeam as largest
  alliance in 2003
• Portugals 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

19
Star Members Capitalize on 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

20
Oneworld 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

21
Oneworld Also Seeking Joint Purchasing and 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

22
Even Smaller Carriers and LCCs are Forming
Alliances

• Starlet Alliance includes LCCs 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 bmibabys code

23
There are Two Significant Cargo Alliances

• WOW
• Lufthansa
• Japan Airlines
• Singapore Airlines
• SAS

• Sky Team Cargo Alliance
• AeroMexico
• Air France
• Alitalia
• CSA
• Delta Air Logistics
• Korean Air

24
Cargo Carriers Look for Benefits in Alliances

• 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

25
Alliances Key Focus Will 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

26
Global 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

27
Questions