Accenture Global Airline Survey

Draft status
Sustaining profitable growth
- High Performance in the Airline Industry -
Guido Haarmann
Partner Accenture, Head of Global Airline Practice

Dr. Peter Baumgart

Senior Manager Global Airline Practice

Copyright © 2008 Accenture All Rights Reserved. Accenture, its logo, and High Performance Delivered are trademarks of Accenture.
Agenda

 Current state of the airline industry

 High Performing Airlines 2001 - 2007

 Market dynamics and industry scenario 2012

© 2008 Accenture. All rights reserved. 2

The upcoming years will financially exhaust the airline industry
Current state of the airline industry

Airlines deliver weak capital returns both within the aviation value chain and
1 compared to other industries

Prolonging industry’s profit cyclicity, economic downturn 2009 – 2012 will

2 neutralize recent boom profits

Record a/c deliveries will see untimely delivery in economic downturn,

3 accelerating price competition

4 Fuel costs are expected to rise again above late 08 / early 09 levels

Recent M&A activities supported home market consolidation in mature EU

5 and US airline markets

© 2008 Accenture. All rights reserved. 3

1

Airlines deliver weak capital returns both within the aviation value
chain and compared to other industries

Capital return in aviation

Cross- industry stock performance ROCE split within airline industry

+140%
NASDAQ Airline average Industry average
1992 - 2004 1992 - 2004
DOW
6%
4/10/20 4%
10% 4/10/20
4/10/20 5%
US airline basket (XAL) 4/10/20
12%
4/10/20 7%
13%
4/10/20 10%
Monthly share Share 15%
returns* volatility* 4/10/20 13%
16%
4/10/20 4/10/20 4/10/20 9%
4/10/20
4/10/20 4/10/20 4/10/20 30%
4/10/20 21%

Source: finance.yahoo.com. XAL Amex Airline basket, Dow Jones and
NASDAQ 1992-2008. *Monthly returns 1992-2006 as average share
price performance, volatility as standard deviation of monthly returns:
College of Business, Auburn University
© 2008 Accenture. All rights reserved.
Source: Spinetta, 2000, quoted in Doganis, 2002 for period 1992-
1996. IATA for period 1996-2004, Accenture.
4
2

Economic downturn 2009 - 2012 will continue industry’s cyclicity,

neutralizing last years’ boom profits
Traffic and profit outlook

IATA traffic forecast (in bn pax p.a.) World airlines’ net profit (in bn US$)

4/10/20 4/10/20
10
6 years 5 years 6 years 5 years 3 yrs 3yrs
4/10/20 08 IATA forecast
5
4/10/20
0

4/10/20 -5
4/10/20 4/10/20 4/10/20 4/10/20 4/10/20 4/10/20
-10

CAGR delta Pax delta -15

4/ 4/ 4/ 4/ 4/ 4/ 4/ 4/ 4/ 4/ 4/ 4/ 4/ 4/ 4/ 4/ 4/ 4/ 4/ 4/ 4/ 4/ 4/ 4/ 4/ 4/ 4/ 4/ 4/ 4/
2% Σ 14.0 bn. 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10
/2 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2
0 0 0 0 0 Σ0 -3.9bn
0 0 0 0 0 0 0 0 0 0Σ0-2.8bn 0 0 0 0 0 0 0 0 Σ0 -0.1bn 0 0 0 0
4% Σ 14.9 bn.

Source: IATA 12/2008, Accenture. Source: IATA, Accenture. Forecasts in red.

 IATA expects crisis to peak in 09 and return to mid-  Airline industry’s strong demand cyclicity results in
term average growth path of approx. 5% in 2012. below-zero-sum profit cycles.
 Pax forecast cut of 0.9 bn for 5 years, i.e. 0.18 bn.  Mirroring the upturn 06-08, IATA forecasts a
p.a. equals approx. 3 airlines the size of LH. corresponding negative profit cycle until 2012.

© 2008 Accenture. All rights reserved. 5

3

Record aircraft orders will see untimely delivery in economic downturn,

accelerating price competition

Industry cyclicity

Profit and aircraft order / delivery correlation

profits in bn US$ a/c orders

10 4/10/20  A/C orders correlate strongly with profits.
Even though orders are also placed in
5
negative profit environments, order peaks
4/10/20
0 coincide with profit peaks.
1975 1980 1985 1990 1995 2000 2005 2010
-5  As of 2005, record a/c orders have lifted
4/10/20
-10 delivery backlog to unprecedented level.
-15 4/10/20  Delivery peaks tend to lag order peaks by
2-3 years. And usually, delivery peaks are
4/10/20 reached at economic downturn.
 For downturn as of 09ff, record deliveries
4/10/20 a/c orders 4/10/20 can be expected (e.g. 116 of 192 ordered
A380 have Entry-into-Service between
4/10/20 2009 and 12).
 Deliveries will exert additional massive
a/c deliveries
4/10/20 (intercont) yield pressure.
1975 1980 1985 1990 1995 2000 2005 2010

Source: Airbus, Boeing, IATA, Accenture. Aircraft orders only consist of Airbus
and Boeing figures. All Airbus and Boeing aircraft types included, i.e. short-
and long-haul above 100 seats/ac.

