Aviation StrategyThe airline saw its first quarterly RASM decline in two years (also partly due tough first-half 2007 RASM comparisons). Even though demand outlook has ... secured

Aviation EconomicsJames House, 1st Floor 22/24 Corsham Street

London N1 6DRTel: +44 (0) 20 7490 5215Fax: +44 (0) 20 7490 5218e-mail: [email protected]

Issue No: 118 July/August 2007

Aviation Strategy

Analysis

Paris Airshow round-up 1-3

Southwest: Major modelling or just tinkering? 3-6

Skybus: Will the Ryanairmodel work in the US?

7-12

Premium transatlantic airlines:how important are they?

• Eos Airlines• MAXjet Airways• Silverjet• L’ Avion

13-21

Databases 22-23

Airline traffic and financials

Regional trends

Paris Air Show Orders

Orders

CONTENTS

PUBLISHER

www.aviationeconomics.com

Paris Air Show: AftermathNow that the dust has settled on the Paris Air Show and Boeing's

787 unveiling ceremony, it is worth considering the implicationsof both events on the aviation world. There is no doubt that the 868gross orders (767 net) for Boeing and Airbus combined at Le Bourgetfar exceeded most people's expectations. The sales tallies would cer-tainly persuade one that Airbus is on the road to recovery followingthe difficulties it has faced over the past two years.

The question on everyone's mind relates to the timing of the nextdownturn. Most forecasts provided for a slight fall in aircraft ordersthis year compared with 2006 in what could be seen as a slipperyslope towards a further fall in '08 and '09. However, the explosion oforders over the past month makes it almost certain that the 2006 tallyof 1,874 orders will be matched or beaten. It is worth noting that athird consecutive year of around 1,500 orders represents 13-15% ofthe world's total installed fleet, someway below the 1989 peak whenorders represented about 20% of the world's installed fleet at thattime. The backlog at Airbus and Boeing is now likely to extend into2011, which should equate to deliveries peaking in 2011 (assumingthat orders fall in the next two years). Regardless of whether a down-turn takes place, both manufacturers face differing fortunes, and theirproduct profiles, particularly in the widebody segment, look to be ondiverging paths.

2007 was billed confidently by Airbus COO John Leahy as the'Year of the 350'. However, despite a successful Airshow that sawkey orders from Qatar Airways (which looks to have quietly hedgedits bet by placing an order for 30 787s) and US Airways, many of theAirbus orders may have been induced through heavy discountingrather than a clear vote of confidence on behalf of its airline cus-tomers. 2007 has been another terrific year for the 787. During theweek long media circus surrounding the roll-out of the first assembledand painted unit, 75 new orders were announced including Airbusdefectors LAN and Air Berlin.

This takes 787 orders to 235 for 2007, and the backlog to 750.And the 787 has yet to make its inaugural flight (this is expected tooccur end August/early September). To put the backlog into context,the A330 has recorded about 786 orders since its inception in 1988and the 767 has recorded 1,011 orders since United launched theprogramme in 1978. The 787 could conceivably attract over 1,000

Customer Quantity Customer QuantityLAN 26 CIT 5Air Berlin 25 Uzbekistan Airways 2ALAFCO 10 BBJ 1Unidentified 6 Total 75

787 ROLLOUT ORDERS

Aviation StrategyAnalysis

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Contributing Editor:Heini Nuutinen

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July/August 2007

orders by the time it enters service with ANAin June '08. At an estimated production rateof 110 per year, it will take Boeing until 2014 toclear the current backlog in the absence of asecond production line. So it is very likely thatBoeing will open a second line in order to helpclear the huge backlog and also to free capac-ity for the yet to be unveiled -10 stretch versionof the 787. Improved delivery slots for the air-craft could therefore be available in the 2010-2011 timeframe which would be well timed forthe likes of British Airways and the US networkcarriers which have yet to place widebodyorders (namely American, Delta and United).These four carriers alone could order close to200 frames and tie up the second line for twoyears. This isn't taking into account likely inter-est from Qantas for the 787-10 and a potential100 aircraft order from Emirates.

Both Airbus and Boeing are anxious toexploit the current demand in the narrowbodysegment as the A320 and B737NG are nowcash cows, long ago having covered theiramortised development costs. Airbus is set toincrease production of the A320 family to 40per month from its current level of 31. Bothmanufacturers are using narrowbody profits tofund their more capital intensive widebodyprogrammes.

The A350 has gone through various itera-tions since its unveiling at Le Bourget in 2005.At the insistence of Steven Udvar-Hazy ofILFC (among others), the initial design (A350v 1.0, essentially an A330 with new wings andengines) was replaced by a ground-upredesign that takes us to the currentA350XWB (unveiled at Farnborough lastyear). ILFC still seems unhappy about Airbus'reluctance to embrace the concept of an all-composite fuselage, and its order for 52 787sat Le Bourget was arguably the most signifi-cant of all the orders placed. An ILFC A350order would have been a massive boost forthe programme from a customer who orderson merit.

Boeing retains the upper hand in terms ofdeveloping a strategy to counter whatevercompetitive threat the A350 may pose downthe road. Entry into service for the larger A350-1000 is not until 2015 at the earliest assumingthe A350 programme doesn't encounter any ofthe delays that hindered the A380. Once the

Customer OrderQatar Airways 80 x A350, 3 x A380US Airways 60 x A320, 10 x A330-200, 22 x

A350* Emirates 8 x A380Jazeera Airways 30 x A320Nouvelair 2 x A320GECAS 60 x A320ALAFCO 12 x A350**, 7 X A320S7 25 x A320Air France 2 x A380, 18 x A320Aeroflot 5 x A321Intrepid 20 x A330FAir Asia 15 X A330-300Thai Airways 8 x A333Private Customer 1 x A380Etihad 5 x A330-200, 4 x A340-600, 3 x

A330-200FAirCastle Leasing 15 x A330F CIT 7 x A350***, 25 x A320Ural Airlines 5 x A320Aeroflot 22 x A350Afriqiyah 5 x A320, 6 x A350Kingfisher 20 x A320, 20 x A350****, 5 x

A345, 10 x A330-200

Libyan Airlines 7 x A320, 4 x A330, 4 x A350MNG Cargo 2 x A330FFlyington Freighters 6 x A330FAvianca 14 x A320, 5 x A330Hong Kong Airlines 30 x A320, 20 x A330,1x ACJMandala Airlines 25 x A320BAA Jet Management 1 x ACJSingapore Airlines 20 x A350NAS (Saudi Arabia) 20 x A320Gross Total 729Net total 687Notes: * 20 x A350, ** 12 x A350, *** 5 x A350, **** 5 x A350were already booked

AIRBUS’ FINAL PARIS AIR SHOW ORDERS

Customer OrderGECAS 6 x 777F Lion Air * 40 x 737-900ERILFC ** 52 x 787ILFC ** 10 x 737 - ILFCILFC * 1 x 777-300ERTAM 4 x 777-300ERAir France * 9 x 777-300ER KLM * 7 x 737-700Virgin Blue 10 x 737Gross Total 139Net Total 80

Notes: * previously identified as an unidentified order,** 2 previously identified as an unidentified order

BOEING’S FINAL PARISAIR SHOW ORDERS

This is turning out to be a difficult year forlow-cost pioneer Southwest Airlines. The

hitherto hugely successful carrier, which hasbeen profitable for 34 consecutive years andrecorded stellar earnings growth in 2005 and2006, has seen its profits plummet in thepast two quarters. In the three months endedJune 30, Southwest's economic net incomefell by 28.6% to $195m and its operatingmargin plunged by 4.8 points year-over-year.

Southwest has been hit by the doublewhammy of rising fuel costs and decliningunit revenues. Its average fuel cost per gal-lon, including hedges, was up by 14.1% inthe second quarter, while its PRASM fell by4%.

The airline's profits are falling mainlybecause its industry-leading fuel hedges arewearing off. In the wake of September 11,Southwest was the only US airline with thecash (and the foresight) to take on extensivenew fuel hedges at crude oil prices in the$20s and $30s (per barrel). Those hedgespaid off handsomely when oil prices subse-

quently surged.In CEO Gary Kelly's estimates,

Southwest saved a staggering $2.5bn in2000-2006 because of its fuel hedges. Nowthat the hedges are diminishing, the airlinehas to pay more for fuel year-over-year evenwhen there is no change in oil prices.

As the largest domestic carrier,Southwest has felt the full impact of thisyear's slowing domestic demand. The airlinesaw its first quarterly RASM decline in twoyears (also partly due tough first-half 2007RASM comparisons).

Even though demand outlook hasimproved somewhat and RASM compar-isons will be easier in the second half of2007, Southwest will obviously not beachieving its target of 15% EPS growth in2007. The current consensus estimate is a7% decline, from 71 to 66 cents per share.

None of this has helped Southwest'sshare price, which has effectively gonenowhere in the past five or six years. Sinceearly 2004 the stock has fluctuated in the$14 to $18 range; in late May the price was


July/August 20073

Southwest: Major remodellingor just tinkering?

By Robert Cullemore [email protected]

specifications for that aircraft are known,Boeing has a six to seven year lead time tocounter with a 777 replacement (known as the'Y3'). The strides made in composite usage onthe 787 and the new production and procure-ment methods will undoubtedly flow through toY3 in addition to any as yet unknown efficien-cies. Therefore, Y3 could marginalise theA350 almost as soon as it is unveiled.

Airbus also needs to keep focused on theA380, which looks set to enter service withSingapore Airlines in October. The next chal-lenge facing the A380 will be when it goes intoseries production. Airbus CEO-to-be ThomasEnders told German business weekly, FocusMagazine "we can't allow to make anyhowlers when production is stepped up."Indeed. The A380 programme has notsecured orders from any new airline cus-tomers since Kingfisher placed an order forfive frames back in June 2005.

Fortunately for Airbus, 92% of Europeanairlines surveyed recently by UBS are current-ly in discussions to buy new aircraft within thenext year compared with only 22% of U.S.respondents. Scott Carson, CEO of BoeingCommercial Airplanes (BCA), has describedthe current environment as an "unbelievablecycle" that defies "traditional indicators".Network carriers in Western Europe and theUS had driven previous cycles but the currentdriver is now emerging markets carriers. In asignal that memories of the catastrophe thatderailed Boeing in the late 1990s when theylast increased production rates, Carson goeson to state "the worst thing we could do in thisindustry is dump excess capacity on the mar-ket…If we knee-jerk and move too fast (withproduction increases), we do real damage tothe industry." Hopefully, Airbus won't makethe same mistake a decade after Boeinglearned its lesson.

again closing in on $14, before bouncingback to the $16 range ($16.35 on July 20).

