Market overview

Michael Davies

Customer Business

Overview

Latest traffic statistics

US airline yields and costs

Capacity reductions

Outlook for traffic

Key issues & uncertainties

Aircraft delivery forecasts

Discussion

2001-02 passenger traffic growth RPKs – key markets

-40%

-35%

-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

Jan

Feb Mar

Apr

May Ju

nJu

lAug S

ep Oct

Nov

Dec Ja

nFeb M

arApr

May

June

US domestic

Transatlantic

Europe Intra

AEA weekly traffic RPKs

-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

Sep 0

9

Sep 2

3

Oct

07

Oct

21

Nov 0

4

Nov 1

8

Dec

02

Dec

16

Dec

30

Jan

13

Jan

27

Feb 1

0

Feb 2

4

Mar

10

Mar

24

7-Apr

21-A

pr

5-M

ay

19-M

ay

2-Jun

16-J

un

30-J

un

Eur

NA

Asia

US airlines’ 2001-02 traffic Transpacific passenger & total international cargo

-45%

-35%

-25%

-15%

-5%

5%

15%

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr

Transpacific Pax.

International Cargo

North American domestic traffic 2001-02

-40%

-30%

-20%

-10%

0%

10%

20%

30%

Sep Oct Nov Dec Jan Feb Mar Apr May Jun

Continental

American

Delta

Southwest

AirTran

AMR Eagle

Continental Express

Majors

Low Cost/

Regionals

October 2001 passenger load factor Change vs. Oct 2000

58%

62%

66%

70%

74%

78%

82%

Britis

h AW

KLM

Air F

rance

Am

eric

an

Delta

Contin

enta

l

Nort

hwes

t

Cath

ay

Oct 2000

58%

62%

66%

70%

74%

78%

82%

Britis

h AW

KLM

Air F

rance

Am

eric

an

Delta

Contin

enta

l

Nort

hwes

t

Cath

ay

May 2002 passenger load factor Change vs. May 2001

May 2001

58%

62%

66%

70%

74%

78%

82%

Britis

h AW

KLM

Air F

rance

Am

eric

an

Delta

Contin

enta

l

Nort

hwes

t

Cath

ay

June 2002 passenger load factor Change vs. Jun 2001

Jun 2001

Key Rolls-Royce customers’ traffic change

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun

British Airways

American

Cathay

Singapore

Emirates

US domestic yields – absolute levels

6

7

8

9

10

11

12

13

14

15

16

J F M A M J J A S O N D J F M A M J J A S O N D J F M A M

2000 2001

US¢

Yields : c/RPM

Revenues : c/ASM

Source : Air Transport Association

2002

US airlines’ costs up, revenues down

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J

1999 2000 2001 2002

-5

-4

-3

-2

-1

0

1

2

3

Unit costs

Operating profit ($bn)

Unit revenues

Change (year-on-year) Profit ($bn)

Airline net profits

-$10,000

-$5,000

$0

$5,000

$10,000

$15,000

1995 1996 1997 1998 1999 2000 2001

Variation of reported

2001 final figures

with year 2000

figures

$m

106

108

110

112

114

116

118

120

Jan

Feb Mar

Apr

May

Jun

Jul

Aug

Sep Oct

Nov

Dec

Jan

Feb Mar

Apr

May

Jun

US

UK

Economic leading indicators 2001-2002 Source : Conference Board, composite leading indices

Decline Aug-Oct Recovery since Dec

GDP growth forecasts for 2002

-1%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

USA Japan Germany UK France China

Aug-01

Dec-01

Jun-02

Source : Consensus Forecasts

Sharp upturn in June forecast

Industry monitor – June 2002

GDP

Pax. traffic

L.F.

Profits

Orders

Deliveries

Composite

leading inds. (Indiv.countries)

Asia Pacific Europe Middle East North Asia N.America

Cargo traffic

Stored aircraft – monthly totals

Inc.freighters

0

200

400

600

800

1000

1200

1400

1600

1800

2000

2200

2400

No

of

air

cra

ft

Regional Jets

Widebody

Narrowbody

Stored aircraft – monthly totals Rolls-Royce only

Inc.freighters

0

50

100

150

200

250

300

350

400

450

Aug S

ep Oct

Nov

Dec Ja

nFeb

Mar

Apr

May

Forec

ast

Aircraft available for sale or lease

Source : Airline Monitor/BACK

0

200

400

600

800

1000

1200

Jan-99 Apr Jul Oct Jan-00 Apr Jul Oct Jan-01 Apr Jul Oct Jan-02 Apr

New WB

New NB

Old WB

Old NB

Stored aircraft summary : by engine mfr

213

711

240

1178

379

1222

478

2115

0

500

1000

1500

2000

2500

R-R P&W GE Total

August

May

Includes Reg Jets)