© 2008 Accenture. All rights reserved. 6

4

Fuel costs are expected to rise again above late 08 / early 09 levels
Fuel cost outlook

Mid-term fuel cost outlook Short-term fuel price volatility

(in annual averages, $/barrel) Forecast 2008 (in $/barrel)
Forecast 2007
100
85
80 73

60 60
53 91
54
40 72
67
20

0
1995 2000 2005 08 2010 12 2015 2020

Source: tecson.de (stated fuel prices are annual averages for Brent Source: tecson.de. Horizontal bars are annual averages as shown in
crude oil spot, forecasts EIA (Energy Information Administration) 2008 graph on the left.

 Fuel forecasts have underestimated 08 peak.  High volatility highlights importance of fuel
 Economic downturn is consensually expected to management
lead to mid-term declining oil prices.  Current oil prices are below annual average
estimates, hence mid-term fuel price rise is to be
expected.
© 2008 Accenture. All rights reserved. 7
5

Recent M&A activities supported home market consolidation in mature

EU and US airline markets
Consolidating Industry Structure

Key airline M&A 2001-2008 Degree of industry consolidation

(in market shares revenue 07)
AF/KL, AZ Expand market share in EU home market
EU LCC World Hub Airlines (non-
(liberalized market) liberalized market)
LH/LX, SN, Expand market share in EU home market
OS 4/10/20

BA/IB Expand market share in EU home market 4/10/20

LH/B6 Gain feed/de-feed network JFK
4/10/20 27%
DL/NW, Expand market share in US home market
4/10/20 4%
US/HP 5%
4%
CX/KA Expand into Inner-China with cont ops
4/10/24/10/24/10/24/10/2 4/10/24/10/24/10/24/10/2
0 0 0 0 0 0 0 0

Source: Carrier news releases, Accenture. Source: OAG, Air Transport Intelligence, Accenture.

 EU carriers have recently been very active to expand
their home market position.
 Several ventures in Asia have failed (e.g. CX/MU) as
Asian carriers apparently prefer stand-alone models for
the time being, favored by high-growth environment.
 Hub carrier industry structure has no global player with
dominant global market share.
 A similar degree of consolidation as e.g. EU LCC
market would unrealistically require all top 7 Hub
airlines to merge.

© 2008 Accenture. All rights reserved. 8

Agenda

 Current state of the airline industry

 High Performing Airlines 2001 - 2007

 Market dynamics and industry scenario 2012

© 2008 Accenture. All rights reserved. 9

 Accenture’s High Performance research provides a unique industry
perspective on past and future drivers for top-of-peer success

Accenture High Performance Studies

 Accenture High Performance studies are

conducted since 2002 across a broad range
of industries. Per industry, a peer set of 20-
40 industry players on global basis is
studied.
 Peer set is analyzed by scoring model
mirroring financial market perspective.
Applied methodology is general for all
industry studies.
 Selected High Performing companies are
“… one of the ten most notable
analyzed by industry-specific case studies
initiatives in the field during the past
on market and operational data to
quarter century.”
understand reasons for outperformance.
(Harvard Business Review, 2005)

© 2008 Accenture. All rights reserved. 10

Five High Performance dimensions represent a comprehensive
assessment of financial success
High Performance dimensions

Measure Economic perspective

Growth  Revenue CAGR  Market success

 Spread between Return and  Company value creation

Execution Profitability
Cost of Capital

 Peer Outperformance in  Ability to achieve

High Consistency Profitability, Growth and sustained economic
Performance Future Value company success

 Total Return to Shareholder  Shareholder success

Longevity (stock price rise/fall and
dividends)
Expectation
 Share of market capitalization  Investors’ expectations of
Future Value which is not backed by increase in company’s
company’s assets future financial performance