Many analysts have lost confidence inSouthwest's prospects. Until a few monthsago, there was a near-universal "buy" ratingon the stock; now it is mostly "hold" andsome "sell" recommendations. "A growthstory comes to a close", noted one particu-larly bearish analyst in April, in reference tothe diminished earnings prospects.

Southwest has faced criticism from WallStreet that its ASM growth rate is too high forthe current demand conditions, which hasmade it difficult to raise fares to boost earn-ings.

Calyon Securities issued a memorableresearch note in early May that sounded likea direct appeal to Southwest: "Raise ticketprices… seriously". Analyst Ray Neidlargued that Southwest's resistance to fareincreases, which was resulting in a lowreturn on equity, was the key driver behindthe stock's lacklustre performance over thepast five years.

Southwest has long had a strategy ofgrowing at a brisk pace - 8% annual ASMgrowth is the target these days - and resist-ing fare increases so as not to drive awaytraffic. The management has made it veryclear that they fear any retrenchment couldembolden competitors.

But this strategy, which Calyon Securitiessummarised as being "willing to sacrificeshort-term profitability for market share andwhat they believe to be a long-term strategicadvantage" clashes with the objectives ofshareholders and analysts, who often take arelatively short-term view.

It is hard not to sympathise withSouthwest: why should it forgo good growthopportunities to strengthen its strategic posi-tion when it has ample resources and astrong balance sheet to support suchgrowth?

To add insult to injury, Southwest has hadto worry that it may be underleveraged. InApril there was much speculation that itmight become a target for an LBO. The rea-son was that, technically speaking, it fit thecriteria of an LBO candidate: ample cashflow and reserves, modest debt, high per-centage of aircraft ownership, cheap stock

and good growth opportunities.No-one actually came forward to support

the idea; the management and Wall Streetwere in broad agreement that piling on debtwould be disastrous in a volatile industry andthat an LBO would be detrimental toSouthwest's unique corporate culture.However, the management has neverthe-less felt it necessary to change some of theirfinancial goals to make Southwest look lessattractive as an LBO target.

First, Southwest plans to increase itsdebt leverage from the current 35% (lease-adjusted debt-to-capital ratio) to the 35-50%range by issuing additional debt before year-end. The current level is at a record-low,having declined steadily from about 50%nine years ago. However, the airline indicat-ed that it is not comfortable with leverageabove 50%.

Second, Southwest is continuing aggres-sive share repurchases. It has bought back$1.6bn of its stock since January 2006 andexpects to authorise new programmes. Theshares are either retired or used to fund thecompany's employee stock plan.

Kelly noted recently that Southwest'smanagement has never been this busy. Theexecutives have been scrambling to try toplease everyone.

The results of some of those efforts - allaimed at improving near-term profit growth -have been outlined in recent weeks, begin-ning at an "Investor Day" held at the NYSEon June 27 and continuing in Southwest'ssecond-quarter earnings conference call onJuly 18.

Southwest is talking about pursuing anaggressive "transformation plan" that targets$1bn-plus in incremental annual revenue by2009 or 2010 to offset higher fuel costs andreach its financial targets. The airline is trim-ming capacity growth, introducing a volun-tary early-out programme, making someroute changes, developing ancillary rev-enues, revamping its fare structure and plan-ning to expand internationally through code-sharing.

The key questions are: How much of itwill be major remodelling and how much justtinkering? Is it all really necessary and help-ful to Southwest's future prosperity, or is


July/August 20074


July/August 20075

some of it merely aimed at pleasing analystsand shareholders?

Still highly profitableIn many respects, the concerns about

Southwest are overblown. The airline con-tinues to be highly profitable, with industry-leading margins. The second-quarter oper-ating margin, at 12.7%, was still in a differ-ent league from AMR's and Continental's 7-8% margins. Delta came closer with 10%and Northwest is expected to do likewise.But the other US LCCs are not likely toreport margins higher than 5-7% for thesecond quarter.

Southwest's management is confidentthat, with the help of the $1bn revenue ini-tiatives and other measures, the airline willachieve its 15% EPS growth target in 2008and also its 15% ROIC target by 2009. Inother words, 2007 could be just a small dipin an otherwise steady upward profit-growth trend.

In the past four years, Southwest's oper-ating margins have improved steadily from8.8% in 2003 to 10.8% in 2006. The con-sensus estimates suggest that 2007 couldsee the margin dip to the mid-8s - notexactly a worrisome scenario - and 2008would see a return to near-10%.

Southwest remains a low-cost producer,with industry-leading CASM (thoughAirTran has almost caught up) and incredi-ble efficiency levels. Despite labour andother cost pressures, the airline has held itsnon-fuel CASM at around 6.5 cents for thepast seven years. This has been accom-plished through continued productivityimprovements; for example, headcount peraircraft declined from 86 in 2003 to 68 in2006.

Of course, Southwest still has good fuelhedges compared to the rest of the indus-try. A decision to add to this year's hedgepositions in the fourth and first quarters,when crude oil prices dipped briefly, is pay-ing off handsomely now that the price againexceeds $70 per barrel. Southwest hashedges in place to cover 90% of its second-half 2007 needs at an average price of $51.It has also hedged 65% of next year's

needs at $49, 50% of 2009 needs at $51and 15-25% of 2010-2012 needs at $63-64.

Southwest's culture, staff morale, popu-larity and brand are as strong as ever. Theairline has staged a very smooth and suc-cessful leadership transition since 2001,with Gary Kelly taking over from HerbKelleher. The company has an unbeatablebalance sheet and continues to pay divi-dends (having done so for 124 consecutivequarters).

In other words, Southwest's operatingmodel is obviously not broken and the com-pany continues to present an attractiveopportunity for the longer-term investor.

Structural and other issuesBut Southwest does face some structur-

al issues, in addition to the fuel anddemand challenges. And those structuralissues have worsened in recent years -essentially the reason why the airline isnow taking extensive action.

Because it is based on low costs, theSouthwest model is very recession resis-tant, always coming on its own in hardtimes. By contrast, the legacy model comeson its own in boom times when the empha-sis shifts to revenue generation. The lega-cies have more fare buckets to play withand international markets to turn to whenthe going gets tough domestically.

However, the legacy carrier's deep costcuts in recent years, in or out of Chapter 11,have narrowed Southwest's cost advan-tage, particularly on the labour front.Southwest now has the highest-paid pilotsfor narrowbody aircraft in the industry.

Although Southwest continues to haveexcellent labour relations, its upcomingpilot contract negotiations may be compli-cated by the continued weakness in theshare price (some of the compensation istied to stock performance). On the non-labour front, Southwest may simply be run-ning out of cost-cutting options.

The other major structural change, ofcourse, is the surge in competition, bothfrom the revitalised legacies and LCC copy-cats.

Consequently, to prosper in a changing

and more competitive domestic environ-ment, Southwest needs to make adjust-ments to its business model.

The remediesSouthwest, which takes great pride in

the fact that it has never laid off staff or cutpay, has found a potentially very good wayto tackle the labour cost challenge: a volun-tary early-out programme. It has offeredearly-out packages, consisting of a $25,000cash payment plus some benefits, to about25% of its workforce - some 8,700 opera-tional employees (excluding pilots andmechanics) who have been in their jobs forat least ten years.

The aim is not to cut the workforce but toreduce the number of highly paid workersso that they can be replaced by people onentry-level rates. It can be done withoutalienating labour; in fact, employees sug-gested it, and it was thoroughly discussedwith the unions. The eligible workers haveuntil August 10 to decide.

Southwest has also bowed to Wall Streetpressure and slightly slowed its growth rate.The airline is reducing its planned ASMgrowth in the fourth quarter of 2007 and in2008 from 8% to 6%. Southwest said that itwas also reviewing growth plans for 2009and 2010 but that it continued to see"tremendous long-term growth opportuni-ties".

The ASM growth adjustment and moreefficient schedules will mean Southwest tak-ing 15 fewer aircraft in 2008 (19 rather than34). As of July 18, the airline had agreementwith Boeing to defer five 737-700 deliveriesto 2013 and was exploring alternatives forthe other ten 737-700s. The 15 fewer air-craft will free up $200-300m in cash to sup-port additional share repurchases.

Southwest is also shifting capacity tomore profitable markets. In the fourth quar-ter, it will eliminate 39 roundtrip flights,including long sectors such as Philadelphia-Los Angeles and Baltimore-Oakland, whileadding 45 new flights in growth marketssuch as Denver and New Orleans. This isexpected to boost fourth-quarter earningsby $10m.

To achieve the $1bn annual revenueimprovement target, Southwest is looking todevelop ancillary revenues, expand interna-tionally through codesharing and implementmeasures that will help attract more busi-ness traffic.

Southwest expects to disclose details ofmany of those initiatives in the fourth quar-ter - somewhat later than had been antici-pated. The early announcements are likelyto include assigned seating or priorityboarding for a fee. The airline is also con-sidering in-flight offerings, such as wirelessinternet access, and selling travel-relatedproducts and services through its website.

Raymond James analyst Jim Parkersuggested in a recent report that Southwesthas enormous potential to generate incre-mental revenue and earnings. Ancillary rev-enues currently account for only 2% of itstotal revenues. Parker calculated, as ahypothetical example, that if 20% ofSouthwest's 92m passengers in 2008 pur-chased an assigned seat for $10, it wouldgenerate incremental revenue of $184m.Assuming a pretax margin of 90%, therewould be $103m additional net income.

Southwest's management also sees"hundreds of millions of dollars" revenuepotential from expanded codesharing. Theairline will have upgraded systems in placeby 2009 to accommodate international tick-eting. The plan is to initially expand code-sharing with ATA to the Caribbean andCanada (Mexico and Hawaii are alreadyserved). Later Southwest may look for addi-tional partners to fly from Baltimore toEurope and Asia.

Other planned initiatives include majorenhancements to the fare structure and rev-enue management, upgrading the FFP anda new business traveller-focused ad cam-paign. CEO Kelly said that some of it is sim-ply "catching up" with competitors but thatthere would also be innovation.

It is not clear at this point to what extentSouthwest's business model will change. Itsfuture position will definitely be a little moreupmarket, but Kelly also noted in the sec-ond-quarter call that the new initiativeswould maintain the airline's "low fare, lowcost leadership".


