Industry – Alla Serebrova

Delta Airlines - Eugene

Southwest Airlines - Shaun

British Airways - Alex

Global AirlinesGlobal Airlines

Presentation AgendaPresentation Agenda

Industry Characteristics

Current State

Market Outlook

Companies in focus: Delta Airlines

Southwest

British Airways

YIELD: Revenues divided by revenue passenger-kilometers; it represents an aggregate of all the airfare and airline charges and is measured on a per-kilometer basis.

ASK: The number of seats available for the transportation of revenue passengers multiplied by the number of kilometers these seats are flown.

RPK: One-fare paying passenger transported one km. RPK is computed by multiplying the number of revenue passengers by the km they fly.

PASSENEGR LOAD FACTOR(%): Percentage of seating capacity which is actually sold and utilized. RPK divided by ASK

UNIT COST:The average operating cost incurred per ATK

YIELD: Passenger revenues divided by revenue passenger-kilometers. PR per RPK. It represents an aggregate of all the airfare and airline charges and is measured on a per-kilometer basis.

BREAK-EVEN LOAD FACTOR: The LF at which operating revenues cover operating costs. Unit Cost divided by Yield.

GlossaryGlossary

Highly Concentrated Market Dominated by North America (41%)

Half of the World’s Fleet is operated by just 17 airlines (of 650)

Half of all ASK are focused on the top 6% of routes (33 airports)

The Intra-North American Zone Represents 1/3 of the Total

Intra-Asia traffic (10,6%)

Intra-Europe traffic (8,5%)

Europe-Asia travels (7,4%)

Transpacific flights (6,6%)

North Atlantic traffic (11,6%) The International Traffic accounts for 57% of total PK

Industry Characteristics

Source: Airlines Gate

Airline Industry is MaturingAirline Industry is Maturing

Worldwide RPK Growth Rates are Declining

Capital IntensiveCapital Intensive

High Cash FlowHigh Cash Flow

Labor IntensiveLabor Intensive

Highly UnionizedHighly Unionized

Thin Profit MarginsThin Profit Margins

Cyclical/SeasonalCyclical/Seasonal

Travel agencies Travel agencies

Industry CharacteristicsIndustry Characteristics

Source: Rolls-Royce

Airline costsAirline costs

Maintenance: parts and labor 13%

Flying Operations

27%

Depreciation6%

Administrative6%

Transport Related

10%

   Passenger Service 9%

Promotion/Sales 13%

    Aircraft and Traffic

Service 16%

Labor Costs Per EmployeeLabor Costs Per Employee

Profitability Triggers New Orders

Younger fleet - higher profits

Aircraft Aircraft ReplacementReplacement

Aircraft Replacement TrendsAircraft Replacement Trends

Business vs. Personal/PleasureRevenue and Traffic Shares

Source: Air Transport Association

Volatility Geopolitical Instability

Oil disruption fears

Not an Industry Free of RiskNot an Industry Free of Risk

Jet fuel prices remain high Historically airline stocks have tended

to trade in the same direction as fuel prices

Exceptions: supply shocks or wars

Refining margins at $11.9/ bbl

The US experience - 1978 International traffic - bilateral agreements Hub and spoke networks development

Europe (1993) and Asia are still lagging behind State aid distortion Government indifference Airport constraints Restriction of slot sales

Logical outcomes of deregulation: Regional LCC: Alliances

Deregulation and its effects

LCC have 30% cost advantage Non-unionized workforce Better business practices:

Simple point to point

Higher utilization, shorter turns, no waiting at hubs, red-eyes

No transfers

Tickets - internet

Charge for food and drink

The Basic Business Model of the The Basic Business Model of the Network Carriers is BrokenNetwork Carriers is Broken

Look at the successful LCCs which operate a core, old-line, network hub operation

• Air Tran at ATL

• Frontier at DEN

Even Constrained to the American Landscape, LCC’s ≠ Point-to-Point

Global Airlines Alliances

Star Oneworld SkyTeam

Annual Passengers, mlns 296 209 174

Destinations Served, more than 815 559 451

Countries Served, more than 130 134 98

Fleet 2,130 1,852 985

Employees 312,076 269,100 151,000

- STAR ALLIANCE (21%)(United, Lufthansa, Air Canada, Air New Zealand, ANA, Austrian, British Midland, Lauda Air, Mexicana, SAS, Singapore, Thai, Varig)

- ONEWORLD (17%)(American, British Airways, Cathay Pacific, Iberia, Qantas, Lan Chile, Aer Lingus, Finnair)

- SKYTEAM (12%)(Air France, Delta, Alitalia, Korean Airlines, Aeromexico, CSA Czech Airlines

- QUALIFIER GROUP (Swissair, Sabena, LOT Polish Airlines, TAP Air Portugal, Air Europe, Air Littoral, Turkish Airlines, Volare Airlines, PGA Portugana Airlines, Crossair).