Source: Accenture

© 2008 Accenture. All rights reserved. 11

Airline High Performance has been researched for 2001-2007 to cover
performance both in boom and downturn phases
Selection and composition of peer group
Research approach
 Reference period:
Research period 2001-2007
chosen to cover management
of both crisis and growth,
excluding 08’s oil bubble.
 Segmentation:
LCC and Hub carriers to
achieve high-level view on
industry business models’
performance differences.
Separated for data
interpretation.
 Scheduled pax services:
Pax transport focus for
scheduled services, hence no
cargo and charters, regional
airlines excluded due to size.
Source: Accenture
© 2008 Accenture. All rights reserved.
Selection criteria
 All airlines world-wide with ≥
50m ASK p.a.
 ASK boundary used as ‘soft
cap’, carriers who showed
exceptional growth have been
added (e.g. easyJet).
 Pax revenues need to account
for at least 60% of total
revenues
 Public company with financial
data available for 2001-07
Analyzed Peer Group
 Air France-KLM Group
 Alitalia
 All Nippon Airways
 American Airlines
 British Airways
 Cathay Pacific
 Continental Airlines
 Delta Air Lines
 easyJet
 Iberia
 Japan Airlines International
 Korean Air
 LAN Airlines
 Lufthansa
 Malaysia Airlines
 Northwest Airlines
 Qantas
 Ryanair
 Singapore Airlines
 Southwest Airlines
 Thai Airways
 United Airlines
 US Airways
12
LAN Airlines, Ryanair, easyJet, Lufthansa and Cathay Pacific financially
outperform their peers
High Performing Airlines 2001 - 2007

Rank High Performers Company size 2007 Home market Hubs

 2.6 bn € revenue  Latin America  SCL, LIM, GYE, BUE,

1
 47 IC a/c, 27 cont a/c SAO

 2.7 bn € revenue  Europe  27 home bases, STN as

2
 0 IC a/c, 176 cont a/c (all largest with 40 a/c
B737-8)

 2.6 bn € revenue  Europe  19 home bases, LGA as

3
 0 IC a/c, 116 cont a/c largest base, GVA as
largest outside UK

 22.4 bn € revenue  Europe  FRA, MUC, ZRH, VIE,

4 BRU
 112 IC a/c, 378 cont a/c

 7.0 bn € revenue  Pearl River Delta,  HKG

5
 109 IC a/c, 16 cont a/c Inner-China

Source: Company annual reports 07, subsidiaries included. No freighters counted. Note: Deviating business years: FR 03/2008, U2 09/2007 included.

© 2008 Accenture. All rights reserved. 13

LAN Airlines, Ryanair, easyJet, Lufthansa and Cathay Pacific financially
outperform their peers
Evaluation of Financial Performance
Financial High Performance score distribution
(Airlines by IATA 2-letter code).

U2 WN
LCC FR
Key findings
SA LA

US CO NW DL  South American hub carrier

US LAN outperforms the industry
UA
AA  LCC business model again
Segments

proven to be attractive
EU LH IB AF BA AZ  Hub business model with three
distinct sub-models
QF
represented in High Performer
MH
group: LA, CX, LH (p. 30 for
AP SQ NH
details).
TG
CX KE JL

4/10/2 4/10/2 4/10/2 4/10/2 4/10/2 4/10/2 4/10/2 4/10/2

0 0 0 0 0 0 0 0
Performance Scores (A-F)*
Source: Accenture. * For each metric, companies are given a graded score based on a
normal distribution, with A-F derived as median +/- 0.33 and +/- 1 standard deviation.

© 2008 Accenture. All rights reserved. 14

LAN Airlines, Ryanair, easyJet, Lufthansa and Cathay Pacific financially
outperform their peers
Q&A regarding evaluation of Financial Performance
Why does CX score higher than SQ?
 SQ has low value and negative growth of
Future Value. On the contrary, CX scores high
on these two values.
 In addition, CX outperformed SQ in revenue
growth by factor two.
Could a US carrier be High Performer?
 We have denied US carriers joining Chapter 11
programs during 2001- 2007 being labeled as
High Performers.
 Rule was applicable in one case, US ranked
high due to high Future Value and Revenue
CAGR but entered Chap. 11 twice (02 and 04).
Source: Accenture
© 2008 Accenture. All rights reserved.
BACK-UP
Why is WN no High Performer?
 Despite its reputation for growth and
profitability, performance between 2001-2007
is only moderate.
 Actually, WN falls short to its peers due to
decline in Total Return to Shareholders,
Revenue and Future Value
How stable are the results?
 We have run various scoring weightings and
sensitivity analysis.
 Results can be considered stable with an
industry-reasonable weighting of measures.
 With all runs, LA has been ranked as top of
peers.
15
Business models of High Performers are analyzed in-depth to identify
operational root causes for financial outperformance
Three dimensions of High Performance

1 Market Focus & What makes High

Position Performers more
successful in the market?

 Each High Performer analyzed

individually
 Research done by experts of
Accenture’s Global airline
2 Distinctive What do High Performers practice
Capabilities different to achieve  Findings are solely based on
outperformance?
publicly available secondary
information, i.e. no interview
approach of High Performers

Performance What is the ‘success DNA’

3 of High Performers in
Anatomy
culture and management?