July/August 20076

By Heini [email protected]

Despite the tougher environment for low-cost carriers in the US, this summer is

seeing the first significant additions to the LCCranks since JetBlue in early 2000: SkybusAirlines, which began A319 operations out ofColumbus, Ohio, on May 22; and VirginAmerica, which is gearing up for takeoff fromits San Francisco base in August.

While Virgin America will undoubtedly havemuch greater initial industry impact (because ithas a global brand and is heading straight forthe key transcontinental markets), Skybus maycontribute more to the LCC sector as a pioneerof innovative strategies. The Columbus-basednew entrant is uniquely interesting for severalreasons.

First, Skybus will be the first airline to test aRyanair-style business model in the US. Themodel features ultra-low costs, web-only book-ings, bare-bones service, $10 fares, a focus onancillary revenues and use of secondary air-ports.

As an interesting twist, Skybus also wantsto build a Southwest-style people-centric cul-ture. In other words, it aims to combine thebest practices of the world's most successfulLCCs. It may succeed because its top man-agement includes several former long-timeSouthwest and Ryanair executives.

Second, Skybus raised a record $160m instart-up capital, making it the best-financednew airline entrant in US history. Its backersinclude major financial institutions in New Yorkand Boston, as well as prominent members ofthe Ohio financial and business community.

Third, Skybus has an unusually aggressivegrowth plan. The airline placed a $3bn firmorder for 65 A319s in October 2006 - thelargest order Airbus has received from a USstart-up. Those deliveries commence in late2008, and in the meantime Skybus is rapidlybuilding a fleet of leased A319s.

Fourth, with all of those A319s to finance,Skybus will be an early candidate for an IPO.The current thinking at the airline is that itwould go public within three years.

Skybus has had a promising start, seeing astrong response to its low fares and nonstopflights. But its longer-term prospects willdepend on essentially three things: proper exe-cution of the plan, whether the Ryanair-stylefare/service concept will work on a larger scale(rather than just as a niche) in the US, andwhether the Columbus market can generateenough O&D traffic.

Skybus' background

Skybus originated as Heartland Airlines,formed in 2000 by John Weikle, a 29-year vet-eran of the FAA who also worked at UPS andAirborne Express. The plan had been to oper-ate 717s out of a hub at Dayton, Ohio, butHeartland never got off the ground due toSeptember 11 and other factors.

In 2003 Weikle resurrected the venture asSkybus Airlines and switched the base toColumbus, Ohio, to take advantage of AmericaWest's decision to close a hub there that year.In 2004 he was joined by Kenneth Gile, a 25-year veteran of Southwest (most recently,director of flight operations), who assumed theposition of president/COO and interim CEO.The two men began raising start-up capital andputting together a management team. Skybusapplied for DOT certification in January 2005,with the aim of starting operations in early2006.

The DOT certification process was abreeze (at least compared to Virgin America's):there were no outside objections or majorissues and approval was granted in March2006. However, Skybus wanted to raise morefunds, and in the end it needed a waiver fromthe DOT to prevent its certificate being revokedbased on the one-year dormancy rule.

Like JetBlue in New York, Skybus hasenjoyed strong local support as the "hometownairline" for Columbus. Its original $3.5m seedmoney came from three Columbus-based enti-ties: Huntington Bancshares (a regional bank),


July/August 20077

Skybus: Will the Ryanair model work in the US?

Nationwide Mutual Capital (a private equityfund owned by an insurance company) andWolfe Enterprises (a private company withinterests in local media enterprises). In 2005the three original investors contributed an addi-tional $3.25m. Skybus also secured $57mworth of incentives from the city, state andColumbus Regional Airport Authority.

A private placement in February 2006,arranged by Morgan Stanley, raised more than$90m, giving the airline start-up funds that farexceeded the $60m required by the DOT andfacilitated the Airbus order. However, to beextra safe, Skybus raised another $72.7m frominstitutional investors in a private placement inMarch 2007.

With a total of $160m in equity capitalraised when it began operations, Skybus is ina strong position to grow the business andweather any setbacks. It is even better fundedthan JetBlue, the previous record holder, whichraised $130m prior to its launch in February2000 (or $159m adjusted for inflation).

Skybus has a nicely diffuse ownershipstructure: as of late March, there were 51 indi-viduals and 32 institutions, and only one entityheld more than 7% of the voting stock. Thethree largest shareholders were FidelityInvestments (12.6%), QVT Financial (a NewYork-based hedge fund, 6.7%) and MorganStanley (6.4%). US institutions and funds held78.4%, non-US institutions 13.5% and individ-uals 8.1% of the voting shares.

The nine-member board looks exceptional-ly strong - a "who's who of heavy hitters", asone local business column described it. It ismostly made up of finance executives andincludes several principals from the keyinvestors. Chairman is C. Robert Kidder, prin-cipal of 3Stone Advisors (a Columbus-basedprivate investment firm linked to Nationwide,one of the original backers) and also a boarddirector of Morgan Stanley.

The management team is made up of indi-viduals with the right credentials for starting anLCC - mostly seasoned airline managers,including several with long careers atSouthwest or Ryanair - but who are unprovenin top executive positions.

There are two ex-Southwest veterans,including president/COO Gile, to help instil aSouthwest-style culture. Ex-Ryanair veteran

Charles Gibson was brought in as consultantand board member to provide the "DNA ofRyanair". Gibson spent 16 years at Ryanair(1986-2002), most recently as director ofground operations, and in 2003-2004 wasinterim CEO of Tiger Airways, the Singapore-based LCC modelled after Ryanair.

Gibson has a small equity stake in Skybus,as does ex-Ryanair/Tiger Airways executiveDeclan Ryan. A couple of years ago DeclanRyan also invested in Allegiant Air, the LasVegas-based niche LCC that has emulatedRyanair's ancillary revenue strategy (seeAviation Strategy briefing, Jan/Feb 2007).

Skybus picked Michael Hodge of NewYork-based hedge fund Tiger Management (anearly investor) as its CFO - a sign that it antici-pates significant future capital needs to fundgrowth. Among other things, Hodge previouslyoversaw Tiger Management's Ryanair invest-ment.

The choice of CEO is intriguing: WilliamDiffenderffer, a former Eastern Airlines attorney(1981-1986), ex-CEO of SystemOne and othertravel technology companies and author ofleadership book “The Samurai Leader” (2005).He is reportedly highly entrepreneurial andkeen to test new business concepts.

Ultra-low operating costsLike many LCCs, Skybus plans to keep its

costs low by operating an all-new single-typefleet, offering one-class no-frills service, usingcheaper and less congested airports, maximis-ing productivity and relying heavily on technol-ogy and the Internet. But Ryanair and Skybustake many of those strategies further thanother LCCs in order to achieve the lowest unitcosts in the industry. Skybus expects its CASMto be below Southwest's and AirTran's - cur-rently the low-cost leaders in the US on astage-length adjusted basis.

Skybus strives for "unprecedented efficien-cy and productivity". Its owned A319s will have156 seats; this is the same as European LCCeasyJet has on its A319s but 18% more thanthe 132 seats Frontier, the Denver-based LCC,has on its A319s in single-class operation (thetypical two-class configuration on the A319 is124 seats).

Skybus targets average daily aircraft utilisa-


July/August 20078

tion of 15 hours, which would exceed theindustry-leading 13-14 hours achieved byJetBlue and Gol. The airline believes that itsbusiness model and scheduling approachmake that kind of utilisation possible. Forexample, turnaround times are shortened byboarding and disembarking passengers on theramp, through two doors, rather than using asingle airbridge. Of course, lesser airport infra-structure requirements also mean cost sav-ings.

Skybus designs its flight schedules so thataircraft return to Columbus at night, therebyminimising maintenance and flight crewovernight costs and providing a "quality of life"benefit to employees. Allegiant Air introducedsomething similar a few years ago, calling it a"cost-driven schedule". The strategy is possi-ble because leisure travellers tend to be lessconcerned about departure and arrival times.

The combination of being a new airline,employing young workers and Columbusbeing a relatively low-cost location means thatSkybus' labour costs must be among the low-est in the industry. Its pilots start at $65,000annually - less than half of the national averagepilot salary. Like Southwest, Skybus is veryincentive-oriented. Its flight attendants are onrelatively low wages but get commissions onin-flight sales. All of its employees have stockoptions.

Skybus is the first US airline to function asan e-commerce company, resulting in signifi-cant cost savings. The airline sells tickets onlythrough its own website; like Ryanair, it has nocall centres.

Skybus also benefits from extremely lowairport costs, resulting from the use of smallsecondary airports.

A new value propositionSkybus' product and fare strategies repre-

sent a new value proposition to US air trav-ellers, who are used to a much more upscaleproduct on LCCs than European travellers areseeing.

The airline does not offer connections,codeshares, FFPs, airport lounges, seatassignments or free catered items. Nor does itoffer an in-flight entertainment system. UStravellers have become accustomed to LiveTV

or XM Satellite Radio on LCCs, but Skybus'swebsite simply tells customers to "bring abook".

Also, Skybus' aircraft are more crampedthan what US travellers are used to. The airlinefollows Ryanair's example and leaves out seat-back magazine pouches, which apparentlyadds two inches of legroom. But even then itwill only have a 30-31 inch seat pitch, com-pared to Frontier's 33 inches (or JetBlue's 34inches on A320s).

The basic premise is, like the Europeanswho fly Ryanair, US leisure travellers will notmind the bare-bones product and service,reduced legroom and less convenient airportsbecause they are getting what they really want:extremely low-cost, hassle-free, reliable, non-stop service on clean new aircraft.

Skybus' one-way fares range from $10 (orabout $20 including taxes and fees) to last-minute fares on the longest sectors as high as$390. The airline has made a commitment tooffer at least 10 seats on each flight at the $10fare. Overall ticket prices are about half of theaverage cost of flying on competitors. The tick-ets are non-refundable; the change fee is $40.

The airline has inevitably faced criticismthat the $10 fares are gimmicky, impossible toget and could be seen as a bait-and-switch.However, if the European experience is any-thing to go by, customers will quickly learn thatto get the really low fares at peak or holidayperiods or on popular routes, bookings mustbe made months in advance.

In early July, the website showed that the$10 fares were sold out to key long haul desti-nations in California and Florida through mid-December, though they could be obtained toother cities from September. (On July 11,Skybus began taking reservations for theDecember 16-March 6 period, thus releasingthousands more $10 fares.)

