U.S. Airlines: “Mainline Carrier Prospects”

John P. Heimlich (jheimlich@airlines.org)

Vice President and Chief Economist

30th Annual FAA Aviation Forecast Conference

March 18, 2005

ATA Mar-05 -- 2

The Air Transport Association of America, Inc.March 2005

Combination Services

Alaska AirlinesAloha Airlines

America West AirlinesAmerican Airlines

ATA AirlinesContinental Airlines

Delta Air LinesHawaiian AirlinesJetBlue AirwaysMidwest Airlines

Northwest AirlinesSouthwest Airlines

United AirlinesUS Airways

All-Cargo Services

ABX AirASTAR Air Cargo

Atlas AirEvergreen Int’l Airlines

FedEx CorporationPolar Air Cargo

UPS Airlines

Associate Members

AeromexicoAir CanadaAir Jamaica

Mexicana

ATA Mar-05 -- 3

Wall Street Perspective“Ultimately, all carriers feeling ill effects…”

“[L]egacy carriers and LCCs continue to fight strenuously for market share with a complete lack of pricing power creating an anemic revenue environment… Fuel…remains a major factor in the industry’s inability to make a profit and we remind investors that this is not the first time the airlines have been faced with tough year over year comps. However, this is the first time that carriers have not been able to pass these costs on to the consumer as evident by several failed fare increases and the declining yields.

In the current environment, we doubt that legacy carriers are even marginally inching forward since the meager revenue gains are more than offset by still very high and once again rising fuel price levels. The near-term prognosis is quite bleak considering the sector is not even at the halfway point of what seasonally is by far its toughest period… Ultimately, all carriers lack any pricing power and are feeling the ill effects…”

Reno Bianchi and Steven K. Burton – Citigroup Corporate Bond ResearchAirline Industry Research Report (December 21, 2004)

ATA Mar-05 -- 4

All Aviation Stakeholders Must Engage in “Self-Help” Along With Airlines and Suppliers… Congress, Regulators, and Airports Must Adapt

“We find ourselves in the grip of a strange anomaly. The government that embraced deregulation more than 25 years ago, and whose members often excoriate airline executives for failing to change rapidly enough to accommodate market demands, has itself failed to adapt to the changing times. Many elements of our aviation policy are remnants of the past…”

Robert L. Crandall, Retired Chairman, American AirlinesKeynote speech, Wright Memorial Dinner (December 17, 2004)

ATA Mar-05 -- 5

Airline Balance Sheets in Disrepair With Heavy LossesStandard & Poor’s (S&P) Corporate Credit Ratings

AAA: Extremely strong capacity to meet financial commitments. Highest rating.AA: Very strong capacity to meet financial commitments.A: Strong capacity to meet financial commitments, but somewhat susceptible to adverse economic conditions and changes in circumstances.BBB: Adequate capacity to meet financial commitments, but more subject to adverse economic conditions. (BBB- is the lowest investment grade rating.)BB: Less vulnerable in the near-term but faces major ongoing uncertainties to adverse business, financial and economic conditions.B: More vulnerable to adverse business, financial and economic conditions but currently has the capacity to meet financial commitments.CCC: Currently vulnerable and dependent on favorable business, financial and economic conditions to meet financial commitments.CC: Currently highly vulnerable.C: A bankruptcy petition has been filed or similar action taken but payments or financial commitments are continued.D: Payment default on financial commitments.

Inv

es

tme

nt

Gra

de

(>=

BB

B-)

* Formerly Atlantic Coast Airlines** Airfreight company

ATA Mar-05 -- 6

Crude Oil Prices Soaring to Record HighsWTI* to Reach Nominal Record in ’04; Little Relief Seen in ’05

$19.73

$23.34

$27.14

$31.66

$41.40$41.40

$31.10

$50.00

$26.10

15

20

25

30

35

40

45

50

55

60

65

70

1992-2001 2002 2003 2004 2005F

Nominal Real ($2004)

*West Texas Intermediate at Cushing, Texas

Source: PIRA Energy Group and Air Transport Association

“…it would be a mistake to underestimate the effect high oil prices have already had on the world economy. [T]he…losses suffered by the airlines mirror the increase in their fuel bills. ‘We are not that far behind the high prices of the early 1980s even in real terms…’”

(Daniel Yergin, Chairman, Cambridge Energy Research Associates, Financial Times, September 16, 2004)

“If fuel prices average $50 for 2005, the debt burden on the network airlines will grow by a number that rivals the entire combined market capitalization of these carriers.”