© 2008 Accenture. All rights reserved. 16

High Performers excel in profitably outgrowing their peers
Seven Building Blocks of High Performance

Revenue growth premium 1 Superior market penetration 2

 Outgrow competition  Dominate home market
Market Focus &
Position  Win and retain premium pax segments  Dedicate local ops presence

pp. 19 - 21 pp. 22 - 23

3 4 5 6
Operational Non-pax revenue Demand / Financial freedom
excellence contribution Capacity Fit

 Maximize a/c  Strengthen  Leverage multi-  Secure superior

Distinctive productivity cargo hub strategies cash reserves
Capabilities  Flexibilize contribution  Sychronize  Optimize
superior cost  Access ancillary demand & gearing
base revenue capacity
sources
pp. 24 - 25 pp. 28 - 30 p. 31 - 32
pp. 26 - 27
Leadership culture 7
Performance  Win and retain best talent
Anatomy  Re-think existing organizational structures

pp. 33 - 34

© 2008 Accenture. All rights reserved. 17

High Performers outgrow competitors, herewith deepen market
penetration and access additional economies of scale
Outgrow competition

Revenue growth 2001 – 2007

(in CAGR %)
 High Performers have been able to realize
growth rates factor 2-3 above average
4/10/20 18% airline market growth.
 Figures of FR and U2 show well-known LCC
4/10/20 15% market segment growth premium.
 LA proves that LCC growth rates are also
possible with hub business model. In 2006,
4/10/20 18%
LA successfully initiated a ‘New way to
travel’ program aimed at making short-haul
4/10/20 12%  traffic more accessible and affordable for
12% South Americans.
4/10/20 6%  LH’s organic growth strategy was a path in
line with average market growth. As of 08,
inorganic growth due to recent acquisitions
4/10/20 5% +7%p will push LH growth rate to significantly
higher level.
4/10/20
World-wide IATA
Source: Accenture

© 2008 Accenture. All rights reserved. 18

High Performance hub carriers excel in revenue generation and
capital efficiency, while operating at industry-average cost levels
Win and retain premium pax segments
Op. Exp. / Rev

EBITA / Rev 4/10/204/10/20 4/10/20

4/10/20 4/10/20
4/10/20
4/10/20 4/10/20
4/10/20
4/10/20
Pre-tax ROIC 4/10/2 4/10/2 4/10/2 4/10/2 4/10/2 4/10/2
0 0 0 0 0 0
4/10/20

4/10/2 4/10/2 4/10/2 Depr. / Rev

4/10/20 0 0 0 4/10/204/10/20
4/10/20 4/10/20
4/10/20

Rev / Inv. capital

4/10/2 4/10/2 4/10/2 4/10/20 4/10/2 4/10/2 4/10/2

0 0 0 0 0 0
4/10/20
4/10/20
4/10/20
p.28

4/10/2 4/10/2 4/10/2 Source: Accenture. All fig. as 7-year average.

0 0 0 Goodwill always included.
© 2008 Accenture. All rights reserved. 19
High Performance hub carriers successfully access premium
revenue segments
Win and retain premium pax segments

Revenue premium

Yield premium ($c/RPK) SLF

 Yield-volume trade-off is a different
4/10/20
game between LCC and hub
4/10/20 business models.
4/10/20 4/10/20  All three High Performance hub
4/10/20 4/10/20
4/10/20 carriers (LA, LH, CX) are top-
positioned and reputable as
premium service providers in their
4/10/20 4/10/20 4/10/20 4/10/20 4/10/20 4/10/20
respective home market.
 Rev/ASK figures surface magnitude
REV / ASK ($c)* of brand and product premium
4/10/20 positioning.
4/10/20
 HP hub carrier also manage to
achieve industry-standard SLF,
4/10/20
4/10/20 4/10/20 4/10/20 hence revenue premium is no trade-
off to volume economics.
4/10/20 4/10/20 4/10/20 4/10/20

Source: Accenture. * Rev/ASK requires stage-length adjusted ASK. Data incomplete

for peer set, hence selected comparison based on peer set of same region as HP.

© 2008 Accenture. All rights reserved. 20

All High Performers successfully establish superior market
positions at their home markets
Dominate home market
Organic single-hub growth: CX Deployed capacity growth: EU LCC
(in mio. pax transported) (in seats/week for reference week 07)
4/10/20 75%
4/10/20 4/10/20
4/10/20
4/10/20 +15%p 4/10/20
Gain in pax
5% 4%
market 13% 4%
4/10/20 4/10/20 4/10/20 4/10/20 share
4/10/24/10/ 4/10/24/10/24/10/24/10/ 4/10/2
0 20 0 0 0 20 0
Source: Annual reports CX, HKG airport. Source: ATI, Accenture.