Alliances: Rational and Benefits

Rational - very effective at traffic redirecting Increasing the geographic scope of the network

International market entry restricted by bilaterals

Most cost effective way to develop a new market

Maintain presence in a key market

Benefits Revenue Growth Cost Savings

bbb

ccc

2003 – 2003 – Positive Result Positive Result ddespite SARSespite SARS

Source: Rolls-Royce

11st st HHalf 2004 alf 2004 TTraffic – raffic – RRebound vs. 2003ebound vs. 2003

Economic growth is the major contributor to air travel demand

2004 - 5% highest in 3 decades (China, Japan, US)

Global Economic GrowthGlobal Economic Growth

Traffic Revenues against H1/ 2000Traffic Revenues against H1/ 2000

2004 2004 CCargo argo TTraffic raffic SStrongtrong

Freight represents 28% of total tonne-kilometres Europe-Asia (23,6%) Transatlantic flights (19,8%)

Transpacific flights (19,4%)

Traffic by RegionTraffic by Region

Productivity – Productivity – RRecovery in ecovery in 22004004 Many FC items: 2 ways to increase productivity

to increase aircraft utilization

to increase # of seats

Passenger Aircraft Productivity 1982 - 2008

Worldwide economic growth will average 3.0%/year

Passenger traffic growth will average 4-5% per year

Cargo traffic growth will average 6.2% per year

Economic and Traffic Growth 2004–2023

Infrastructure develops alongside air travel demand

The world fleet will more than double over the next 20 years reaching 34,770 aircrafts (25,000 new)

Economic and traffic growth rates vary by region

Market OutlookMarket Outlook

• 2004 traffic forecast now +13.5% (18% ytd)• Driven by strong GDP growth in N America• Recovery from SARS in Asia• Aircraft overcapacity being eliminated• Productivity recovered to pre- 9/ 11 levels (75%)• Airline profits recovering in Asia• But yields still very weak in US and Intra- Europe• Costs impacted by $ fuel price• Inability to pass on rises to consumers in US domestic market• Delivery upturn in 2005- 2007 consistent with traffic and productivity projections• Longer term growth increasingly driven by Asia

Summary

Delta AirlinesDelta Airlines

Current Stock Information Stock Price: US $7.26 Stock Symbol: DAL Exchange: NYSE Shares Outstanding: 123.545 million Market Capitalization: 911.93 million Dividend: $0.00

History & Facts Started as crop-dusting operator First flight in 1929 as Delta Airlines Headquarters: Atlanta, Georgia CEO: Gerald Grinstein Employee: 60,000+ Daily flights with partners: 7,500+ Destinations: 496 cities in 88 countries

Management Team Gerald Grinstein

- Chief Executive Officer, 20yrs experience in airline industry

Michael Palumbo- Vice President, Chief Financial Officer, responsible for Trans World

Airlines’ on time performance from worst to first

Joe Kolshark- Chief of Operations, served Delta for 16yrs, 757/767 Captain

Jim Whitehurst- Chief Network and Planning Officer

Curtis Robb- Chief Information Officer, 30yrs information technology

experience

Business Structure Connection carriers

• American Eagle• Atlantic Southeast Airlines• Chautauqua Airlines• Comair• SkyWest

Shuttle• Northeastern States

SkyTeam Alliance• Global Alliance

Song• Low-cost Carrier

Codeshare Partners

Current Situation Losing over $3 billion since 2001 Facing bankruptcy protection, Chapter 11 filing Expecting 2,000 maintenance, 3,000 customer

service and 1,800 management job losses in 2005 Agreed 32.5% pay cut, fewer benefits for pilots,

saving nearly $1 billion

Reasons for Delta’s Suffering Low cost carriers with minimal debt loads

offering low fares Use of high-cost hub-and-spoke operation Increase in fuel price Greater choices to select from Sept. 11 incident causing less demand SARS outbreak Highest operating per unit cost Inability to maintain sufficient liquidity Significantly higher pilot salaries