To earn customer loyalty, it is more criticalfor Skybus to ensure that fares in the $50-$80range are available on a consistent basis. Thatappeared to be the case in early July. One-wayfares on the Columbus-Los Angeles (Burbank)route in September-October were $50, $75 or$100 (depending on the date), which com-pared very favourably with the $99-$149 inter-net fares that Southwest was offering on one-stop flights via Las Vegas, Phoenix or Chicago


July/August 20079

Midway.Skybus wants to emulate Ryanair's highly

successful ancillary revenue strategy: max-imising onboard sales, charging extra for flight-related items that were traditionally oftenincluded in the air ticket price, and selling trav-el-related products through its website. Thebasic idea is to be able to market an attractivelow fare and then sell those additional servicesthat each passenger values.

The extra charges include checked bagfees of $5 each for the first two bags and $50for each additional bag. Passengers can boardearly for a $10 fee per flight. Onboard every-thing from food and drinks to pillows and blan-kets costs extra. Skybus offers a variety ofdishes for $8 or $10, promising "a tasty depar-ture from traditional airlines".

Skybus actually prohibits passengers frombringing their own food or beverages. Ryanairappears to have given up on that policy -according to its website, "passengers are wel-come to bring their own food on board" - butRyanair only sells sandwiches and snacks.

Since some of this is totally new to US trav-ellers, Skybus goes to extra lengths to explainit on its website. There is a section called "theSkybus rules of flying" which, fortunately,comes across as informative and entertaining,rather than cringe-inducing.

One of the most controversial aspects ofSkybus is that its customer service is notreachable by phone. But that is one of the"rules" and clearly explained on the website:"Don't call us. We don't have a phone number.Seriously. We'd love to chat, but those phonebanks are expensive. And a good website likewww.skybus.com is even more convenient."

The in-flight menu section of the web site isfull of reminders of the new value proposition:"Fares from $10. Now, there's a reason to cel-ebrate. Pop the top on some Asti Spumante"(which also costs $10; other alcoholic drinksare $5 and soft drinks $2). Another reminder:"No, drinks aren't free. Give us a break - someof you paid just $10 for your seat."

The website is impressive: simple, informa-tive and easy to navigate (Ryanair could learnfrom it). There are six prominent buttons: Booka flight, Avis/Budget, Hotels, Cruises,Attractions and Vacation packages; plus"Check-in now", "View/change reservations"

and "Help" buttons. The "search flights" sectionincludes a unique monthly fare calendar, allow-ing customers to see at one glance whichdates in any particular month have the lowestfares.

Some of the early comments on internetdiscussion forums indicate, as might beexpected, a mixed response to Skybus' poli-cies. Some people feel that the airline is simplygoing too far, that it is taking humanity out of airtravel, while others note that existing servicelevels are so bad anyway that doing away withthem and charging less is a good idea.

Those are the seasoned travellers. ButSkybus' low fares will make regular air travelpossible for a whole new segment of the pop-ulation. The internet forums included a postingfrom a single mother in Columbus who cannow, for the first time, afford to fly herself andher five kids to visit grandparents in California.

This type of business model has to be fea-sible in the US, where so many people haverelatives and friends scattered all over the vastcountry.

However, Skybus may have to modifyaspects of the model down the road, such asthe no-phone policy. In the wake of JetBlue'sservice meltdown in February and what onecommentator referred to as a "trigger-happyCongress", it may not be possible to be a100% e-commerce airline in the US.

Skybus has emulated Ryanair's "aircraftbranding" strategy, namely selling advertisingspace inside and outside its aircraft. Fuselageadvertising is not totally new in the US -Southwest has a marketing deal with Orlando'sSeaWorld, under which one aircraft is paintedlike the killer whale Shamu - but Skybus isgoing further by actively promoting it as a rev-enue source. The going rate is reportedly$500,000 per year per co-branded aircraft.

The first such deal (at a special rate) wasclinched with Nationwide Mutual Insurance,one of the original local backers. Under theone-year contract, Nationwide's logo and slo-gan will appear on the inside and outside ofone aircraft. Inside, the ads will be on traytables, overhead bins, restroom doors andrefreshment carts. The rest of the fleet will bein Skybus' standard livery featuring an orangecolour scheme similar to easyJet's with a but-terfly logo.


July/August 200710

Ancillary revenues account for about 15%of Ryanair's total revenues but 25% of its prof-its. Allegiant's percentages are similar.Ancillary revenues are the highest-marginbusiness; Merrill Lynch estimated in a late-2006 report on Allegiant that such activitieshave pretax margins in excess of 75%.

People-centric cultureSkybus said in its DOT filings that it would

try to create a Southwest-style culture, whichit considered critical in making the differencebetween a successful carrier and one withemployee relations challenges. The airlineprobably has a better chance than most toemulate Southwest, because two of its keyexecutives lived in that culture for manyyears.

But, while LCCs around the world havecopied many aspects of Southwest's busi-ness model, no-one has been able to emulatethe special "Southwest spirit". It was built andmaintained with the help of a personality cultaround former-CEO Herb Kelleher. It has a lotto do with going to great lengths to attract theright-quality staff, training them well, treatingthem well, paying good salaries, creating afun work environment and motivating workersto outperform their counterparts at other carri-ers. All of that has been done consistently forover 30 years, allowing trust to build.

Consequently, Skybus’ management nowputs more emphasis on developing a culturethat is unique to Skybus. Among other things,it means hiring people who are competent,very enthusiastic and willing to take a chancewith a new service concept.

Growth plans and prospectsSkybus plans to link Port Columbus

International Airport with key business andleisure destinations throughout the countrythat are underserved or have only turbopropor RJ service. The airline also expects to fly toselected destinations in Canada and theCaribbean (it has applied to serve Cancun inMexico and Nassau in the Bahamas).

There are many good market opportuni-ties because, even though Columbus getsplenty of air service, travel to numerous cities

from there involves one-stop flights via hubssuch as Atlanta, Chicago and Phoenix. Mostof the 12 initial routes introduced by Skybusbetween May 22 and the end of July did notpreviously have non-stop service.

The initial growth spurt has taken Skybusall around the country. Its network alreadyincludes points in the East and West coasts,the Southeast, the Midwest and the PacificNorthwest.

The airline talked about the initial destina-tions as falling into three types. First, thereare the "primary metropolitan areas" such asKansas City, San Diego, Fort Lauderdale,Richmond (Virginia) andGreensboro/Winston-Salem (North Carolina).Of course, none of those are congested hubs.

Second, Skybus operates to what it calls"convenient, well-known airports that arealternatives to congested gateways". Theseinclude Burbank in the Los Angeles area andOakland in the San Francisco Bay area.

Third, like Ryanair, Skybus is testing thealternate access point potential of varioussmall, low-cost airports that are further awayfrom key cities. These include Bellingham(Washington), which is located betweenSeattle and Vancouver; Portsmouth (NewHampshire), which is 55 miles from Bostonand also convenient for Portland, Manchesterand Concord; St. Augustine (Florida), which isa 30-minute drive from Jacksonville; andChicopee (Massachusetts), which can servethe cities of Hartford and Springfield.

Southwest has shown that out-of-the-wayairports can work well in the US when lowfares are offered. For example, Southwesthas successfully developed Manchester(New Hampshire) into a major gateway - anairport that, like Portsmouth, is 55 miles fromBoston.

But Skybus is moving in unchartered terri-tory with airports such as Chicopee and St.Augustine. Chicopee has not had regularpassenger service since the 1980s, andbefore Skybus St. Augustine was not evencertified as a commercial airport. Skybus is adream-come-true for these airports, whichhave been scrambling to upgrade facilitieswith the help of state or local grants.

In addition to potential geographical chal-lenges, traffic generation may be hampered


July/August 200711

by difficult schedules. The once-daily flightsare scheduled for the convenience ofColumbus-originating passengers (or crews);for example, the 19:18 hour departure timefrom Chicopee means that New England-originating passengers cannot connect toFlorida or the West coast - they have to stayovernight in Columbus.

Like the European LCCs, Skybus offersno connecting flights "at this time" - some-thing that facilitates tighter scheduling andhelps keep costs low but will hamper trafficgeneration, so the policy may well be recon-sidered in the future.

In the meantime, many passengers will becreating their own multi-point trips throughColumbus, paying separately for each sectorand moving their baggage between flights.Skybus says on its website that it does notrecommend it, but in reality connecting trafficwill help make marginal routes profitable.

Of course, like LCCs typically, Skybus isnimble enough to pull out of a route after acouple of months if the route is doing verybadly.

Connecting traffic will grow when frequen-cies are increased. Most of the routes intro-duced so far have a daily service, thoughthree markets (Burbank, Ft. Lauderdale andPortsmouth) have two daily flights. However,Skybus expects to eventually operate high-frequency service in many markets, becauseit is counting on the "Southwest effect" (oftraffic multiplying in response to low fares,benefiting all carriers).

The growth plan is ambitious. Havingcommenced service with two aircraft (bothleased from Virgin America), Skybus expectsto operate eight leased A319s by year-endand 12 or 13 by the fourth quarter of 2008,when deliveries commence from Airbus. The65 A319s to be purchased from Airbus will bedelivered between late 2008 and 2012, at arate of 13 or 14 per year.

In a 2003 study commissioned by theColumbus Regional Airport Authority, BACKAviation Solutions concluded that theColumbus market would respond well to addi-tional low-fare service and that Skybus' planpresented an opportunity to leverage thatpotential. Skybus' forecasts are based pri-marily on BACK's estimates and use conser-

vative assumptions (including the assumptionthat its low fares will be fully matched by com-petitors). BACK utilised a model that has suc-cessfully predicted passenger volumes forLCCs in European markets.

Columbus suffered a major blow whenAWA (now US Airways) reduced its operationthere from 49 daily flights (mainly RJs) to justfour mainline flights in 2003. But that opera-tion had existed only to enhance AWA's pres-ence in the East, and direct flights to the EastCoast from Phoenix and Las Vegas hadmade it redundant.

After AWA, Columbus had many of thepre-requisites for successful LCC entry: limit-ed destinations, no hometown LCC, low-fareservice accounting for only 20% of total traffic,a growing metropolitan area and a largepotential catchment area. The airport maydraw traffic from cities such as Akron,Cincinnati and Cleveland. Columbus is the15th largest city in the US, with a populationof 1.6m, and nearly 6m people live within 100miles.

