Low Cost Carrier Market

Drew Magill Director Future Market

Boeing Commercial Airplanes
April 2004

Agenda

Global Perspectives Business Model Market Enablers Long Term Outlook Preferred Airplane Summary

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

Low Cost Carriers: Thirty Years of Innovation

VIRGIN EXPRESS

Eurobelgian Airlines (EBA)

Go
Nok Air
Thai Air Asia

Pacific Blue
SWA 737200 SWA 737300

AAT

RYR 737200

EBA 737300

VOZ EZY 737Takes 700sover 800s Go ASW GO 737737GOL 300s 300s CEB 737- BMA DC9s 700s 737Virgin 757s AAT 300Express 737- 500 EZY takes CQT CQT 737800s over EBA DC9s DC9s 700s jetBlue FRO 737 EZY WJI SWA RYR WJI CQT CQT -200/ 737- 737- 737- 737- CQT 737- 737CQT 737-300 300s 200 700s 800 717s 700s 700s 717s 700s

Air Do Skymark Thai AirAsia Pacific Blue Freedom Air Intl. One-Two-Go Lion Air Sky Asia Ted Song

1970’s

1980’s

1990’s

2000’s

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

N. America Flights/week: 23,800 Miles/flight: 540

Europe Flights/week: 4,150 Miles/flight: 490

Asia Flights/week: Miles/flight:

555 390

Oceania Flights/week: Miles/flight:

136 590

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

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

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

Asia Flights/week: Miles/flight:

990 +78% 470 +20%

Oceania Flights/week: Miles/flight:

1,340 +885% 700 +20%

Passengers Drive Airline Strategies

Airlines Are Giving Passengers What They Want – More Frequencies And Nonstops
Index 1980=100
Air Travel Growth

300 275 250

Passengers prefer more nonstops and more frequency choices

225 200 175 150 125 100 75 1980

Frequency Growth Nonstop Markets

Average Airplane Size

1985

1990

1995

2000

2003

…And Lower Fares

Real Yields (adjusted for inflation)

Yield Trends
25

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

20

15

10

1983

1987

1991

1995

1999

2002

…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.

Low Cost Carrier

Short Haul Carrier

Global Network Carrier 0 0.2 0.4 0.6 0.8 1

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 plan Relentless pursuit to reduce cost/complexity Hands on management Instilled corporate culture Distribution Product Operational − 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

High Labor Productivity

Unit costs ($ / ASK) 35% to 50%

>>NOT “cheap” labor

High Airplane Utilization

>>NOT “cheap” airplanes OperationalOverhead Low Network Distribution Product carriers Direct sales design Cost Airport Carrier Seat density charges No CRS One class No Crew costs commission No catering Aircraft No FFP utilization Single Fleet

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

80% 70% 60%
Early Deregulation Numerous Opportunities

Australia

SE Asia

Growth Rate ('03)

50% 40% 30% 20% 10%
NE Asia
Head to Head Liberalization Continues

Europe

N America

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

Air Travel Markets Have Unique Characteristics
North America
• U.S. Deregulation 1978 • Canadian deregulation
complete in 1988

Europe
• Deregulation staged: 1997 • 20% population & 24% GDP in
7% of territory • Congested airspace and airports • High speed subsidized rail is a direct competitor Rail is a minor competitor; autos compete for short distances

Asia Pacific
• Various stages of regulated
markets and government. ownership/influence. • Large geographic dispersion of population centers • Significant portion of travel requires flying

• 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

• Underutilized regional
Airports

• Except for Japan, less
competition from other transportation modes

• Airspace and airports
relatively open • Rail 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

• Mixed loyalty at most
national carriers • Very little charter • Closely held pricing, generally • Generally low but rising average income levels in many countries

• No loyalty to flag carriers
(just $ and ff miles) • Very little charter • Price transparency

North American Low Cost Carriers
Southwest supplies twothirds of available seats in North America LCC market

North America
Southwest AirTran ATA WestJet jetBlue Frontier Spirit 0 1,000,000 2,000,000 3,000,000