Transformation Progress SimpliFares Interior Service Upgrade Redesign of Atlanta Hub Growing Cincinnati and Salt Lake Hubs SkyMiles Program New Aliances – Continental Airlines, Northwest

Airlines & KLM Royal Dutch Airlines Growing Song

Yr ending 2003 2002 2001

Operating Revenues

Passenger 12,323 12,321 12,964 Cargo 464 458 506 Other (net) 516 526 409Total 13,303 13,305 13,879

Income Statement - Revenues

Yr ending 2003 2002 2001

Operating Expenses

Salaries 6,342 6,165 6,124 Aircraft fuel 1,938 1,683 1,817 Depreciation 1,202 1,148 1,283 Contracted services 886 1,003 1,016 Landing fees and other rents 858 834 780 Aircraft maintenance 630 711 801 Aircraft rent 727 709 737 Other expenses 1,506 2,361 2,923Total 14,089 14,614 15,481

Income Statement - Expenses

14%

9%

6%

6%

4%

5%

11%

45%

Salaries Aircraft fuel

Depreciation Contracted services

Landing fees and other rents Aircraft maintenance

Aircraft rent Other expenses

Operating Expenses

Other Expenses & Net Earnings

Yr ending 2003 2002 2001Other Income (Expense) -403 693 262Earnings Before Tax -1,189 -2,002 -1,864Income Tax Benefit 416 730 648Net Earnings -773 -1,272 -1,216

Basic and Diluted Loss per Share (’03) : -$6.40

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

1996 1997 1998 1999 2000 2001 2002 2003

-1,500

-1,000

-500

0

500

1,000

1,500

2,000

2,500

Opt. Revenues Opt. Expenses Opt. Income Net Income

Earnings Trend

Balance SheetYr ending 2003 2002Asset Current 4,967 3,902 Property & Equipment 16,752 16,524 Others 4,637 4,294

Total Asset 26,356 24,720Liability & Equity Current 6,624 6,455 Non-current 19,582 16,530 Deferred 534 578 Emp. Stock Ownership 275 264 Shareholder's Equity -659 893

Total Liability & Equity 26,356 24,720

Contractual Payment Due by period 

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

2,004 2,005 2,006 2,007 2,008 After 2009

Debt Operating lease payments Interest & related payments

9.76

Fleet Structure & Average Life

Cash Flow Statement

Yr ending 2003 2002 2001

Beg. Balance 1,969 2,210 1,364

Operating Act 453 285 236

Investing Act (260) (1,109) (2,696)

Financing Act 548 583 3,306

End. Balance 2,710 1,969 2,210

Free Cash per share (’03) = $1.54

Performance Factors (% from ’02 to ’03) Operating revenues: $13,303 () Operating expenses: $14,089 (3.6%) Operating margin: -5.9% (3.9pt) Net earning (loss): -$773 (40.06%) Opt revenue per available seat mile: 9.90¢ (5.4%) Opt cost per available seat mile: 10.48¢ (1.6%) Passenger load factor: 73.4% (1.4pt) Breakeven passenger load factor: 78.1% (1.5pt) Cargo ton mile yiled: 33.08¢ (8.0%) Avg aircraft fuel price per gallon: 81.78¢ (22.2%) End of yr full-time equivalent employees: 70,600 (6.0%)

Delta Industry S&P 500Valuation measureP/E ratio 0.00 39.20 23.16P/E high 0.00 35.85 44.41P/E low 0.00 6.29 15.38Profitability measureGross margin 7.02 26.93 46.90Operating margin -7.37 6.32 21.54Net profit margin -19.51 2.92 13.95Management EffectivenessROA -11.02 2.45 7.27ROI -14.84 3.62 11.05ROE (5yr avg) -9.33 5.85 19.04Liquidity measureQuick ratio 0.46 1.03 1.30Current ratio 0.63 1.33 1.80

Ratios

Open 7.350 Bid N/AHigh 7.400 Ask N/ALow 7.120 EPS -13.100Volume 7,660,700 P/E 0.0052-week high 13.200 Indicated annual dividend 0.0052-week low 2.750 Yield 0.00

