Low Cost Carrier Market

Drew Magill

DirectorFuture Market

BoeingCommercial

Airplanes

April 2004

Agenda

1. LCC Model Is Sustainable

2. LCC model driven by passenger needs for better service, lower costs

3. …enabled by an environment of free competition via open, liberalized markets

Global Perspectives

Business Model

Market Enablers

Long Term Outlook

Preferred Airplane

Summary

Low Cost Carriers: Thirty Years of Innovation

SWA737-300 AAT

SWA737-200

CQTDC9sCQTDC9s

EBA737-300

CQT717sCQT717s

Virgin Express

takes over EBA

GO737-300s CEB

DC9s757s

RYR737-800

WJI737-200

FRO737

-200/-300

SWA737-700s

EZY737-300s

RYR737-200

EurobelgianAirlines (EBA)

VIRGINEXPRESS

Go

Nok Air

Pacific BlueThai Air Asia

CQT737-700s

CQT737-700s

WJI737-700s

jetBlue

AAT737-800s

GOL737-700s

EZYTakes over Go

EZY737-700s

BMA737-300-500

VOZ737-700s-800s

ASW 737-300s

Air DoSkymarkThai AirAsiaPacific BlueFreedom Air Intl.One-Two-GoLion AirSky AsiaTedSong

1970’s 1980’s 1990’s 2000’s

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

OceaniaFlights/week: 136Miles/flight: 590

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%

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

Passengers Drive Airline Strategies

Airlines Are Giving Passengers What They Want – More Frequencies And Nonstops

75

100

125

150

175

200

225

250

275

300

1980 1985 1990 1995 2000

Index 1980=100

Frequency Growth

Nonstop Markets

Average Airplane Size

Air Travel Growth

2003

Passengers prefer more nonstops and more frequency choices

…And Lower Fares

Yield Trends

10

15

20

25

1983 1987 1991 1995 1999

Rea

l Yie

lds

(adj

uste

d fo

r inf

latio

n)

2002

In real dollar terms the price of air travel decreases over time

…Which Results In Fewer Complaints And Increasing Market Share

•Direct flights

•Fewer delays

•Multiple frequencies

•Lower and consistent pricing

•Note: US Market. Europe / Asia model evolving.

0 0.2 0.4 0.6 0.8 1

GlobalNetworkCarrier

Short HaulCarrier

Low CostCarrier

Passenger Complaints / 100,000

Air Travel Consumer Report, January – December, 2003

Agenda

Global Perspectives

Business Model

Market Characteristics

Long Term Outlook

Preferred Airplane

Summary

Low Cost Carrier Business Model

Disciplined execution and focus

Significant cost differential

Stay with the planRelentless pursuit to reduce cost/complexityHands on managementInstilled corporate culture

DistributionProductOperational

− Utilization− Point to Point− Secondary Airports− Demand stimulation: Europe/Asia

Low overhead

Simple value proposition Consistently setting and meeting expectations

Brand awareness and presence

Unit Cost Advantage Is Derived From Many Factors

Unit costs($ / ASK)High Labor

Productivity>>NOT “cheap” labor

High Airplane Utilization>>NOT “cheap” airplanes

DistributionDirect salesNo CRSNo commissionNo FFP

Product designSeat densityOne classNo catering

OperationalAirport chargesCrew costsAircraft utilizationSingle Fleet

Overhead Low Cost Carrier

Network carriers

35% to 50%

High Airplane Utilization And Crew Productivity Is Essential

More Flights

On-time, Reliable Service

Fewer Aircraft / Other Assets Needed

Internal Business Culture Drives High Productivity

Agenda

Global Perspectives

Business Model

Market Enablers

Long Term Outlook

Preferred Airplane

Summary

Key Low Cost Market Characteristics

• Ability to compete: open liberalized/liberalizing markets

• 30% to 35% lower fares / lower cost opportunity

• Sizeable and balanced traffic flows

• Underserved markets

LCC Are At Different Stages Of Maturity

0%

10%

20%

30%

40%

50%

60%

70%

80%

0% 5% 10% 15% 20% 25% 30%Market Penetration

Gro

wth

Rat

e ('0

3)

Europe

N America

Australia

SE Asia

NE Asia

Early DeregulationNumerous Opportunities

LiberalizationContinues

Head to Head

Air Travel Markets Have Unique Characteristics

Europe• Deregulation staged: 1997

• 20% population & 24% GDP in 7% of territory

• Congested airspace and airports

• High speed subsidized rail is a direct competitorRail is a minor competitor; autos compete for short distances

• 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 dispersion of population centers

• Significant portion of travel requires flying

• Underutilized regional Airports

• Except for Japan, less competition from other transportation modes

• Mixed loyalty at most national carriers

• Very little charter• Closely held pricing,

generally• Generally low but rising

average income levels in many countries

• U.S. Deregulation 1978• Canadian deregulation

complete in 1988

• 1/6 population density of Europe

• U.S. & Canadian population centers are on opposite sides of the continent

• Majority of Canadian population lives within 100 miles of the U.S. border

• Airspace and airports relatively open

• Rail is a minor competitor; autos compete for short distances

• No loyalty to flag carriers (just $ and ff miles)