Scheduled Available Seats per Week
Aug-03 OAG

Air Travel Markets Have Unique Characteristics
North America United States
• • U.S. Deregulation 1978 Deregulation 1978 • Canadian deregulation
complete in 1988

Europe
• Deregulation staged: 1997 • 20% population & 24% GDP in
7% of territory • Congested airspace and airports • High speed subsidized rail is a direct competitor Rail is a minor competitor; autos compete for short distances

Asia Pacific
• Various stages of regulated
markets and government. ownership/influence. • Large geographic dispersion of population centers • Significant portion of travel requires flying

• 1/6 population density of • 1/6 population density of Europe Europe • Population centers are on • U.S. & Canadian opposite coasts population centers are • Airspace and airports on

opposite sides relatively open of the continent • Rail is a minor competitor; • Majority of Canadian autos compete for short population distances lives within 100 miles of the U.S. border

• Underutilized regional
Airports

• Except for Japan, less
competition from other transportation modes

• • Airspace and airports No loyalty to flag carriers
(just $ and open relatively ff miles) • • Rail little minor competitor; Very is a charter autos compete for • Price transparency short distances

• Lingering loyalty to national
carriers: link to culture • Vertically-integrated charter • Prices becoming transparent • Single currency adopted • More leisure time

• Mixed loyalty at most
national carriers • Very little charter • Closely held pricing, generally • Generally low but rising average income levels in many countries

• No loyalty to flag carriers
(just $ and ff miles) • Very little charter • Price transparency

There Are Two Major Competitors In 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

Ryanair

easyJet

Air One

DBA

Europe

BMIBaby

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

Scheduled Available Seats per Week
Aug-03 OAG

The European Arena Is Crowded With Low Cost Entrants

lite
Wizz Air
SmartWings

AIR POLONIA

Low Cost Carriers Have Differing Market Strategies
Pure Low Cost Carriers

• Year round traffic • Independent travelers • Balanced directional flows • Grow the market • Single airplane type

Optional business: hot meals, Business lounges, Branding papers Branded meals

Cost

Main Airports Low-Fares High-Frequency

Hybrid Models • Mix of business and leisure • A la carte services • Compete in some charter markets

amenities

Air Travel Markets Have Unique Characteristics
North America
• U.S. Deregulation 1978 • Canadian deregulation
complete in 1988

Europe
• Deregulation staged: 1997 • 20% population & 24% GDP in
7% of territory • Congested airspace and airports • High speed subsidized rail is a direct competitor Rail is a minor competitor; autos compete for short distances

Asia Pacific
• Various stages of regulated
markets and government. ownership/influence. • Large geographic dispersion of population centers • Significant portion of travel requires flying

• 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

• Underutilized regional
Airports

• Except for Japan, less • Lingering loyalty to national
carriers: link to culture • Vertically-integrated charter • Prices becoming transparent • Single currency adopted • More leisure time competition from other transportation modes

• Airspace and airports
relatively open • Rail is a minor competitor; autos compete for short distances

• Mixed loyalty at most
national carriers • Very little charter • Closely held pricing, generally • Generally low but rising average income levels in many countries

• No loyalty to flag carriers
(just $ and ff miles) • Very little charter • Price transparency

In 2003, There Were Few Competitors
Virgin Blue and AirAsia have recently expanded to regional operations

Virgin Blue

Cebu Pacific

AirAsia

*

Asia and Australia/NZ

Air Do

Skymark

0

50,000

100,000

150,000

200,000

Scheduled Available Seats per Week
Aug-03 OAG * Estimated

Many New LCCs Are Emerging In Asia

Thai AirAsia

Tiger Airways

Tony Fernandes Chief Executive Officer, AirAsia

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

Brett Godfrey Chief 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 jets Single-aisle Twin-aisle 747 and larger

$1.9T Dollars 24,300 Units

Low Cost Carriers Will Account For A Significant Portion Of Delivery Demand
Smaller regional jets Single-aisle Single-aisle LCC Twin-aisle 747 and larger

7% Of Addressable Delivery Dollars 10% Of Addressable Units

$1.9T Dollars 24,300 Units

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