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Low Cost Carrier Market

Drew Magil l

D i rec tor

Fut ure Market

BoeingCommerc ia l

A i rp lanes

Apr i l 2004

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Agenda

1. LCC Model Is Sust ainabl e

2. LCC m odel dr iven by passenger needsfo r be t t e r serv ic e , low er c os ts

3. enabled by an envi ronm ent of f ree

c om pet i t ion v ia open, l ibera l ized m ark et s

GlobalPerspect ivesBusiness Model

Marke tEnablersLong TermOut look

PreferredAi rp laneSummary

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Low Cost Carriers In 2000Flights Per Week: 28,640

N. AmericaFlights/week: 23,800Miles/flight: 540

EuropeFlights/week: 4,150Miles/flight: 490

AsiaFlights/week: 555Miles/flight: 390

Oceania

Flights/week: 136Miles/flight: 590

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Low Cost Carriers In 2003Flights Per Week: 42,490 +50%

N. AmericaFlights/week: 30,100 +27%Miles/flight: 643 +18%

EuropeFlights/week: 10,060 +140%Miles/flight: 520 +7%

AsiaFlights/week: 990 +78%Miles/flight: 470 +20%

Oceania

Flights/week: 1,340 +885%Miles/flight: 700 +20%

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Passengers Drive Airline Strategies

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Airlines Are Giving Passengers WhatThey Want More Frequencies AndNonstops

75

100

125

150

175

200

225

250

275

300

1980 1985 1990 1995 2000

Index 1980=100

FrequencyGrowth

NonstopMarkets

Average

Airplane Size

Air TravelGrowth

2003

Passengerspre fer m orenonst o ps andm ore f requencycho i ces

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And Lower Fares

Yield Trends

10

15

20

25

1983 1987 1991 1995 1999

RealY

ields(adju

sted

forinflation)

2002

In rea l do l larte rms t he pr ic eof a i r t raveldec reases overt i m e

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Whic h Resul t s In Few erCom pla in ts And Inc reas ing

Mark et ShareD irec t f l i gh ts

Few er de lays

Mul t ip le

f requenc ies

Low er and

cons is ten tpr i c ing

Not e: US Market .

Europe / Asia m odelevo lv ing.

0 0.2 0.4 0.6 0.8 1

Global

Network

Carrier

Short Haul

Carrier

Low Cost

Carrier

Passenger Complaints / 100,000

Air Travel Consumer Report, January December, 2003

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Agenda


Marke tCharac te r i s t i csLong TermOut look


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Low Cost Carrier Business Model

Disc ip l ined

exec u t ion and

focus

Sign i f icant

cos t

d i f ferent ia l

Stay w i th t he p lan

Relent less pursui t t o reduce c ost /c omplex i t y

Hands on m anagement

Ins t i l led c orpora te c u l tu re

Dist r ibut ion

Product

Operat ional Ut i l izat ion

Point t o Point

Sec ondary Ai rpor t s

Dem and st im ulat ion: Europe/Asia

Low overhead

Sim ple va lue proposi t ion

Cons is tent ly set t ing and meet ing expect a t ions

Brand

awareness

and presenc e

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Unit Cost Advantage Is DerivedFrom Many Factors

Unit costs($ / ASK)High Labor

Product iv i t y>>NOT c heap labor

High Airp lane

Ut i l iza t ion>>NOT c heap a i rp lanes

Dis t r ibu t ion

Direct sales

No CRSNocommissionNo FFP

Product

design

Seat densityOne classNo catering

Operat ional

Airport

chargesCrew costsAircraftutilizationSingle Fleet

Overhead Low

Cost

Carr ier

Ne two r k

car r ie rs

35%to50%

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Internal Business Culture Drives HighProductivity

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Agenda


Marke tEnablersLong TermOut look


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Key Low Cost Market Characteristics

Abi l i t y t o c ompet e : open

l iberal ized/l ibera l iz ing m a rke t s

30% to 35% low er fares /

low er c ost oppor tun i t y

Sizeab le and ba lanc ed t ra f f ic f low s

Underserved mark e t s

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Air Travel Markets Have UniqueCharacteristics

Europe

Deregulation staged: 1997

20% population & 24% GDP in7% of territory

Congested airspace andairports

High speed subsidized rail

is a direct competitorRail is a minor competitor;autos compete for shortdistances

Lingering loyalty to national

carriers: link to culture Vertically-integrated charter

Prices becoming transparent Single currency adopted More leisure time

Asia Pacific Various stages of regulated

markets and government.

