Low Cost Carriers

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• Low Cost Carriers
• within an
• Evolving Industry -
• Growth and Challenge
• With special thanks to
• Raymond James and Associates, Inc. (RJA) and
• GCW Consulting

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U.S. Airline Industry Earnings History and
Projections
Source RJA, SEC Filings, Forms 41, Carrier
Reports
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U.S. Airline Industry Earnings History and
Projections
Source RJA, SEC Filings, Forms 41, Carrier
Reports
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Forms 41, Reported Profit and Loss Year Ending
2004 3Q
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PAX MARKET SHARE CAN OVERSTATE LCC PENETRATION
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LCC Growth did not happen entirely by Accident
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Non-Fuel Costs Have Stayed More Stable Than You
Think
Source Forms 41, GCW Consulting
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Highest Cost Carrier Twice as Expensive as Best
LCC in Adjusted Stage Length Analysis
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The GAP is closing very slowly.
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Recently Legacy Carriers have tried to keep up
with LCC capacity.
Source Form 41s, GCW Consulting
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Thesis They Have Not Done it in a Cost
Minimizing WayLegacy Carrier Airplane Size Chart
Source Form 41s GCW Consulting
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• Breathtaking Negative Impact on Infrastructure
  Financing from Reduced Aircraft Size
• Government Failure Executive, Legislative,
  and Judicial.
• Market Failure Fighting the Last War.

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A typical Regional Jet imposes the same
infrastructure costs but contributes 60 per
passenger less than a typical mainline
narrow-body.
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LCCs - Sharp Growth In Aircraft
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AirTrans Fleet To Almost Double Over Next Four
Years(Includes the exercise of options)
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JetBlue - Strong Growth in Aircraft to Drive
Strong Capacity GrowthEnd of Year Cumulative
Total Fleet
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Southwest Growth Moderate in Relative Terms
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Cost advantage particularly compelling for
Southwest.
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Southwests ambitious fuel hedging program has
enabled them to remain profitable while while
holding fares to historically low levels.
Profile of Fuel Hedges
Pro Forma Comparison Ex-Fuel Hedges

• Southwest utilizes financial derivative
  instruments for both short-term and long-term
  time frames when it appears the Company can take
  advantage of market conditions
• LUVs average fuel price during 2004 was 26.00/
  barrel while market average was 41.51 / barrel
• Has a mixture of purchased call options, collar
  structures, and fixed price swap agreements in
  place to hedge against rising fuel prices

Southwests Average Fuel Hedged
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THE FATE OF THE HUBS - One Mans Opinion
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THE OTHER APPROACH
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Concentration at National Level Not Dangerous

• National Herfindahl-Hirschman (HH1) Index Since
  Deregulation

Source US DOT OD1A Database Notes Domestic OD
Passengers
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The Seven Phases of Airline Deregulation - Thus
Far

• Phase 1 (1978 - 1980) INITIAL SHOCK
• Entry of former charter carriers UA goes
  Point-to-Point Two Tier Pricing Approved.
• Phase 2 (1980 - 1984) BIG ADJUSTMENTS
• Frequent flyer programs information technology
  and yield management Hubs develop including
  international new entrants fail (all but one).
• Phase 3 (1984 - 1988) MERGER MANIA
• An historic shift in competition policy. WN
  moves onto the radar screen.
• Phase 4 (1989 - 1993) RETRENCHMENT AND HUB
  DOMINANCE
• Recession, war, oil prices, too much for the
  unprotected middle tier except for one.

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The Seven Phases of Airline Deregulation
(continued)

• Phase 5 (1994 - 2000) RECOVERY, BOOM, AND
  DOMINANCE
• Demand soars price discrimination accelerates
  new entrants fair poorly profits approach
  records but labor costs keep pace.
• Phase 6 (2000 - Present) TRAGEDY AND
  RESTRUCTURING
• LLCs emerge Swissair and United in the Tank
  Do you believe in the great (wo)man theory
  or in the market?
• Phase 7 - BE OPTIMISTIC

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