But Columbus is not New York, Atlanta orLondon - huge population and business cen-tres that have facilitated the rapid growth ofJetBlue, AirTran and Ryanair. Consequently,there has been some scepticism on WallStreet about Skybus' plans. Calyon Securitiesanalyst Ray Neidl said recently that he foundit "difficult to see how enough O&D traffic canbe generated out of a city the size ofColumbus". JP Morgan's Jamie Baker notedin April (in a research note on Southwest) that"Columbus has already been proven toosmall to support a low-cost carrier hub, at atime when demand trends were significantlyhigher".

Also, there is already a fair amount ofcompetition at Columbus - something like 12other airlines, including Southwest, JetBlue,Delta, US Airways and American. Southwesthas a not-insignificant 23% traffic share andoperates nonstop from there to nine cities.

Skybus has indicated that it intends toavoid a head-on confrontation withSouthwest. Also, the airline sees the possibil-ity of opening a couple of "focus cities", whereit could base several aircraft - in other words,reduce dependence on Columbus. Thosewould probably be wise strategies.


July/August 200712

By Heini [email protected]

Despite scepticism from many in theindustry, specialist all-premium airlines

are carving out a niche in the lucrativetransatlantic market. But can these airlinesmake a profit and, if they do, will their suc-cess be short-lived, given that some ofEurope's majors look set to launch all-pre-mium services of their own?

Though transatlantic business fareshave slowly come down in the last decade,there's little doubt that business passengersunderpin the economic return of transat-lantic routes. As Andrew Lobbenberg, avia-tion analyst at ABN Amro points out, it's pre-mium passengers that "really support thelegacy airline profits, and that's why we areseeing all-business class start-up airlines".In this article Aviation Strategy takes a lookat the key all-premium entrants: Eos,MAXjet and Silverjet on US-London routesand L'Avion, which has just launched onNewark-Paris; and also considers theresponse of some of the European majors.

Eos AirlinesNew York-based Eos Airlines arose from

Atlantic Express, a proposed low cost point-to-point transatlantic airline that DavidSpurlock, a former director of strategy atBritish Airways, planned to launch back in2005. At that time the airline was fundedwith around $90m, with a majority of the car-rier's equity held by three US west coast pri-vate equity firms - Golden Gate Capital,Maveron (co-founded by Howard Schultz,the chairman of Starbucks) and Sutter HillVentures - with the rest owned by theSpurlock family and other investors.

However, in 2005 the airline suffered aspate of managerial resignations and itslaunch date was postponed after a delay inreceiving US FAA certification. But encour-aged by the success of PrivatAir's all-premi-um transatlantic service run on behalf ofLufthansa, in 2005 Spurlock and the other

investors decided to change strategy, andthe rebranded Eos became the first all-pre-mium transatlantic airline, launching its firstservice in October 2005, just two weeksbefore the inaugural service from rivalMAXjet.

Today Eos employs around 230 staff andoperates three 757-200ERs (on five-yearleases from ILFC) between LondonStansted and New York JFK, with a fourthaircraft being added in September that willincrease frequency on the airline's soleroute to 40 flights a week. Eos will receiveanother 757 in December and a sixth air-craft is currently being "negotiated"; thesewill be used not just to add frequency onStansted-JFK but also for two new city pairsthat Eos plans to launch before the end ofthe year.

The first new route will be betweenStansted and either Chicago, Boston andWashington DC (with Chicago the most like-ly candidate), with a probable launch date ofNovember. West coast US routes are notpossible with 757s, so if the airline wants toextend its network westwards it will have toacquire 767s (which Eos says may be apossibility at some point).

The second route will be from JFK to acontinental European destination, most like-ly to Italy or to Paris CDG, Frankfurt,Amsterdam or Zurich. Last year Eos said itwanted to commence flights to Paris CDG inMarch and Zurich in April 2007, but theseambitions have had to be postponed.Nevertheless, the longer-term plan is to addall of these US and European destinationsinto the Eos network, with a target of aroundthree new destinations a year in 2008-2010.Most of this expansion will be between con-tinental Europe and the US, rather than outof UK airports, and earlier this year Eosapplied for the so-called "blanket" openskies certification, which would allow the air-line to operate to each and any of theEuropean countries that are in the new


July/August 200713

Premium transatlantic airlines:how important are they?

open skies deal with the US (without theneed for any other application to the USDoT).

In contrast to the lower cost (though stillpremium) services from its start-up rivals,Eos - named after the Greek goddess ofdawn - is firmly aimed at the top end of thepremium segment, with an upmarket, luxuryproduct that more closely resembles first-class than business class. Each 757 has 48lie-flat seats, and among the frills offeredare an FFP and personal escort throughfast-track check-in. The airline also tries todifferentiate itself via on-time service -according to analysis of CAA statistics, theairline was the most punctual of nine sched-uled airlines serving New York and Londonin 2006, with an average delay per flight of18 minutes (as opposed to the 39 minutesof MAXjet).

This upmarket offering enables Eos tohave average fares that - while still cheaperthan those offered by BA and Virgin - arehigher than its all-premium rivals MAXjetand Silverjet, with some fares starting ataround £1,046 ($2,000), but more typicallyfrom around £1,499. Interestingly, toencourage trade sales Eos pays UK travelagents a hefty 10% commission on all tick-ets they sell.

Yet despite this price point, and whileEos says it has a considerable cost advan-tage over MAXjet and Silverjet as it uses

757s rather than 767s, theairline posted heavy lossesin its first year of operation.According to a US DoT filing,in the first six months of2006 Eos recorded an oper-ating loss of $36m on rev-enue of $10.5m, whichcomes on top of a $36.9moperating loss in the sixmonths to the end of 2005.

In October 2006 Eosclosed a second tranche offunding, this time raising$75m in a round arranged byMorgan Stanley, in order tofund route and fleet expan-sion in 2007. Worryingly, Eoscontinues to reshuffle its

management: after CEO and founder DavidSpurlock moved to become chief strategicofficer in June 2006, his replacement asCEO, David Pottruck - who was previouslyCEO of financial services giant CharlesSchwab - lasted just eight months (althoughhe stayed on as Eos chairman) before beingreplaced as CEO by Jack Williams (who has23 years' experience with American Airlinesand seven with Royal Caribbean Cruises) inFebruary this year.

Williams wants to build up Eos into a"lifestyle brand" - i.e. position Eos evenmore as a first class rather than businessclass product. Although the airline is startingto gain a following among board-level exec-utives at some City and Wall Street financialfirms, in May this year Eos launched a new$6m marketing campaign in New York andLondon, partly targeted at premium classcustomers in the fashion and entertainmentindustries, as well as in the finance sector.

Williams says the premium market onUS-UK routes is growing by 10-12% a year,but while Eos is trying to differentiate itselfas being more upmarket than its rivals,there's little doubt that Eos is competingfiercely with MAXjet and Silverjet for largelythe same target market. Although airlines trynot criticise each other in public, in Marchthis year a senior Eos executive memorablycalled airlines that claim to be carbon neu-tral (by offsetting carbon dioxide emission


July/August 200714

Privatair Eos Silverjet MAXjet L'Avion

Seat DesignInclined Flat

(170°,55")Horizontal Flat

(Flat, 78")Inclined Flat (170°, 60")

Traditional (170°, 60")

Traditional (140°, 50")

Consumer FocusCorporate

(LH, KL, LX)Subsidised

Corporate, VIPValue SME,

LeisureValue SME,

LeisureValue SME,

Leisure

Network DesignHub Bypass or Complement

Scale (Frequencies)

Scale (Frequencies)

Scope (Destinations) TBD

Distribution N/AMulti-channel

(Corp. focused)Multi-channel

(Web focused)Multi-channel

(Web focused) Web

Price Point N/A High Medium Low Low

Scale (Frequency) Model• Movable large corporate (subsidised) business

• Strong local catchment areas

• Affluent leisure and VIP traffic

• Sub-nine hour stage length (one daily rotation per A/C)

Scope (Destinations) Model• Mix of affluent leisure and movable business

• Broad regional catchment areas

• Seasonal and economic balance

• Availability of peak-time slots

• Seven to twelve hour stage length

MAIN PRODUCT DIFFERENCES

Source: MAXjet, IEA LCC Conference June 2007

though adding an extra amount to fares) as"putting lipstick on a pig". This was a none-too-subtle attack on Silverjet, which hasdeclared itself carbon neutral (see page 16).

The comment may betray the growingpressure on Eos's latest management todeliver a profitable exit opportunity to its pri-vate equity owners, who are no doubt look-ing for an IPO or trade sale in order to makea hefty profit on their initial investment.Williams claims that the airline is now break-ing even on a per-flight basis (i.e. includingflight operating costs only), and is aiming tomake a net profit in 2008. But load factorsare believed to be at around the 70% level,and whether Eos can raise these into the80s in order to deliver a significant net prof-it and provide a basis for a successfulinvestor exit remains to be seen.

MAXjet AirwaysMAXjet Airways is based in Washington

DC and launched operations on a New YorkJFK to London Stansted route in November2005, just a few weeks after Eos.

Like Eos, MAXjet has also had its fairshare of challenges. It was originally calledSkyLink Airways and wanted to operate outof Baltimore/Washington airport bothdomestically and internationally as a lowcost, low fare airline, and also as a charteroperator. However, it changed its name inApril 2005 after a legal challenge fromSkyLink Aviation of Canada, and in thesame month carried out a major manage-ment reshuffle when Kenneth Carlson - itsco-founder and first CEO - resigned, andwas replaced by Gary Rogliano.

Rising fuel costs, a delay in US FAA cer-tification and difficulty in persuading the USDoT of its "financial fitness" forced the air-line to postpone its launch date, and its pro-posed strategy evolved into an all-premiumconcept at the same time as it scaled backits initial fleet size (it had originally targeteda fleet of eight 767s by the end of 2005).

After the initial JFK-Stansted route,MAXjet added services from Stansted toLas Vegas and Washington Dulles in 2006.The non-stop Las Vegas route began inNovember, in direct competition with a

Virgin Atlantic service from London Gatwick,but demand is strong enough (with load fac-tors on the route around the 75% level) thatMAXjet will increase frequency to fourflights a week this September.

The Washington Dulles-Stansted routehas been more problematical. After a seriesof delays it was launched in April 2006, butwas unexpectedly suspended in Januarythis year as part of a "seasonal revision",with capacity transferred to Stansted-LasVegas until May, when the Dulles servicewas restarted on a four-times-a-week basis.The problem that MAXjet faces is that it isnot a route with particularly high demand,with less than 1m passengers a year fromLondon - and many of those are US federalemployees, who are mandated to travel onUS airlines that the government has blockdeals with.