Last: US $7.260 Net Change: US -$0.240 % Change: -3.20%

Market Stock Value

Stock Price Movement (1yr)

Stock Price Movement (3yrs)

Recommendation

Huge Outstanding LT Debt Extremely Volatile Market Condition No Dividend Payment Continuous Down Stream Stock Movement

- SELL -

Southwest Airlines

Stock Information

Stock Symbol: LUVStock Exchange: NYSE Stock Price: $15.89Shares Outstanding: 793.33 MMarket Cap: 12.606BDividend: $0.018

Company History

Commenced service on June 18, 1971– using 3 Boeing 737 aircraft servicing state of Texas

simple notion: lowest possible fares, on-time delivery, and excellent customer service.

Became a major airline in 1989

2003 was 31st consecutive year of profitability

Corporate Statistics

Offers flights within United States

2900 flights per day

Flies to 59 cities (60 airports) in 31 states

Operates 405 Boeing 737 jets

Awards

Named “Most admired airline” for the second straight year in 2003 by FORTUNE magazine

Ranked in top 5 for “Best companies in America to work for” by FORTUNE magazine

Ranked #1 in fewest customer complaints for 13th consecutive year- Department of Transportation's Consumer Report.

Southwest Officers

Executive Position Service Herb Kelleher Chairman of the Board 33yrs Gary C. Kelly CEO 18yrs Colleen Barrett President 26yrs Donna Connover VP Cust. Operations 27yrs Joyce Rogge VP Marketing 16yrs Greg Crum VP Flight Operations 25yrs

Industry Competitors

Main competitor is the automobile

Other discount airlines ie. Jetblue, AirTran Airways

Challenges from old-line carriers and they’re subsidiary upstarts

Market Share

Southwest’s Market Share Southwest’s Capacity By Region (Southwest’s top 100 city-pair markets based on passengers carried)

External Challenges

Florida hurricanes

Post 9/11 terrorism concerns

Increased security measures

Technology

Competitive Advantage

customer service Point-to-point carrying strategy Quick turnaround strategy low fares performance enhancing winglets Employee productivity

– one of the lowest operating cost structures in the industry

New Jet Design

Present and Future Planning

Recently commenced service from Philadelphia

Installation of RAPID CHECK-IN kiosks in 2004

Plan to increase capacity at an average rate of 8% from 2004-2012

Expansion projects at Fort Lauderdale, Houston Hobby, Las Vegas, Oakland, Tampa

Hedging Program

2004 : over 80% at $24/barrel

2005 : over 80% at $25/barrel

2006 : over 60% at $31/barrel

2007 : over 40% at $30/barrel

Financial Statement Analysis

ROE: 5.45% P/E : 45.85 Price/Book (mrq): 2.28 EP/S : 0.349 Operating Margin (ttm): 7.56% Dividend Yield: 0.11%

Operating Expenses

landing fees and other rentals, 7%

depreciation and amortizations, 7%

other operating expenses, 18%

Salaries, wages, and benefits, 41%

Fuel and oil, 15%Maintenance materials and repairs, 8%

aircraft rentals, 3%

agency commissions, 1%

Income Statement

Company Fleet

Current age of fleet is 9.2 years

Stock-Based Employee Compensation

Stock-Based Employee Compensation

Composition of Long-Term Debt

Important Statistics

Load Factor: 66.8% Industry: 79.0%Break-even Load Factor: 66.75% Available Seat Miles: 71.7 trillionsRevenue Passenger Miles: 47.9 trillions

Stock Chart

Stock Chart (4 Year)

Recommendataion

Hold

By Alexei

Company History Background

Start as a merger of small UK air companies in early 19th

Nationalized in 1939 (British Overseas Airways Corporation)

In 1979 Government intention to sell BOAC

BA privatised in 1987

Market background

Public company with limited distribution of shares outside UK (in ADR form)

Stocks Traded At London Stock Exchange (BAY) At New York Stock Exchange (ADR: BAB)

Number of shares: 1,082,845,212 Price per share: NYSE: $41.48 Dividends counts in Pounds Debt corporate rating stands at BB+

Stable, backed by fleet 3.3 bn ₤

Service/Products

BA provides scheduled passenger and cargo Airline services 154 destinations in 75 countries (last year 174 destinations in 83 countries) carried more than 36 million passengers last year