Organic multi-hub growth: LA Inorganic multi-hub growth: LH

(in revenue 07) (in bn. ASK) 4/10/20
4/10/20
4/10/20
LAN 70% 218
86% Fig. 22
market 138 4/10/20 +7%p
share (1)
27% 16% avail. 4/10/20
52% Gain in
30% 4/10/20 09
ASK
4/10/20 4/10/20 4/10/20 4/10/20 4/10/20 4/10/24/10/ 4/10/24/10/ 4/10/2 4/10 market
0 20 0 20 0 /20 share
LAN
market 1929 1999 2003 2005 2008 Acqui-
05 08 08 08
entry sition
Source: LAN. (1) domestic operations to start Q1 09. Source: Carrier reports, IATA EU carriers, Accenture.

© 2008 Accenture. All rights reserved. 21

Local ops presence drives competitive advantage and dominant
home market position
Dedicate local ops presence
FR local ops leverage LA local hub ops at each SA primate city

1996 1998

Ops Ops start

bases
SCL 1929
# 1929 GYE 1999
GYE 1999 LIM 2003
2003
2001 2005 LIM 2003 BUE 2006
BUE 2006 SAO 2008
SAO 2008

Source: Ryanair. FR currently operates 27 ops bases in EU, U2: 19. Source: LAN

 As LCC do not offer connex flights, growth into new
catchments requires new local ops bases.
 LCCs could easily take market shares on those O&Ds
served by hub carriers solely by hub connexes as
customers prefer direct flights (and LCCs offered
competitive prices).
© 2008 Accenture. All rights reserved.
 HP hub carriers LA and LH secure local ops in key
home market catchments with multi-hub networks:
 LA established dedicated hub ops at each primate city
in South America upon market entry. In Europe, LH
assigned BRU, VIE, ZRH hub roles dedicated to local
catchment demand, while FRA/MUC maximize feed.
22
High Performance hub carriers outperform peers both in cont
and intercont a/c productivity
Maximize aircraft productivity

HP a/c productivity advantage

(in BH/day )
 By excellence in network design and respective market
Intercont ops portfolio, HP hub carriers achieve substantial
4/10/20 productivity surplus for intercont network over peer
group.

4/10/20  Well-understood in the industry, LCC business model

4/10/20 is able to yield highest cont a/c productivity.
n/a  Yet, LA and LH prove that certain parts of LCC network
structure can also be successfully imitated within hub
4/10/20 4/10/20 4/10/20
business model network:
 LH introduced LCC-similar network design for parts of
Cont ops its non-hub network (test case for newly-established
HAM base; later rolled-overXXX; network is P2P,
4/10/20 dedicated a/c, reduced turn-around times, minimized
out-of-base overnight stays).
4/10/20 4/10/20
4/10/20  LA moved to communal A320 family cont ops with de-
peaked schedules, higher P2P share, longer operating
days, overnight flights and reduced turnaround times
4/10/20 4/10/20 4/10/20 compared to previous B737 fleet.

Source: Carrier reports 07/08, Accenture research

© 2008 Accenture. All rights reserved. 23

Low Cost Carrier sustain their cost advantage and are able to
implement more flexible cost base
Flexibilize superior cost base

LCC business model cost advantage

(in $c CASM 07, stage-length adjusted)

4/10/20

3.2

1.4

0.9 4/10/20
0.7 0.5 0.4
* 4/10/2 4/10/2 4/10/2 4/10/2 4/10/2 4/10/2
4/10/2 4/10/2
0 0 0 0 0 0 0 0

Source: MIT, AEA, Accenture. *A/C comprises BH/day utilization and seat
capacity.

 Since their appearance, LCC cost advantages have

often been quoted.
 Leading hub carriers successfully started to imitate
LCC network and ops structures: De-peaking hubs
and establishing home bases and p2p schedules for
non-hub services.

© 2008 Accenture. All rights reserved. 24

High Performance hub carriers professionalize belly cargo to
achieve lower break-even thresholds per flight
Strengthen cargo contribution

Belly cargo business impact

Belly cargo rev share

(in % of total rev)
4/10/20  Compared with peers, High Performer hub
carrier benefit from stronger share of belly
4/10/20 cargo in revenue portfolio.
4/10/20
 This can be ascribed to the fact that high
IC traffic share also implies significant belly
capacity that establish revenue potential.
4/10/20 4/10/20
 Exploiting this revenue potential lowers the
Break-even SLF impact break-even SLF of pax flights by 6%p on
average for HPs.
4/10/20
 LA shows an exceptional strong cargo
6% impact of 11%p on B/E SLF
4/10/20