MAXjet's three routes are served with afleet of four 767-200ERs and a single 767-200 (all of which are leased), with the lasttwo 767-200ERs being added in June andJuly of this year.

MAXjet defines its market as price-sensi-tive business customers - often employeesof small companies that cannot get corpo-rate discounts (large corporates can getanything up to a 50% discount on fares);standard business travellers at corporates,and affluent leisure travellers who want toexperience business class product.

They are served with a 102-seat config-uration on the 767s, but crucially MAXjetdecided not to equip its aircraft with lie-flatseats, and instead uses standard businessseats that recline to "only" 160°. In relativeterms (for an all-premium service provider)it is "low-cost" in other areas as well - forexample, 85% of tickets are sold via theinternet and call centres, with just 15%through travel agents.

MAXjet positions itself as offering thecheapest business class fares across theAtlantic, at a price point that is less thanSilverjet and considerably less than Eos. InFebruary it announced a major fare sale,with transatlantic fares as low as £299 oneway, including taxes and fees, and MAXjetsays that at these prices it attracts leisurepassengers that are willing to try business


July/August 200715

class for thesame cost asthey would payfor a flexibleeconomy fareon a major air-l i n e .Strategically,MAXjet is dif-ferent fromcompetitors inthat it hasdecided to

expand its network rather than primarilybuild up frequency on its core New York toLondon route. Now that the two latest air-craft have arrived, a four-times-a-weekStansted-Los Angeles route will belaunched in August, which will competeagainst services out of Heathrow from BA,Virgin, American and United, while a fifthroute may be launched either to Florida orthe US west coast. MAXjet believes thelonger range of the 767-200ER gives it amarked advantage over Eos, and other westcoast destinations such as San Franciscoare under consideration.

The airline aims to add a sixth 767 in thesecond half of this year and a seventh inearly 2008, and it is likely that these aircraftwill be used for expansion on routes to theMiddle East, Africa and Asia, which is possi-ble now that the open skies deal allows on-flight rights from the UK to non-EU coun-tries, providing permission is given by thatthird country. In effect this will turn Stanstedinto a mini-hub operation for MAXjet, and tofacilitate this the airline is reportedly consid-ering moving its base over to Stansted fromthe US.

However, this expansion will be expen-sive, and Jarions Investors, its original100% owner, has already seen mountinglosses. Despite carrying more than 75,000passengers in the period from November2005 to December 2006, MAXjet made anet loss of $80m for 2006, which came ontop of a net loss of $30m in 2005. Revenuegrew from $2.3m in 2005 to $41m in 2006,its first full year of operation, but the operat-ing loss increased from $28m in 2005 to$73m in 2006.

MAXjet too has been reshuffling its man-agement, including the appointment ofWilliam Stockbridge - who has been atMAXjet since it was founded, and was pre-viously CEO of a cargo company - as CEOin November 2006 (moving over from chair-man, and replacing Gary Rogliano). In Aprilthis year Richard Sharp was replaced aschairman after five months by KennethWoolley (the majority investor in the airline;and who was also an early investor inJetBlue) while John Severson, previouslywith Spirit Airlines and Jet USA, was madeCFO.

There has been unconfirmed speculationthat Jarions is looking for an exit, thoughthis is denied by the airline, and last sum-mer there were reports that Indian airlineKingfisher wanted to buy MAXjet (in order toget past Indian government restrictions oninternational competition - see AviationStrategy, June 2007), but again this wasdenied by the US airline. Yet in 2006 the air-line also denied reports that MAXjet wantedto float on the Alternative Investment Market(AIM), the junior market of the London StockExchange - but that is exactly what it hasjust done this year.

In early June MAXjet raised £47.3m (netof £3m of fees and costs) from institutionalinvestors through a placing of 36.6m sharesat £1.38 arranged by Panmure Gordon. Thisrepresents 53.6% of the enlarged equity,and values the airline at £96m. AIM tradingstarted on 14 June, but the share price fellimmediately, and stood at £1.29 as at mid-July.

The money raised will be used to fundboth fleet and route expansion, as well asfor retiring debt, but it is too early to make acall on whether this fundraising will beenough to see the airline through into profit,given increasing competition. Load factor inMay was 74.9%, which Stockbridge says isahead of estimates, but the airline is still notbelieved to be breaking even.

SilverjetSilverjet is based at London Luton airport

and launched its first flight, on Luton-Newark, in January this year. The airline


July/August 200716

Eos Airlines 757-200ER 4

MAXjet Airways 767-200 1

767-200ER 4Silverjet

767-200ER 2L'Avion

757-200 1

PREMIUM CLASS TRANSATLANTIC

FLEETS

was founded by the entrepreneur andSilverjet’s new CEO Lawrence Hunt, whospent two years researching what budget-conscious business passengers want froma transatlantic service before setting up thecompany last year. In a pre-launch IPO onAIM in London in May last year, Silverjetraised a total of £25.3m ($48.6m), net ofcosts and fees. The float valued the airlineat £33.6m, with 81% of the airline held byinstitutional investors and 19% by the air-line's directors (including Silverjet chairmanPeter Owen, previously CEO of Aer Lingus).

In October last year, Silverjet made thetactical purchase of Gatwick-based chartercarrier Flyjet and its associated lessorSkylease for a price of between £4m and£5.5m, depending on certain conditions andtargets being reached (and payable instages up to 2009). Launched in 2003,Flyjet operates charters out of Gatwick andManchester to holiday destinations aroundthe world, and although Flyjet did haveplans to launch a low cost, low fare serviceon Newark-Luton, the acquisition was madeprimarily to give Silverjet an air operator'scertificate (AOC), although it also benefitedfrom charter flight revenue and the acquisi-tion of some key staff. Skylease was ameans to acquire Silverjet's initial aircraft, a767-200ER that Skylease leases "at a rentalwhich represents a significant discount tocurrent market rates". Skylease also leasestwo 757s, though these are currently char-tered to European tour operators untilOctober of this year.

Prior to the Skylease deal, last yearSilverjet signed a letter of intent to acquiretwo 767-200ERs from Thomsonfly, with thefirst aircraft delivered this April and the sec-ond due to be delivered in October. Theyare costing Silverjet $14.1m each, and arebeing financed via a sale and leasebackdeal with Novus Capital. After refitting, thefirst aircraft began operations in July, beingused for a second daily frequency on theLuton-Newark route, and when the next onearrives it will enable a third frequency orpotentially a second US destination; in MaySilverjet applied for permission from the USDoT to start a Luton-Chicago route inNovember.

This June Silverjet also signed an LoI toreceive another pair of ex-Thomsonfly 767-200ERs, in March of 2008, and in the medi-um-term the airline wants to launch at leastthree further routes by 2009, operated witha fleet of up to 10 aircraft. The airline cur-rently employs just over 150, and this willdouble by the end of 2007.

However, Silverjet also has ambitions toexpand considerably in the longer term, andHunt says that the airline has identifiedmore than 30 routes that it would like toserve out of Luton, with plans to grow thefleet to 40 aircraft inside a decade. Linked tothese ambitions, Silverjet is reportedly con-sidering a move to Heathrow when the newOpen Skies deal kicks in, though it would befaced with the normal problem of findingslots there, and operations are likely toremain at Luton in the medium-term.

In the US, other potential destinationsinclude Boston, Miami and San Francisco,but long-term Silverjet is looking to expandto non-US destinations, with South Africa apossibility as well as Asian destinationssuch as China (Beijing, Shanghai and HongKong) and India (Mumbai and Delhi).Although these cities are reachable with767s, the airline is contemplating acquiringA350 or 787 equipment for the operation ofthese routes, and if the airline went downthis strategic path it would switch all its fleetover to A350s or 787s, as it says that it willalways operate a single model policy.However, these non-US routes are unlikelyto be launched before 2012, although theairline is believed to be talking with prospec-tive airline partners in these countriesalready, based on partnerships with local


July/August 200717

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£ SILVERJET’S SHARE PRICE HISTORY

airlines that can link up their domestic net-works with long-haul flights from Silverjet.

Silverjet's focus is very much on deliver-ing a premium service at the lowest possiblecost, making it "difficult for the legacy carri-ers to compete", according to Hunt. It offers100 lie-flat seats on its aircraft (which costs£1.9m per 767 to equip), as well as women-only toilets and no overhead lights (which itsays bother sleeping passengers). The air-line says a major point of differentiation withits competitors at Stansted is that it hascopied the separate check-in and securityfacilities enjoyed by private jet passengers.At Luton it has secured a dedicated terminal(through the 10,000 square feet of Luton'soriginal terminal building) that can handleup to 200 passengers at the same time,while it has contracted with Newark airportfor a similar "private area" there.

Similar to MAXjet, Silverjet is targetingcorporate executives, upmarket leisure trav-ellers and employees at small and medium-sized businesses. The vast majority ofSilverjet's business is believed to be in thelatter two categories, although the airlinehas initially been hampered by its lack ofdeals with travel management companies(TMC), with whom small and medium busi-nesses traditionally arrange their corporatetravel. Since the start of the year the airlinehas prioritised this area, and has nowsigned a series of deals with most of theleading TMCs. Silverjet had also beenaffected by not being live on the main glob-al distribution systems (Amadeus, Galileo,Worldspan and Sabre) until this Spring,which is believed to have hit trade sales inthe first few months of 2007 (as the lack ofGDS access forces agents to use the air-line's website, which they are traditionallyreluctant to do).

Silverjet does not operate a FFP andsays it has no plans to introduce one as itwill merely increase costs. However, thisdoes not preclude future partnerships withother airlines, and sources suggest thatinformal discussions have been held witheasyJet, which has a large presence atLuton. Silverjet has also linked up with acompany called CarbonNeutral for a carbonoffsetting scheme (with a mandatory offset

contribution included in on all fares) thatSilverjet claims makes it the first airline tobe carbon neutral on all flights.

Other cost-saving initiatives include anunusual "profit share" deal with Talk PR, itspublic relations agency, which is based on alow monthly retainer fee. However, Silverjetis believed to have a more conventionalcontract with its blue chip advertisingagency, M&C Saatchi, which is running acampaign targeting the SME sector.