(Gary Chase, Lehman Brothers, “Fuel Eating the Upcycle,” October 19, 2004)

Ave

rag

e P

rice

of

Cru

de

Oil

($/

Bar

rel)

*

ATA Mar-05 -- 7

2005 Jet Fuel Prices Expected to Surpass 2004 RecordHedging and Point-of-Sale Alteration Keep Jet Price Paid Below Spot

10

15

20

25

30

35

40

45

50

55

60

65

Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

55

65

75

85

95

105

115

125

135

145

155

165

Crude Oil (WTI)* Jet Fuel Paid (DOT) Jet Fuel Spot (EIA)

*West Texas Intermediate (WTI) at Cushing, Texas

Sources: U.S. Department of Transportation, Energy Information Administration, Air Transport Association, and PIRA Energy Group

Crude Oil $/bbl*

2001 $26

2002 $26

2003 $31

2004F $41

2005F $50

FO

RE

CA

ST

Ave

rag

e P

rice

of

Cru

de

Oil

($/

Bar

rel)

* Jet Fu

el Pric

e excl. Taxes (¢/G

allon

)

ATA Mar-05 -- 8

38.2 38.2

41.5

43.6

45.0

30.0

32.0

34.0

36.0

38.0

40.0

42.0

44.0

46.0

48.0

50.0

2000 2001 2002 2003 2004F

Rev

enu

e P

asse

ng

er M

iles

pe

r G

allo

n

Source: ATA Cost Index for Major and National Passenger Airlines

Aviation Fuel Efficiency Has Risen Steadily Conservation Efforts Accelerated Post-9/11, Paying Off in Better Throughput

ATA Mar-05 -- 9

Mainline Passenger Revenue Running Just Above 1995With Express Flying Included, Passenger Revenue Finally > 2001

$55.0

$60.0

$65.0

$70.0

$75.0

$80.0

$85.0

$90.0D

ec-9

5D

ec-9

6D

ec-9

7D

ec-9

8D

ec-9

9D

ec-0

0

Jun

Dec

-01

Jun

Dec

-02

Jun

Dec

-03

Jun

Dec

-04

12

-Mo

nth

Ro

llin

g S

ys

tem

Ps

gr.

Re

ve

nu

e (

$M

illio

ns

)

Mainline Express*

Source: ATA research

* Express data not available before January 2000.

ATA Mar-05 -- 10

3.0

3.6

4.4

3.0

1.9

0.8

3.7

0.0

1.0

2.0

3.0

4.0

5.0

2000 2001 2002 2003 2004 2005F 2006F

U.S. Economy Remains Relatively Strong But GDP Decelerating Post-2004, Partly on Higher Energy Costs

Source: U.S. Bureau of Economic Analysis

Re

al

GD

P G

row

th v

s.

Pre

ce

din

g Y

ea

r (%

)

ATA Mar-05 -- 11

0.65%

0.70%

0.75%

0.80%

0.85%

0.90%

0.95%

1.00%

1.05%

80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04

Sy

ste

m-W

ide

Pa

sse

ng

er

Rev

en

ue

as

% o

f N

om

ina

l GD

P*

Air Travel Demand Disconnecting from Cyclical FactorsHistorically > 0.90% of GDP, Passenger Revenue Now Just 0.70%

Sources: U.S. Bureau of Economic Analysis; U.S. Department of Transportation Form 41 reports

Historical Band

*Four-quarter rolling passenger revenue derived from government filings of major and national passenger airlines

ATA Mar-05 -- 12

Planes, Trains, and Automobiles . . .Domestic Air Travel Volumes Ahead of 2000 but Still Lag Amtrak/Autos

85

90

95

100

105

110

115

Dec-00

Mar Jun Sep Dec-01

Mar Jun Sep Dec-02

Mar Jun Sep Dec-03

Mar Jun Sep Dec-04

Mar

Planes Trains Autos

Sources: Seabury APG (Domestic Onboards-T100); Amtrak (Ridership); Federal Highway Administration (Rural Arterial Vehicle Miles); Travel Industry Association

An

nu

ali

zed

Ps

gr.