• Very little charter• Price transparency

North America

North American Low Cost Carriers

0 1,000,000 2,000,000 3,000,000

Southwest

AirTran

ATA

WestJet

jetBlue

Frontier

Spirit

North AmericaSouthwest supplies two-thirds of available seats in North America LCC market

Scheduled Available Seats per Week

Aug-03 OAG

Air Travel Markets Have Unique Characteristics

• Deregulation 1978

• 1/6 population density of Europe

• Population centers are on opposite coasts

• Airspace and airports relatively open

• Rail is a minor competitor; autos compete for short distances

• No loyalty to flag carriers (just $ and ff miles)

• Very little charter• Price transparency

EuropeUnited States• Deregulation staged: 1997

• 20% population & 24% GDP in 7% of territory

• Congested airspace and airports

• High speed subsidized rail is a direct competitorRail is a minor competitor; autos compete for short distances

• 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 dispersion of population centers

• Significant portion of travel requires flying

• Underutilized regional Airports

• Except for Japan, less competition from other transportation modes

• Mixed loyalty at most national carriers

• Very little charter• Closely held pricing,

generally• Generally low but rising

average income levels in many countries

Europe• Deregulation staged: 1997

• 20% population & 24% GDP in 7% of territory

• Congested airspace and airports

• High speed subsidized rail is a direct competitorRail is a minor competitor; autos compete for short distances

• Lingering loyalty to national carriers: link to culture

• Vertically-integrated charter• Prices becoming transparent• Single currency adopted• More leisure time

• U.S. Deregulation 1978• Canadian deregulation

complete in 1988

• 1/6 population density of Europe

• U.S. & Canadian population centers are on opposite sides of the continent

• Majority of Canadian population lives within 100 miles of the U.S. border

• Airspace and airports relatively open

• Rail is a minor competitor; autos compete for short distances

• No loyalty to flag carriers (just $ and ff miles)

• Very little charter• Price transparency

North America

There Are Two Major Competitors In Europe

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

Ryanair

easyJet

Air One

DBA

BMIBaby

Virgin Express

Scheduled Available Seats per Week

Europe

Ryanair and easyJet have accelerated growth using acquisitions and large numbers of airplanes

Ryanair has the largest market presence with 20% more available seats

Aug-03 OAG

The European Arena Is Crowded With Low Cost Entrants

lite

AIR POLONIA

Wizz Air

SmartWings

Low Cost Carriers Have Differing Market Strategies

amenities

CostLow-Fares

High-Frequency

MainAirports

Business Branding

Branded meals

Optional business: hot meals, lounges, papers

Pure Low Cost Carriers

• Year round traffic

• Independent travelers

• Balanced directional flows

• Grow the market• Single airplane

type

Hybrid Models• Mix of business

and leisure• A la carte

services• Compete in

some charter markets

Air Travel Markets Have Unique Characteristics

Europe• Deregulation staged: 1997

• 20% population & 24% GDP in 7% of territory

• Congested airspace and airports

• High speed subsidized rail is a direct competitorRail is a minor competitor; autos compete for short distances

• 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 dispersion of population centers

• Significant portion of travel requires flying

• Underutilized regional Airports

• Except for Japan, less competition from other transportation modes

• Mixed loyalty at most national carriers

• Very little charter• Closely held pricing,

generally• Generally low but rising

average income levels in many countries

• U.S. Deregulation 1978• Canadian deregulation

complete in 1988

• 1/6 population density of Europe

• U.S. & Canadian population centers are on opposite sides of the continent

• Majority of Canadian population lives within 100 miles of the U.S. border

• Airspace and airports relatively open

• Rail is a minor competitor; autos compete for short distances

• No loyalty to flag carriers (just $ and ff miles)

• Very little charter• Price transparency

North America

In 2003, There Were Few Competitors

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

Virgin Blue

Cebu Pacific

AirAsia

Air Do

Skymark

Scheduled Available Seats per Week

Asia and Australia/NZ*

Virgin Blue and AirAsiahave recently expanded to regional operations

* EstimatedAug-03 OAG

Many New LCCs Are Emerging In Asia

Tiger Airways

Thai AirAsia

Tony FernandesChief Executive Officer, AirAsia

“Our aim is to fly to every airport in Malaysia that can handle a Boeing 737 aircraft.”

Brett GodfreyChief Executive Officer, Virgin Blue

"And they’ve come because they’ve wanted to work in a company that’s a little bit different."

737 - Airplane Of Choice For LCC Market

Global Perspectives

Business Model

Market Characteristics

Long Term Outlook

Preferred Airplane

Summary

Low Cost Carriers Will Account For A Significant Portion Of Delivery Demand

Smaller regional jetsSingle-aisle

Twin-aisle747 and larger

$1.9TDollars

24,300Units

Low Cost Carriers Will Account For A Significant Portion Of Delivery Demand

Smaller regional jetsSingle-aisleSingle-aisle LCCTwin-aisle747 and larger

10%Of

AddressableUnits

24,300Units

7%Of Addressable

Delivery Dollars

$1.9TDollars

Low Cost Carriers Are Here To Stay

LCC Model Is Sustainable

LCC growth driven by passenger preference for better service (more non stops, more freq) AND lower costs

LCC emergence is enabled by free competition in an open, liberalizing environment