Like its rivals, Silverjet has faced lossesin its initial operations. It recorded a pre-launch operating loss of £1.5m and net lossof £1.1m in the six-month period to the endof September 2006, and since the IPO saysit has faced $11.6m of "unforeseen" expen-diture, including the costs of fitting out theLuton terminal and its private lounge atNewark; the acquisition of Flyjet andSkylease; down payments on extra aircraftand an increase in its capital adequacydeposit with the UK CAA (which Silverjetsays is due to higher-than-anticipated levelsof business).

After originally saying that the £25mraised in 2006 would be enough to take theairline through to break-even, in AprilSilverjet unexpectedly went back to themarket. A placement with institutional andexisting investors arranged by ArdenPartners and Kaupthing Capital of 14.4mshares (representing 32.5% of the enlargedequity) at a price of £1.80 raised a total of£25.9m, or £24.6m after financing costs andfees. This sum will pay the unexpectedcosts already incurred and enable othernew expenditure (such as increasing thenumber of cabin crew per flight) and anacceleration of expansion plans.

The airline says it needs just 20,000 pas-sengers each year (less than 0.5% of thetotal New York-London business market) tobreak even. According to its calculations,break-even load factor is 65%, with the fullyloaded costs of a return Luton-New Yorkflight being £65,000 (of which £24,000 is forfuel), all based on an average return fare of£999. At an 80% load factor, this wouldmean an annual profit of £5.2m per aircraft.

Silverjet says its average fare has actu-ally crept up from £999 to £1,050, but load


July/August 200718

factor on Newark-Luton in May was only62.6% - which is not quite the "resoundingsuccess" that the airline claims it to be,although figures just released reveal a loadfactor of 70% for June.

Despite two major rounds of financing,there is believed to be some unease amongsome of the original Silverjet investors. Theairline floated in May 2006 at a price of£1.12 per share, but this fell to £1.01 inSeptember (see chart, page 17) before asteady rise to £2.09 in March 2007, beforefalling back yet again. Some of the IPOinvestors, such as the GAM Star investmentfund (which bought 6.6% of the company atthe float) and the Rathbone SpecialSituations fund (which bought 5.3%), arebelieved to have taken profits as the pricerose after the IPO, but with the share pricecurrently at £1.56 as at mid-July - i.e. wellbelow the offer price of the recent place-ment - concern may be growing. In lateJune a UK newspaper reported thatGoldman Sachs had approached Silverjetabout a possible investment, but the talkswere apparently unsuccessful.

However, Hunt (who owns 8.99% of theairline after the April placement) is bullishabout the prospects for Silverjet, and is aim-ing for turnover of around £38m-£40m in2007/08, with a small profit.

L'AvionThe latest addition to the all-premium

transatlantic sector is L'Avion, which beganas a concept back in 2002 but was formallylaunched as Elysair in July 2006 by Sociétéde Participation Aérienne (SPA) with start-up capital of €25m ($32m). SPA is owned bya number of investment companies andindividuals, one of which is CEO MarcRochet (who owns 6.5%), with ChristopheBejach, Elysair chairman, controlling anoth-er 5%.

Rochet was previously CEO at AOM-AirLiberté, but became chief executive andpresident of Elysair in late 2006, where hewas faced with a series of problems. Mostseriously, Elysair faced a battle to securesufficient slots at Orly to launch a transat-lantic service, as its application to COHOR,

the French slot co-ordinator, faced resis-tance from US airlines, in particularContinental. The US airline pointed out thatit and other US carriers had been forced bythe French government to move operationsfrom Orly to CDG in the 1990s and that ithad since been banned from restarting ser-vices out of Orly. Continental thereforeobjected formally to Elysair's proposedroute to Newark (which is a hub forContinental), but COHOR eventually grant-ed the airline more than 600 slots at Orly,which was enough for the French airline tolaunch its service.

In January this year the airline wasrebranded as L'Avion (although Elysair hasbeen retained as the name for the airline'sholding company) and launched its inaugur-al route under the L'Avion brand betweenParis Orly and Newark on a 12-flights-a-week basis (compared with 98 flights aweek on the sector from Air France). Basedin Orly, L'Avion operates a single 757-200, a15 year-old aircraft leased from GOAL(German Operating Aircraft Leasing) and fit-ted with 90 seats that have a 140° recline.

L'Avion has around 60 employees andoffers return fares from €1,599 ($2,130),which the airline claims is 50% less thancompetitors' fares, and it is targeting 28,000passengers in its first year of operation. Itwill add another leased 757-200 at the endof October, initially to be used on boostingfrequency on the existing route. However,L'Avion wants to add a second US destina-tion to its network, and the French airline


July/August 200719

0

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40

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America

n Virg

in

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ental Eos

Delta

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et

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ia*

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Zoom

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WEEKLY FLIGHTS LONDON-NEW YORK

Note: Summer 2007 schedule, * = Fifth Freedom

has already formally applied to the US DoTfor permission to fly a route to/from Boston.L'Avion says that a third, non-US route willbe added in 2008, with destinations in eastEurope and the Middle East under consid-eration.

L'Avion's tickets are distributed via theinternet and French travel agents, and theairline plans to break-even by the middle of2008, for which it says it needs a 70%-75%load factor. Yet if Virgin and/or BA start oper-ating all-premium services out of Paris in2008 (see below), the airline might struggleto achieve this, and according to uncon-firmed reports some of its flights out of Parishave had only a handful of fare-paying pas-sengers. L'Avion denies this, and says thatin the first six months of operation it"exceeded projections", with a 78% loadfactor in June.

The incumbents respondThough there have been tentative

attempts in the last couple of years to set uppremium transatlantic airlines (for exampleBlue Fox Executive Airlines on Stansted-JFK and Fly First on Luton-Newark, neitherof which made it past the planning stage),the challenge this time around to theEuropean (and US) majors from the newbreed of all-premium airlines is more seri-ous.

Together, Eos, Silverjet and MAXjet offer70 flights a week on London-New York,compared with the more than 400 flights aweek that other airlines on the sector offer(see table, page 19). These services com-pete for between 4m and 4.2m passengersa year that travel on New York-Londonroutes, of which around 30% are businessand first-class passengers. However, in theother 70% of economy passengers around0.6m leisure passengers pay more than£500 per return flight, and these are also atarget for the all-premium airlines, thus giv-ing a total "premium market" of around 1.8ma year.

Chris Avery, aviation analyst at JPMorgan, estimates that the three all-premi-um airlines have already won a 17% shareof the transatlantic premium market, and

other analysts believe that the specialistpremium airline could take as much as 20%to 25% of the transatlantic premium market.

Irrespective of whether the start-up air-lines are making a profit, as long as they arecarrying passengers that would otherwisetravel on BA, Virgin and the other major air-lines that operate out of London Heathrowand Gatwick, they are at the very least anirritation to these majors. The larger airlinespoint out that the starts-up have little or noback-up aircraft if there are technical prob-lems, a restricted timetable and poor con-nections compared with Heathrow andGatwick, but that hasn't stopped these newairlines gaining a small but growing follow-ing among some executives and leisuretravellers. And while Luton and Stansted arenot as central as Heathrow, they are not asbusy either, thereby allowing quicker pas-senger processing times and enabling lesschance of flight delays. Undoubtedly thenew airlines are also benefiting from beingat the top of the aviation cycle, as well asfrom softening fuel prices, but they simplycould not establish themselves unless therewas a latent customer demand that BA,Virgin and others are not meeting.

This leaves the majors in a dilemma.They are loathe to publicly acknowledge theeffect that the start-ups have had on theirtransatlantic business, but passengers areleaking away, as most (though not all) ofEos, MAXjet and Silverjet's customers pre-viously travelled with one of the fourBermuda II designated airlines allowed intoHeathrow.

BA faces a serious challenge, as it is sodependent on premium traffic on New York-London for the majority of its profits.Executives at all three start-ups on London-New York routes barely contain their glee atthe continuing bad publicity that BA andHeathrow somehow manage to generate,which provides a steady stream of disgrun-tled BA passengers prepared to try alterna-tives. BA, naturally, is very reluctant to droptransatlantic business fares, also it hasbeen increasing the number of premiumseats on its transatlantic services and is cur-rently spending £100m in upgrading its pre-mium classes with wider beds and sliding


July/August 200720

privacy screens. In May, BA applied to US regulators for

permission to offer all-premium services(with either one or two classes) next yearbetween "key European business cities"and the US, which it said would allow it togrow "the most profitable part" of its busi-ness - i.e. its premium passengers. BA isbelieved to be looking at using 757s or767s, potentially in a two-class configura-tion, although this service will not be extend-ed into Heathrow flights in the short- andmedium-term, as this would obviously can-nibalise existing premium revenue.

Meanwhile Virgin Atlantic is spending$23.5m on refurbishing its premium econo-my product, and in June unveiled plans foran all-business airline that it wants to launchbefore the end of 2008 at the very latest,operating between London and majorEuropean cities to key US destinations. Theairline will specifically target the marketdeveloped by Eos, MAXjet and Silverjet,and is likely to be launched out of continen-tal Europe first before expansion into theLondon market, although Virgin has not yetrevealed which London airport the airlinewill operate out of.

However, some analysts are sceptical asto whether an all-premium Virgin airline willever operate out of London, as again itwould cannibalise existing revenue. RichardBranson claims that the airline has hadplans for such an airline for a decade, andthat as it will be a "hybrid carrier" it will notcompete with Virgin Atlantic. But unlessVirgin Atlantic and the new airline operateon different route networks, that will beimpossible to avoid.

The new airline will probably use somederivation of the Virgin Atlantic brand and be

part of the existing FFP, according to Virginsources, and will operate a fleet of up to 15narrowbody aircraft. These are likely to benew additions to the Virgin Atlantic fleet, andVirgin is currently negotiating with Airbusand Boeing, although the all-premium airlinemay also use some of the 15 787s orderedby Virgin Atlantic in April.

Paris, Milan, Madrid, Frankfurt andZurich are likely to be among the citieslinked on the European side, with routes ini-tially going into New York before other UScities are added. It's likely that Virgin's all-premium flights will connect with VirginAmerica's domestic network, which giventhe inability of the EU to win rights forEuropean airlines to fly intra-US sectors,may prove very attractive to UK andEuropean business travellers.