4/10/20 4/10/20 4/10/20

Source: Accenture research. Note: Cargo is only relevant for non-LCC airlines,
no LCC uses belly space. All-cargo freighter ops profitability of HP hub carrier
has been disrespected.
© 2008 Accenture. All rights reserved. 25
High Performance Low Cost Carriers are innovators in adding
ancillary revenue sources
Access ancillary revenue sources

FR examples

Product-related  Non-product revenues for FR

(in € per individual booking) comprise (1) Sales tied to tix
sale, e.g. bus/rail tickets, hotel
20
4/10/20 reservations and excess bags
10 4/10/20 4/10/20 Impact (€/Pax)
20 (checked bags counted as pax
4/10/20 rev). (2) FR has exclusive
4/10/20 4/10/20 4/10/20 4/10/20 4/10/20 4/10/20 relationship with Hertz. (3)
Onboard sales of beverages,
4/10/20
food and merchandise. (4) does
not include airline tix or car
4/10/20
Non-Product-related rental commissions.
(in mio € 2007, total rev for FR)  Common industry practices like
37 4/10/20 4/10/20 rebooking fees, oversized
60
4/10/20 23 baggage etc disregarded here.
 Customer post-buy satisfaction
(1) (2) (3) (4)
critical as no ‘cheating’
4/10/20 4/10/20 4/10/20 4/10/20 experience must be created.

Source: Ryanair, Accenture.

© 2008 Accenture. All rights reserved. 26

High Performance hub carriers excel in network design and are
leading edge for operating international multi-hub networks
Leverage multi-hub strategies

Basic hub strategies Multi-hub international expansion

Hub efficiency
Primate city Max feed
catchment network

Primate city Growing Max feed multiply go hybrid

complexity
catchment network

CX LH 2005 LA LH
4/10/20 4/10/20 4/10/20 4/10/20
4/10/20 4/10/20 4/10/20 4/10/20 4/10/20 4/10/20
4/10/20 4/10/20
4/10/20 4/10/20 4/10/20 4/10/20 4/10/20 4/10/20 4/10/20 4/10/20 4/10/20 4/10/20 4/10/20 4/10/20

Source: Accenture Source: Accenture

 Most cost-efficient hub ops is sized to local catchment,
at best primate city with sufficient local demand and
hence small feed network. Example: CX HKG.
 If local hub catchment lacks sufficient size, hub cost
efficiency requires maximizing feed network. Example:
LH FRA and MUC hubs.
 Strategy can be multiplied by operating several
primate hubs linked to a multi-primate hub ops.
Example: LA group
 Hub strategies can be combined to a hybrid multi-hub
network. Example: LH group with ZRH, VIE, BRU
sized to local catchments, in addition to FRA/MUC.

© 2008 Accenture. All rights reserved. Note: Primate cities are political, economical and social attractors in a country (eg Paris for France). 27
High Performance hub carriers excel in network design and are
leading edge for operating international multi-hub networks
BACK-UP
Leverage multi-hub strategies

Hub location pax implications

(in % of pax; indicative figures)
 Hub location is key driver to required feed/
de-feed network size:
4/10/20  With sufficient catchment size at hub
4/10/20 20% location, e.g. London, traffic generated is
dominantly local, i.e. to/from catchment with
60% ground transportation to/from airport.
 Primate cities as economic, social and
4/10/20 80% cultural attractors within a country are best
examples for this demand structure.
40%  If hub is located in catchment with
insufficient original demand (labeled left ‘B-
city’, e.g. Frankfurt, majority of hub traffic
4/10/20 4/10/20 generated will rely on connecting pax. This
implies larger feed/ de-fee network as
compared to primate city hub needs.

Source: Accenture

© 2008 Accenture. All rights reserved. 28

High Performers use superior capacity agility to take market
share from competitors
Synchronize capacity and demand

LH capacity dynamics vs. US Hub carriers

(in annual ASK change)
4/10/20

4/10/20
+7%p
15%  In the aftermath of 9/11, LH reduced
capacity further than US carriers.
10%  Yet, unlike its US peers, LH retained
+9%p operationally critical resources (esp.
5% -1%p no pilot lay-offs, no sale of a/c).
 As of 2003, LH outgrew US
0% competitors with first-mover
advantage when demand started to
-5% pick-up again.