Vo

lum

e I

nd

ex

(1

2M

E D

ec

-00

=1

00

)

ATA Mar-05 -- 13

Short-Haul Domestic Travel Down; Long-Haul Up*Hassle/Taxes Take Toll Where Substitutes Abound; LCCs Offer Long-Haul Alternative

One-Way Trip Length (Miles)

(30%)

(25%)

(20%)

(15%)

(10%)

(5%)

0%

5%

10%

15%

20%

< 250 251-500 501-750 751-1000 1001-1250 1251-1500 1501-1750 1751-2000 > 2000

% C

ha

ng

e in

Do

me

sti

c O

&D

Pa

ss

en

ge

rs v

s. 2

00

0

2001 2002 2003 YE2Q04

Source: U.S. Department of Transportation Data Bank 1A (DB1A) – Origin and Destination (O&D) Survey; Data Base Products

* Because much mainline service has been replaced with commuter service since 2000 and DB1A fails to capture a significant portion of commuter traffic, volume declines for short-haul trips may be overstated.

ATA Mar-05 -- 14

Pricing Power Remains ElusiveDomestic Fares (Excl. Taxes) Down Sharply From 2000; International Recovering

Source: ATA research

“Internet pricing, low-cost carrier growth and higher taxation of airline revenue remain as obstacles to an airline recovery. [I]t may be years before we experience a return to the late 1990's absolute level of revenue….” (William Greene, Morgan Stanley — September 24, 2004)

(30%)

(25%)

(20%)

(15%)

(10%)

(5%)

0%

5%

10%

Jan-01 Apr Jul Oct Jan-02 Apr Jul Oct Jan-03 Apr Jul Oct Jan-04 Apr Jul Oct Jan-05

Domestic International

“Many industries, still saddled with excess capacity, can’t raise prices. The biggest: carmakers and airlines.”(Rich Miller, ”Pricing Power Is Back—But Inflation Isn’t Likely to Follow,” BusinessWeek — December 27, 2004)

% C

ha

ng

e i

n M

ain

lin

e P

sg

r. Y

ield

(¢

/RP

M)

vs

. 2

00

0

ATA Mar-05 -- 15

Aviation Taxes Have Outpaced Inflation and FaresTaxes the Leader of the Pack, at Expense of Fares

PFC <=$12 per R/T

Segment Feephase-in

Segment Fee + CPISecurity Fee

*Itinerary assumes one-stop domestic round-trip with maximum passenger facility charge (PFC) per airport; $200 total includes taxes and fees.

Source: ATA research

PFC <=$18 per R/T

Ind

ex (

1991

=10

0)

ATA Mar-05 -- 16

Notwithstanding Tax Hikes, Fare Compression UnderwaySince 2000, All Buckets Have Declined Except $100-300 Round-Trips

Distribution of Domestic O&D Passengers by Total R/T Ticket Prices (incl. Taxes)2.

2%

13.2

%

4.1%

1.0%

0.2%

20.1

%

21.1

%

31.2

%

6.8%

0.5%

24.4

%

42.2

%

19.4

%

8.1%

3.6%

1.3%

0.2%

0.1%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

$0-100 $100-200 $200-300 $300-400 $400-500 $500-600 $600-800 $800-1000 $1,000+

2000 1H04

Source: ATA analysis of DOT Databank 1A

ATA Mar-05 -- 17

Even With Tax Hikes, Total Ticket Prices Down $40 per R/TTwo-Thirds of Domestic Passengers Now Pay Total Price Under $300

Cumulative Distribution of Domestic O&D Psgrs. by Total R/T Ticket Prices*

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

$0-100 $100-200 $200-300 $300-400 $400-500 $500-600 $600-800 $800-1000 $1,000+

1H04 2000Source: ATA analysis of DOT Databank 1A

*Including taxes

Tickets < $200 -- 25% (up from 23%)

Tickets < $300 -- 67% (up from 55%)

Tickets < $400 -- 87% (up from 75%)

Tickets < $500 -- 95% (up from 88%)

Avg. Ticket Price: $276

Avg. Ticket Price: $316

ATA Mar-05 -- 18

Passenger Unit Revenue Weak at Home; Strong AbroadDomestically, Record Load Factors Insufficient to Offset Sharply Lower Fares