ownership/influence. Large geographic dispersionof population centers

Significant portion of travelrequires flying

Underutilized regionalAirports

Except for Japan, lesscompetition from othertransportation modes

Mixed loyalty at mostnational carriers

Very little charter Closely held pricing,

generally

Generally low but risingaverage income levels inmany countries

U.S. Deregulation 1978 Canadian deregulation

complete in 1988 1/6 population density of

Europe U.S. & Canadian

population centers are onopposite sides of thecontinent

Majority of Canadianpopulation lives within 100miles of the U.S. border

Airspace and airports

relatively open Rail is a minor competitor;

autos compete for shortdistances

No loyalty to flag carriers

(just $ and ff miles) Very little charter Price transparency

North America

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North American Low Cost Carriers

0 1 ,0 0 0 ,0 0 0 2 ,0 0 0 ,0 0 0 3 ,0 0 0 ,00 0

Southwest

AirTran

ATA

WestJet

jetBlue

Frontier

Spirit

North AmericaSouthwes tsuppl ies t w o-

t h i rds o f

avai lab le

seat s in Nor th

Am er ic a LCC

marke t

Scheduled Available Seats per Week

Aug-03 OAG

Ai T l M k H U i

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Deregulation 1978

1/6 population density ofEurope

Population centers are onopposite coasts


relatively open Rail is a minor competitor;autos compete for shortdistances



EuropeUnited States










markets and government.ownership/influence.

Large geographic dispersionof population centers



Except for Japan, lesscompetition from othertransportation modes

Mixed loyalty at mostnational carriers


generally


Europe



















North America

Th A T M j C tit

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There Are Two Major CompetitorsIn Europe

0 100,000 200,000 300,000 400,000 500,000

Ryanair

easyJet

Air One

DBA

BMIBaby

Virgin Express


Europe

Ryanair a ndeasyJ et haveacce le ra ted

grow t h us ingacqu is i t ionsand largenumbers o f

a i rp lanes

Ry anai r hast he la rgestmarke t

presencew i t h 20%moreavai lab le

sea ts

Aug-03 OAG

Th E A I C d d With

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The European Arena Is Crowded WithLow Cost Entrants

lite

AIR POLONIA

Wizz Air

S m a r t W in g s

L C t C i H Diff i

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Low Cost Carriers Have DifferingMarket Strategies

amenities

Cost

Low-FaresHigh-Frequency

MainAirports

BusinessBranding

Brandedmeals

Optionalbusiness:hot meals,lounges,papers

Pure Low CostCarr iers

Year roundtraffic

Independenttravelers

Balanceddirectional flows

Grow the market

Single airplanetype

Hybr id Models Mix of business

and leisure

A la carteservices

Compete insome chartermarkets

Air Travel Markets Have Unique

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Europe










markets and government.

ownership/influence. Large geographic dispersionof population centers



Except for Japan, lesscompetition from other

transportation modes Mixed loyalty at most

national carriers


generally












North America

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In 2003, There Were Few Competitors

0 50,000 100,000 150,000 200,000

Virgin Blue

Cebu Pacific

AirAsia

Air Do

Skymark


Asia and Australia/NZ*

Virg in Blueand AirAsiahaverecen t l yexpandedt o regiona loperat ions

* EstimatedAug-03 OAG

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Many New LCCs Are Emerging In Asia

Tiger A i rw ays

Thai AirAsia

Tony Fernandes

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Tony FernandesChief Executive Officer, AirAsia

Our a im is t o f l y to everya i rpor t in Malaysia tha t c an

handle a Boeing 737

ai rcraf t .

Brett Godfrey

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Brett GodfreyChief Executive Officer, Virgin Blue

"And t heyve c om e

bec ause they ve w ant ed t o

w ork in a com pany t ha t s a

l i t t le b it d i f fe rent ."

3 Ai l Of Ch i F LCC M k

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737 - Airplane Of Choice For LCC Market


Marke tCharac te r i s t i csLong TermOut look


Low Cost Carr iers Wi l l Ac c ount

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For A Signi f ic ant Por t ion Of Del ivery Dem and

Smaller regional jets

Single-aisle

Twin-aisle747 and larger

$1.9TDollars

24,300Units

Low Cost Carr iers Wi l l Ac c ountF A Si i f i P i Of

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For A Signi f ic ant Por t ion Of Del ivery Dem and

Smaller regional jets

Single-aisle

Single-aisle LCC

Twin-aisle747 and larger

10%Of

Addressable

Units24,300Units

7%

Of AddressableDelivery Dollars

$1.9TDollars

Low Cost Carriers Are Here To Stay

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Low Cost Carriers Are Here To Stay

LCC Mode l IsSusta inable

LCC grow t hdr iven bypassenger

preferenc e for be t t e r serv ic e(m ore non st ops,m ore f req) ANDlow er c osts

LCC emergenc eis enabled by f reec ompet i t i on i n anopen, l ibera l izingenv i ronment

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lcc market - 2004

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