-10%
4/10/20 4/10/20 4/10/204/10/204/10/204/10/204/10/20

Source: MIT, LH, Accenture

© 2008 Accenture. All rights reserved. 29

High Performance hub carrier show strong capital efficiency,
LCC use cash reserves as source of growth and crisis buffer
Secure superior cash reserves
EBITA / Rev

4/10/20
p.22
4/10/20
4/10/20
4/10/20

ROIC Cash / Rev

4/10/20 4/10/20
4/10/2 4/10/2 4/10/2 4/10/20
0 0 0
4/10/20
4/10/20
4/10/20 4/10/20
4/10/20 4/10/20
4/10/20
Rev / Inv. capital 4/10/2 4/10/2 4/10/2 4/10/2 4/10/2 4/10/2
0 0 0 0 0 0

4/10/2 4/10/2 4/10/2 4/10/20 (*)

0 0 0 Net PPE / Rev  fleet age (yrs)
4/10/20 4/10/20
4/10/20 4/10/20
9.5
4/10/20 4/10/20
Source: Accenture. All fig. as 7-year 4/10/20
average. Goodwill always included. 3.3
*Other value tree elements not
shown as insignificant 4/10/2 4/10/2 4/10/2
0 0 0 4/10/2 4/10/2 4/10/2 4/10/2 4/10/2 4/10/2
© 2008 Accenture. All rights reserved.
0 0 0 0 0 0 30
High Performance airlines’ strong balance sheet provides the
basis for profitable growth
Optimize gearing

Average gearing 2001 - 2007

(in debt / equity ratio)  High Performers particularly emphasis a
strong balance sheet, measured by
debt/equity ratio.

4/10/20  Realized gearing outperforms both LCC

High Performers and peer group.
4/10/20
 Peer group has been split to avoid bias by
3.5
US airlines: They exceed airlines in all
1.7 other regions by far and need to be
0.9
treated separately in context of Chapter
11 provisions.
4/10/20 4/10/20 4/10/20 4/10/20  Low gearing translates into beneficial
financing conditions, limits cash-out
obligations in crisis and hence ultimately
supports profitable growth.
Source: Accenture

© 2008 Accenture. All rights reserved. 31

Agenda

 Current state of the airline industry

 High Performing Airlines 2001 - 2007

 Market dynamics and industry scenario

2012

© 2008 Accenture. All rights reserved. 32

Accenture view on key aspects of the airline industry scenario 2012

1 Economic downturn will ‘replace’ fuel costs as driver of price-cost gap

New intercont a/c generations will boost competition by re-directing C/Cl and
2 Y/Cl traffic flows

Airlines are vulnerable to eventual CRM pioneers who will overcome

3 mediocre customer loyalty and insufficient customer knowledge

Consolidation will force ‘stuck-in-the-middle’ carriers in all regions to decide

4 between partner and niche strategies

Sustainability will soon not only be a cost issue but will become a competitive
5 instrument

© 2008 Accenture. All rights reserved. 33

1

Economic downturn will ‘replace’ fuel costs as driver of price-cost gap

INDICATIVE
Revenue and Cost Dynamics

US Hub airlines example rev / cost dynamics CASM vs. RASM gap 2012
(in %)
R/CASM in $cents Oil in $/barrel
4/10/20 80
4/10/20
70
4/10/20
Bottom
4/10/20
4/10/2060 line
CASM 50
Oil
4/10/20 40
CASM 4/10/20 4/10/20
4/10/20 30
ex fuel
20 4/10/20 4/10/20
4/10/20
4/10/20
RASM
10
4/10/20 4/10/20 4/10/20 4/10/20 4/10/20
4/10/20 0
1994 1996 1998 2000 2002 2004 2006 2008

Source: MIT, US DoT. CASM=Cost per Available Seat Mile. RASM= Source: MIT, EIA, Boeing, Accenture.
Revenue per ASM. Operating pax revenue only. Oil: tecson.de

 After 9/11 and SARS, soaring fuel prices deteriorated
all efforts to ‘right-size’ costs and capacity.
 In 2007, US Hub carriers faced on average a price-
cost gap of 24%.
 08’s oil price bubble is excluded here.
 Fuel forecast 2012 is at 73 $/barrel (see also p.8),
only marginally different from 07 average.
 Any hypothetical, best-case fleet-roll-over to Next
Generation a/c saves approx. 10% in CASM.
 From 00’s peak, RASM fell by 13% to 03’s low. This is
a possible estimate for 09ff economic downturn.

© 2008 Accenture. All rights reserved. 34

2

New intercont a/c generations will boost competition by re-directing

C/Cl and Y/Cl traffic flows
INDICATIVE
Production Strategy
Average order size A380 Hub vs. direct flights
(in # a/c ordered) (in # a/c ordered)

58 2.5x

4/10/20 4.66
16 15
10 1.86
5

4/10/20 4/10/20 4/10/20 4/10/20 4/10/20 4/10/20 4/10/20

Source: Airbus Orders& Deliveries, as per Aug 31, 08, Accenture. Source: Airbus, Boeing, Accenture.