Programmes Club World flat bed World Traveller Plus Club loyalty programme

Main base of operation (airports) Airport Heathrow (hub structure) 38% of all passengers Gatwick (new structure point to point) New York John F. Kennedy International Airport (hub)

Alliances Oneworld: Aer Lingus, American Airlines, British Airways, Cathay Pacific, Finnair, Iberia, Lan Chile and Qantas DBA

Franchise Six airways: Loganair, GB Airways, British Mediterranean Airways, Sun Air of Scandinavia, Comair of South

Africa and Regional Air of Kenya

Management

Rod Eddinghton Chief Executive. Executive Board Member since 2000 (in industry since 1979)

John Rishton Chief Financial Officer. Appointed in September 2001. In BA since 1994

Martin George Director Marketing and Communications. Appointed in 1997. In BA since 1987

Mike Street• Director Customer Service and Operations since 1997. Executive Board Member since 2000

Robert Webb QC• General Counsel. Joined British Airways in 1998

Strategy

Reduce costs ( current improvement by $2 billion)

Cut jobs (13,000 people) Sell and lease airplanes to simplify fleet (fleet reduction 39 aircrafts

in 2004) Reduce number of unprofitable routes

Reformation customer service New executive Club loyalty programme New web site service Development of new small routs in UK

Balance Sheet improvement Cutting debt amount (selling Qantas shares) Still ₤3.3billion Achieve 10% operating margin

Opportunities/threats

Opportunities Cargo service in Vietnam New small routs in UK New customer service (web site) New terminal 5 in Heathrow in 2008

Threats Gas prices (overspend $128.8 million) Two Unions (pension programs) Italian government Heathrow charges increased (extra ₤300 million prepayment) UK and EU regulations. Increased insurance, spot regulation (may be an extra

cost of ₤300-400 million)

Competitors

Lufthansa Air FranceSmall domestic and European

carriers Delta United

Financial statement analysis

Balance SheetIncome StatementCash flow Statement

Main problem – different standards and currency conversion

6,562

3,286

2,000

3,000

4,000

5,000

6,000

7,000

Dec01

Mar02

Jun02

Sep02

Dec02

Mar03

£m£m

Jun03

Sep03

Dec03

Mar04

Sep01

Jun04

Sep04

From Q2 http://media.corporate-ir.net/media_files/irol/69/69499/presentations/UBS_Q204_05_final.ppt

Net debt £3.3bn lower

£3.3bn

(11)

(7)

1

(14)

(8)

(11)

(6)

2

11

(2)

5

2

-20

-15

-10

-5

0

5

10

15

Q1 Q2 Q3 Q4 FYR Q1 Q2 Q3 Q4 FYR Q1 Q2

%%

2002/03 2003/042003/04 2004/05

http://media.corporate-ir.net/media_files/irol/69/69499/presentations/UBS_Q204_05_final.ppt

Revenue

Employee costs32%

Depreciation and amortisation

9%

Aircraft operating lease 1%

Fuel and oil costs16%

Engineering and other aircraft costs

6%

Landing fees and en route charges

8%

Selling costs7%

Accommodation, ground equipment costs and currency

differences8%

Handling charges, catering and other

operating costs13%

Costs

14.6

2.6

14.3

6.1

10.8

9.4

7.3

4.5

5.44.5

2.8

4.4

2.9

5.4

2.5

8.6

3.4

9.1

3.2

6.1

0

2

4

6

8

10

12

14

16

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

%

Net costs Unit costs

2003/042003/042002/03

2004/05

http://media.corporate-ir.net/media_files/irol/69/69499/presentations/UBS_Q204_05_final.ppt

Cost performanceCost performanceCost reduction

Ratio AnalysisStock Industry S&P 500

Load factor 70.3

Price/Earnings 5.79 39.20 26

Price/Book 1.11 2.42 4.3

Price/Sales 0.4 1.2 3.1

Price/Free CF 2.63 14.45 16.39

Operating Margin 6.73 6.32 18.07

4.334.03

3.5 3.4

3.82

4.29 4.26

6.78

6.27

5.47

0.15 0.13 0.08 0.05 0.04 0.07 0.07 0.16

3.1

2.37

0

1

2

3

4

5

6

7

8

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Financial LeverageDebt/Equity

ADR price chart

Recommendation

Pro Opportunities for growth in Asia Improved debt situation

Cons No CF to investors

Long run recommendation SELL