IAE split 50/50 PW/R-R

Total also includes 14/36 Honeywell

Inc.freighters

Stored aircraft summary : by aircraft category

732

1480

384

511

62

124

0

500

1000

1500

2000

2500

August May

Regional Jet

Widebody

Narrowbody

Inc.freighters

Stored aircraft summary : by age band

37 51 65

122

261

642

158120

243 254

522

753

0

100

200

300

400

500

600

700

800

0-5 5-10 10-15 15-20 20-25 25+

August

March

Inc.freighters

e.g. 0-5 = 1997-2001 build

Incremental stored aircraft since Aug 2001 by age band

0

50

100

150

200

250

0-5 5-10 10-15 15-20 20-25 25+

R-R

P&W

GE

Likely to return to service Not likely to return to service

Age Inc.freighters

Schedule reductions by airline Nov 2001 actual vs planned

-35%

-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

SR EI VS AZ LH IB BA KL AF UA TZ AA NW AC DL WN CX KE SQ CI MH JL QF GF EK

Middle Eastern

N.American

Asian

European Total world schedule -10.2%

-parked aircraft -5%

-reduced flying -5%

Schedule reductions by airline May 2001 vs May 2002, source OAG Feb 2002

-35%

-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

SR EI KL VS BA IB LH AF AZ UA NW AA DL AC WN TZ MH CX JL QF KE CI SQ GF EK

Middle EastAsiaNorth AmericaEurope

Total world schedule -7.5%

Lufthansa – decide in next 2 weeks how much to add back – lifted hiring freeze

Air France – stable capacity

Austrian – adding, but will remain 5% below 2001

KLM – cutting 5% from summer 2001

Thomas Cook – reviewing planned cuts for summer

Schedule reductions by airline Aug 2002 vs Aug 2001, source OAG June 2002

-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

EI KL VS BA IB LH AF AZ UA NW AA DL AC WN TZ MH CX JL QF KE CI SQ GF EK

Middle EastAsiaNorth AmericaEurope

Total world schedule -7.0%

Monthly traffic forecast - US domestic

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

Mar-

01

Apr-

01

May-

01

Jun-

01

Jul-

01

Aug-

01

Sep-

01

Oct-

01

Nov-

01

Dec-

01

Jan-

02

Feb-

02

Mar-

02

Apr-

02

May-

02

Jun-

02

Jul-

02

Aug-

02

Sep-

02

Oct-

02

Nov-

02

Dec-

02

Jan-

03

Feb-

03

Mar-

03

Apr-

03

May-

03

Jun-

03

Forecast RPKs

Actual RPKs

Gulf War (ATA RPKs)

Growth over 2000

Jul90

Mar91

RPKs ASKs

2001 : -6.8% -4.3%

2002 : -1.2% -1.6%

2003 : +12.8% +11.3%

Monthly traffic forecast – North Atlantic

-60%

-40%

-20%

0%

20%

40%

60%

80%

Mar-

01

Apr-

01

May-

01

Jun-

01

Jul-

01

Aug-

01

Sep-

01

Oct-

01

Nov-

01

Dec-

01

Jan-

02

Feb-

02

Mar-

02

Apr-

02

May-

02

Jun-

02

Jul-

02

Aug-

02

Sep-

02

Oct-

02

Nov-

02

Dec-

02

Jan-

03

Feb-

03

Mar-

03

Apr-

03

May-

03

Jun-

03

Forecast RPKs

Actual RPKs

Gulf War (AEA+DoT RPKs)

Growth over 2000

Jul 90

Feb 91

Oct 91

RPKs ASKs

2001 : -10.1% -3.2%

2002 : +0.3% -0.6%

2003 : +17.9% +14.6%

Monthly traffic forecast – Europe-Asia

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

Mar-

01

Apr-

01

May-

01

Jun-

01

Jul-

01

Aug-

01

Sep-

01

Oct-

01

Nov-

01

Dec-

01

Jan-

02

Feb-

02

Mar-

02

Apr-

02

May-

02

Jun-

02

Jul-

02

Aug-

02

Sep-

02

Oct-

02

Nov-

02

Dec-

02

Jan-

03

Feb-

03

Mar-

03

Apr-

03

May-

03

Jun-

03

Forecast RPKs

Actual AEA RPKs

Gulf War (AEA - RPKs)

Growth over 2000

Jul90

Feb91

RPKs ASKs

2001 : -6.6% -3.8%

2002 : +0.2% -0.7%

2003 : +14.1% +12.1%

Monthly traffic forecast – Intra Europe (sched)

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

Mar-

01

Apr-

01

May-

01

Jun-

01

Jul-

01

Aug-

01

Sep-

01

Oct-

01

Nov-

01

Dec-

01

Jan-

02

Feb-

02

Mar-

02

Apr-

02

May-

02

Jun-

02

Jul-

02

Aug-

02

Sep-

02

Oct-

02

Nov-

02

Dec-

02

Jan-

03

Feb-

03

Mar-

03

Apr-

03

May-

03

Jun-

03

Forecast RPKs

Actual RPKs

Gulf War (AEA - RPKs)

Growth over 2000

Jul90

Feb91

RPKs ASKs

2001 : +0.6% +3.4%

2002 : +4.6% +0.6%

2003 : +7.1% +5.8%

Rolls-Royce N.America traffic & GDP forecast

80

90

100

110

120

130

140

150

160

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Nov 00 GDP

Nov 01 GDP

Nov 00 RPKs

Nov 01 RPKs

2001 -7%

2002 -1%

Index (2000=100)