 EK will use A380 to aggressively target intra-
intercont connection traffic.
 DXB stop-over will raise elapsed travel time, EK
needs to attract pax by superior (ground) product or
lowest prices. Offer will particularly target Y/Cl.
 B787 relative order share mirrors industry’s expected
significant increase of directly-served intercont O&D.
 By reducing elapsed travel time, direct flights target
C/Cl pax in particular. Hub-connex flights will try to
remain competitive by attracting C/Cl pax via price.

* Mega-hubs are at least LAX, ORD, JFK, LHR, CDG, FRA, DXB, SIN, DEL, HKG, PVG, NRT. A/C demand fictively calculated based on 7/7
service between mega-hubs except short-hauls (eg CDGLHR) for ordering companies plus 1 MRES each.

© 2008 Accenture. All rights reserved. 35

3

Airlines are vulnerable to eventual CRM pioneers who will overcome

mediocre customer loyalty and insufficient customer knowledge
INDICATIVE
Customer base

Travel industry’s customer loyalty is at best … such is airline customer knowledge

mediocre …

IBM survey 08 Client (disguised)

4/10/20 4/10/20
4/10/20
4/10/20 4/10/20

4/10/20 4/10/20
4/10/20 4/10/20 4/10/20

Skytrax world airline star rating 08

125
 Airlines only possess detailed
4/10/20
4/10/20 knowledge of customers enrolled in
31 42 4/10/20 their FFP programs.
6 1
 FFP customer base is approx. only half
4/10/ 4/10/ 4/10/4/10/ 4/10/ 4/10/ 4/10/ 4/10/ of total customers.
20 20 20 20 20 20 20 20
82%

Source: Skytrax, IBM US Traveler Survey 11/08, Accenture. Source: Accenture.

© 2008 Accenture. All rights reserved. 36

4

Consolidation will force ‘stuck-in-the-middle’ carriers in all regions to

decide between partner and niche strategies
INDICATIVE
Regional perspectives
 2 dominant groups around
AF/KL and LH; focused on
PMI issues.
 BA struggle to regain market
position, might partner with  Foreign premium carriers will
ME carrier dominate international p2p
premium traffic.
 Eastern Europe will be next
multi-hub expansion target  State-driven market protection
 4 dominant airline groups
for local carriers will secure
around UA, AA, DL (all IC) and
local niches
SW (p2p).
 Continued loss of ic market
share to foreign airlines with  Increased competition
superior product.  Local carriers among main gateways
forced to focus  ‘B787s all over’
on local feed/  Race for 1st mover entry
p2p niches into Inner-Chinese market
 Intern. premium
 SA will be become LA Group traffic taken by
home turf. foreign carriers  Regional network
 SA discovered as growth area evolves
with loss of ic market share of
local carriers.  Carrier growth path
plans turn into search
for destinations and
pax
Source: Accenture
© 2008 Accenture. All rights reserved. 37
5

Sustainability will soon not only be a cost issue but will become a
competitive instrument
INDICATIVE
Environmental Conscience for Greenhouse Gas Emissions

Change pressure is high … … but current industry leverages are not

Regulative action Impact Comments

 As of 2011 all EU domestic flights, as of 2012 all Newer a/c Best leverage today but
flights to/from EU will be part of ETS (EU Emissions not sufficient to achieve
Trading Scheme). This applies to all airlines targets
servicing EU a/p, irrespective of country of
More props Given current customer
residence. acceptance, only minor
 ETS certificates are tradable emission rights. EU cont network substitute.
exerts direct volume control of emissions.
Lower Adverse impact, lower
 By 2020, EU commission attempts to reduce CO2 cruising level cruise levels raise fuel
emissions by 46% compared to today’s level. consumption.

Customer perception ATC High potential in EU due to

 CO2 emissions are reported with bookings. Increasing out-dated national flight
zones / ATC structure
knowledge and awareness leads to inclusion as
customer decision factor in buying decision. Bio fuel Innovation still in test
phase, impact not fully
Competition understood.
 With ETS control, an airline can only outgrow others
if it has sufficient ETS certificates available. ETS Less flying Maximum greenhouse
becomes a competitive asset similar to slots. effect with maximum hit on
the industry
Source: European Commission, Accenture Source: Accenture
© 2008 Accenture. All rights reserved. 38
Your contacts for more results and discussion

Guido Haarmann Dr. Peter Baumgart

Accenture Accenture
Maximilianstraße 35 Fraumünsterstrasse 16
D-80539 München CH-8001 Zürich

Tel: +49 89 93081 68617 Tel: +41 79 540 5303

guido.haarmann@accenture.com peter.baumgart@accenture.com

© 2008 Accenture. All rights reserved. 39