Other European majors are expected tofollow BA and Virgin's example in setting upall-premium services, although some ofthem may prefer to go down the outsourcingroute, as currently practised by Swiss,Lufthansa and KLM, all of which contractSwiss VIP charter airline PrivatAir to oper-ate all-premium services on their behalf.PrivatAir was founded in 1977 and operatesa fleet of A319s, 737s, 757s and 767s forprivate VIP operations as well as transat-lantic all-premium services for third parties.These include Lufthansa (since 2003, using44-seat or 48-seat A319LRs and BBJs onthree routes - Dusseldorf to Newark andChicago, and Munich-Newark, although thelatter service will operate out of Frankfurtfrom October), Swiss (since 2005, betweenZurich and Newark, using a BBJ), and KLM(since 2005, using a BBJ betweenAmsterdam and Houston).


July/August 200721

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Aviation StrategyDatabases

July/August 200722

Group Group Group Group Operating Net Total Total Load Total Grouprevenue costs op. profit net profit margin margin ASK RPK factor pax. employees

US$m US$m US$m US$m m m 000sANAYE 31/03 Year 2003/04 11,529 11,204 325 234 2.8% 2.0% 87,772 55,807 63.6% 44,800 28,870

Year 2004/05 12,024 11,301 723 251 6.0% 2.1% 85,838 55,807 65.0% 48,860 29,098Year 2005/06 12,040 11,259 781 235 6.5% 2.0% 86,933 58,949 67.8% 49,920 22,170

Cathay Pacific Year 2004 5,024 4,350 674 581 13.4% 11.6% 74,062 57,283 77.3% 13,664 15,054YE 31/12 Jan-Jun 05 3,074 2,799 275 225 8.9% 7.3% 39,535 30,877 78.1% 7,333 15,400

Year 2005 6,548 6,015 533 424 8.1% 6.5% 82,766 65,110 78.7% 15,440 15,447Jan-Jun 06 3,473 3,201 272 225 7.8% 6.5% 43,814 34,657 79.1% 8,144Year 2006 7,824 7,274 550 526 7.0% 6.7% 89,117 71,171 79.9% 16,730

JALYE 31/03 Year 2003/04 18,398 19,042 -644 -844 -3.5% -4.6% 145,900 93,847 64.3% 58,241 21,197

Year 2004/05 19,905 19,381 524 281 2.6% 1.4% 151,902 102,354 67.4% 59,448 53,962Year 2005/06 19,346 19,582 -236 -416 -1.2% -2.2% 148,591 100,345 67.5% 58,040 53,010

Korean AirYE 31/12 Year 2003 5,172 4,911 261 -202 5.0% -3.9% 59,074 40,507 68.6% 21,811 15,352

Year 2004 6,332 5,994 338 414 5.3% 6.5% 64,533 45,879 71.1% 21,280 14,994Year 2005 7,439 7,016 423 198 5.7% 2.7% 66,658 49,046 71.4% 21,710 17,573Year 2006 8,498 7,975 523 363 6.2% 4.3% 71,895 52,178 72.6% 22,140 16,623

MalaysianYE 31/03 Year 2003/04 2,308 2,258 50 121 2.2% 5.2% 55,692 37,659 67.6% 15,375 20,789

Year 2004/05 2,882 2,798 84 86 2.9% 3.0% 64,115 44,226 69.0% 17,536 22,513Year 2005/06 3,141 3,555 -414 -421 -13.2% -13.4% 65,099 46,122 70.8% 17,910 20,324

Qantas Year 2003/04 7,838 7,079 759 448 9.7% 5.7% 104,200 81,276 78.0% 30,076 33,862YE 30/06 Jul-Dec 04 5,017 4,493 524 358 10.4% 7.1% 57,402 43,907 76.5% 16,548 35,310

Year 2004/05 9,524 8,679 845 575 8.9% 6.0% 114,003 86,986 76.3% 32,660 35,520Jul-Dec 05 4,999 4,626 373 258 7.5% 5.2% 59,074 45,794 77.5% 17,260 35,158

Year 2005/06 10,186 8,711 1,475 542 14.5% 5.3% 118,070 90,899 77.0% 34,080 34,832Jul-Dec 06 6,099 5,588 511 283 8.4% 4.6% 61,272 49,160 80.2% 18,538

SingaporeYE 31/03 Year 2003/04 5,732 5,332 400 525 7.0% 9.2% 88,253 64,685 73.3% 13,278 14,010

Year 2004/05 7,276 6,455 821 841 11.3% 11.6% 104,662 77,594 74.1% 15,944 13,572Year 2005/06 6,201 5,809 392 449 6.3% 7.2% 109,484 82,742 75.6% 17,000 13,729Year 2006/07 9,555 8,688 866 1,403 9.1% 14.7% 112,544 89,149 79.2% 18,346 13,847

Air ChinaYE 31/03 Year 2004 4,050 3,508 542 288 13.4% 7.1% 64,894 46,644 71.9% 24,500 29,133

Year 2005 4,681 4,232 449 294 9.6% 6.3% 70,670 52,453 74.2% 27,690 18,447Year 2006 5,647 5,331 316 338 5.6% 6.0% 79,383 60,276 75.9% 31,490 18,872

China SouthernYE 31/03 Year 2004 2,897 2,787 110 19 3.8% 0.7% 53,769 37,196 69.2% 28,210 18,221

Year 2005 4,682 4,842 -160 -226 -3.4% -4.8% 88,361 61,923 70.1% 44,120 34,417Year 2006 5,808 5,769 39 26 0.7% 0.4% 97,044 69,575 71.7% 49,200 45,000

China EasternYE 31/03 Year 2004 2,584 2,524 60 39 2.3% 1.5% 41,599 27,581 66.3% 17,710 20,817

Year 2005 3,356 3,372 -16 -57 -0.5% -1.7% 52,428 36,381 69.4% 24,290 29,746Year 2006 3,825 4,201 -376 -416 -9.8% -10.9% 70,428 50,243 71.3% 35,020 35,000

Air AsiaYE 30/06 Year 2005 152 122 30 25 19.7% 16.4% 6,525 4,881 74.8% 4,410 2,016

Year 2006 230 173 57 34 24.8% 14.8% 8,646 6,702 77.5% 5,720 2,224

Note: Annual figures may not add up to sum of interim results due to adjustments and consolidation. 1 ASM = 1.6093 ASK

Aviation StrategyDatabases

July/August 200723

Intra-Europe North Atlantic Europe-Far East Total long-haul Total Int'lASK RPK LF ASK RPK LF ASK RPK LF ASK RPK LF ASK RPK LF

bn bn % bn bn % bn bn % bn bn % bn bn %2000 208.2 132.8 63.8 229.9 179.4 78.1 137.8 108.0 78.3 508.9 396.5 77.9 755.0 555.2 73.52001 212.9 133.4 62.7 217.6 161.3 74.1 131.7 100.9 76.6 492.2 372.6 75.7 743.3 530.5 71.42002 197.2 129.3 65.6 181.0 144.4 79.8 129.1 104.4 80.9 447.8 355.1 79.3 679.2 507.7 74.72003 210.7 136.7 64.9 215.0 171.3 79.7 131.7 101.2 76.8 497.2 390.8 78.6 742.6 551.3 74.22004 220.6 144.2 65.4 224.0 182.9 81.6 153.6 119.9 78.0 535.2 428.7 80.1 795.7 600.7 75.52005 309.3 207.7 67.2 225.9 186.6 82.6 168.6 134.4 79.7 562.6 456.4 81.1 830.8 639.3 76.92006 329.9 226.6 68.7 230.5 188.0 81.5 182.7 147.5 80.7 588.2 478.4 81.3 874.6 677.3 77.4

May-07 30.2 21.0 69.6 21.6 17.6 81.3 15.3 11.8 77.3 51.3 40.4 78.8 77.7 58.8 75.7 Ann. change 4.2% 3.3% -0.6 4.5% 2.3% -1.7 -0.7% 1.4% 1.6 2.7% 3.0% 0.2 3.8% 3.7% -0.1

Jan-May 07 138.0 90.9 65.9 92.9 73.1 78.8 75.7 61.4 81.0 244.2 196.4 80.4 364.7 276.9 75.9 Ann. change 4.9% 5.4% 0.4 3.8% 2.6% -0.9 1.5% 4.1% 2.1 3.6% 4.3% 0.6 4.6% 5.2% 0.5Source: AEA

EUROPEAN SCHEDULED TRAFFIC

Date Buyer Order Delivery Other information/engines

Boeing 5 June Philippine A/L 2 x 777-300ER exercised purchase rightsParis Air Show GECAS 6 x 777F

Lion Air 40 x 737-900ERILFC 50 x 787, 10 x 737NG, 2 x 787-800*, 1 x 777-300ER* - * exercised optionsTAM 4 x 777-300ERAir France 9 x 777-300ERKLM 7 x 737-700Virgin Blue 10 x 737NG

4 July Air Berlin 25 x 787-800 2013-17 plus 20 options, 15 purchase rights5 July CIT 5 x 7877 July ALAFCO 10 x 787-800

Airbus Paris Air Show Qatar A/W 80 x A350XWB, 3 x A380Jazeera A/W 30 x A320ALAFCO 7 x A320, 12 x A350Emirates 8 x A380Nouvelair 2 x A320GECAS 14 x A319, 46 x A320Air Asia 15 x A330-300US Airways 60 x A320, 10 x A330-200, 22 x A350Avianca 14 x A320, 5 x A330S7 Group 25 x A320Ural Airlines 5 x A320Kingfisher 20 x A320, 20 x A350, 5 x A340-500, 10 x A330-200Air France 2 x A380, 18 x A320Intrepid Aviation 20 x A330-200FFlyAsianXpress 15 x A330-300Thai A/W 8 x A330-300Aeroflot 5 x A321, 22 x A350XWBEtihad 4 x A330-200, 3 x A330-200F, 1 x A330-300, 4 x A340-600Afriqiyah A/W 5 x A320, 6 x A350Libyan Airlines 7 x A320, 4 x A330, 4 x A350Aircastle Leasing 15 x A330-200FCIT 9 x A319, 16 x A320, 7 x A350XWBMNG Cargo 2 x A330-200FNAS 20 x A320Flyington Freight. 6 x A330-200FHong Kong A/L 30 x A320, 20 x A330, 1 x ACJAvianca 7 x A319, 7 x A320, 5 x A330-200

21 June Mandala A/L 25 x A32022 June Singapore A/L 20 x A350XWB25 June easyJet 35 x A31926 June Uzbekistan A/W 6 x A320

Embraer 13 July Republic A/L 13 x E17520 June BRA Trans. Aer. 20 x E195 plus 20 options

Bombardier 10 July Pluna 7 x CRJ900NG plus 8 options

JET ORDERS

Note: Only firm orders from identifiable airlines/lessors are included. Source: Manufacturers

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