2003 +14%

Rolls-Royce European traffic & GDP forecast

80

90

100

110

120

130

140

150

160

170

180

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Nov 00 GDP

Nov 01 GDP

Nov 00 RPKs

Nov 01 RPKs

2001 -2%

2002 -0%

Index (2000=100)

2003 +12%

Rolls-Royce Asian traffic & GDP forecast

80

100

120

140

160

180

200

220

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Nov 00 GDP

Nov 01 GDP

Nov 00 RPKs

Nov 01 RPKs

2001 -1%

2002 +3%

Index (2000=100)

2003 +11%

Rolls-Royce world traffic forecast (RPKs)

0

1000

2000

3000

4000

5000

6000

7000

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

Nov-00Nov-01History1983 forecast1991 forecast1989 forecast1993 forecast1996 forecast1999 forecast

RPKs (bn)

Rolls-Royce world traffic & GDP forecast

0

50

100

150

200

250

300

350 Nov 00 GDP

Nov 01 GDP

Nov 00 RPKs

Nov 01 RPKs

2003 +12%

1991 –3%

2001 –4%

2002 +0%

Index (1990=100)

‘Airline Monitor’ world traffic forecast (RPKs)

0

1000

2000

3000

4000

5000

6000

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

Jul-01

Oct-01

History

Trend

10% Traffic rebound in 2003

1991 –3%

2001 –6%

2002 +2%

RPKs (bn) Forecast made in October 2001

Reviewed in Jan – no change as yet

‘Aviation Strategy’ world traffic forecast (RPKs)

2000 RPKs based on Airline Monitor data for reference

0

1000

2000

3000

4000

5000

6000

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

Jul-01

Oct-01

Feb-02

History

Trend14% Traffic rebound in 2003

(vs 17% previously)

1991 –3%

2001 –5% (-6% originally forecast)

2002 -1% (vs –5%)

RPKs (bn) Forecast made in October 2001

Reviewed in Feb – less severe

80

90

100

110

120

130

140

2000 2001 2002 2003 2004 2005

Pre Sep-11thCurrent 'high'Current 'mid'Current 'low'Gulf War

Traffic growth scenarios

2002 2003 2004

High +6% +8% 8%

Mid +0% +12% 8%

Low -1% +10% 8%

RPK Index (2000=100)

Regional traffic summary

Near-term growth Long-term levels

2001 2002 2003 2010 traffic level

Europe -2% -0% +12% 97% of previous forecast

N.America -7% -1% +14% 96% of previous forecast

Asia/Pacific -1% +3% +11% 92% of previous forecast

WORLD -4% +0% +12% 95% of previous forecast

200

300

400

500

600

700

800

900

1000

2001 2002 2003 2004 2005

High case

Mid point

Low case

Airline Monitor

Aircraft delivery forecasts 2001-2005 Panel of industry forecasters – Dec 2001

200

300

400

500

600

700

800

900

2001 2002 2003 2004 2005

High

Average

Low

Airline Monitor

Aircraft delivery forecasts 2001-2005 80+ seat aircraft

Latest analyst views (Boeing+Airbus) :

Morgan Stanley : 2003 = 555, 2004 = 660

JPMorgan : 2003 = 530, 2004 = 540, 2005 = 625

CSFB : 2003 = 553

200

300

400

500

600

700

800

900

1000

2001 2002 2003 2004 2005 2006

Mar-01

Feb-02

Aircraft delivery forecasts 2001-2005 Rolls-Royce forecast (100+ seat pax aircraft)

871 deliveries removed

Fleet evolution – ‘mid’ traffic scenario 100+ seater passenger aircraft

10000

10500

11000

11500

12000

12500

13000

2000 2001 2002 2003 2004

End year In service fleet

New deliveries

Retirements/into store

Return from store

c500 aircraft ‘retired’ early

(I.e. assumed not to return)

Fleet required to match

traffic growth (@ constant prod’y)

Fleet evolution – 3 traffic scenarios 100+ seater passenger aircraft

10000

10500

11000

11500

12000

12500

13000

2000 2001 2002 2003 2004

End year In service fleet

New deliveries

Retirements/into store

Return from store

c500 aircraft ‘retired’ early

(I.e. assumed not to return)

1998 1999

1999 & 2000 saw significant

Load factor & utilisation growth

Fleet required to match

traffic growth (@ constant prod’y)

Airline net profit $8.2bn $8.5bn $4.7bn -$12.0bn -$8bn?* -$0.5bn?* $3.5bn?*

Load factor 69.3% 69.8% 72.4% 69.1% 70.5% 72.0% 72.5%

* Airline Monitor estimates

2002 updated May ‘02

Aircraft delivery forecasts Passenger aircraft only

0

500

1000

1500

2000

2500

3000

717 737 A320 757 767 A330 A340 777 747 A380

2001-10

2002-11