6.00

6.50

7.00

7.50

8.00

8.50

9.00

9.50

10.00

10.50

11.00

Dec-00 Mar Jun Sep Dec-01 Mar Jun Sep Dec-02 Mar Jun Sep Dec-03 Mar Jun Sep Dec-04

Domestic Atlantic Latin Pacific

* ATA research of Alaska, American, America West, Continental, Delta, Northwest, United, US Airways

“[T]he industry continues to face a demand curve characterized by very accentuated price elasticity and thus the needed objective to achieve simultaneously capacity and traffic growth as well as improved price realization continues to be a very elusive task.” (Citigroup — October 24, 2004)

12

-Mo

nth

Ro

llin

g P

sg

r. R

ev

en

ue

pe

r A

SM

(¢

)

ATA Mar-05 -- 19

Since 2000, Breakeven Load Factor Well Above Actual Prices, Less Cargo, Higher Costs = More Seats Must be Filled

67.2

69.470.5 70.8 71.1

72.4

70.0

71.8

74.8

73.4

64.3

66.4

69.3

84.1

81.4

64.964.966.0

79.6 80.0

60

65

70

75

80

85

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004F

Actual BreakevenSource: ATA research

Pa

ss

en

ge

r L

oa

d F

ac

tor

(%)—

Ma

jors

an

d N

ati

on

als

ATA Mar-05 -- 20

Capital Expenditures Just One-Third of 2000 LevelsATA Member Passenger Airlines

$2.8$5.2

$10.9$13.1

$2.4

$1.5

$2.4

$2.3

$0.0

$2.0

$4.0

$6.0

$8.0

$10.0

$12.0

$14.0

$16.0

$18.0

2003200220012000

Big 6* Other ATA

* American, Continental, Delta, Northwest, United, US Airways

Source: U.S. Securities and Exchange Commission (SEC) filings of selected companies; Air Transport Association

Cap

ital

Exp

end

itu

res

($B

illi

on

s)

ATA Mar-05 -- 21

2,181

1,800

1,850

1,900

1,950

2,000

2,050

2,100

2,150

2,200

2,250

2000 2001 2002 2003 2004F

Av

aila

ble

Se

at

Mile

s p

er

FT

E (

00

0),

4 Q

tr M

AProductivity Improvements Driving Cost Relief

Network Restructuring, Work Rules, Human Capital, Outsourcing, Technology

Source: ATA Airline Cost Index for U.S. major and national passenger airlines

ATA Mar-05 -- 22

Airline Headcount Down ~126,000 (17%) from 9/11Low Fares, High Fuel Prices, Productivity Gains Driving Cuts or Curbing Growth

433

75

165

74

305

81

152

84

0

100

200

300

400

500

"Big 6" PassengerAirlines*

Selected Low-CostCarriers**

Selected CargoAirlines***

Other U.S. Airlines

Aug-01 Dec-04

Sources: U.S. Department of Transportation P1a employment report; carrier reports for full-time and part-time workers

* American, Continental, Delta, Northwest, United, US Airways

** AirTran, Alaska, America West, ATA (formerly American Trans Air), Frontier, JetBlue, Southwest, Spirit

*** Air Transport Int’l, ASTAR/DHL, Express.Net, Evergreen, FedEx, Gemini, Kalitta, Kitty Hawk, Polar, Ryan Int’l, Southern, Tradewinds, UPS, World

Aug-01 Dec-04

747.6 621.5

TOTAL

U.S

. A

irli

ne

Em

plo

ymen

t (0

00s)

ATA Mar-05 -- 23

Consumer/CEO OutlookCEO Confidence Deteriorating; Energy Costs Swinging Consumers

25

30

35

40

45

50

55

60

65

70

75D

ec-9

8

Mar

Jun

Sep

Dec

-99

Mar

Jun

Sep

Dec

-00

Mar

Jun

Sep

Dec

-01

Mar

Jun

Sep

Dec

-02

Mar

Jun

Sep

Dec

-03

Mar

Jun

Sep

Dec

-04

Mar

Jun

Sep

Dec

-05

75

80

85

90

95

100

105

110

115

120

125

CEO Consumer

Sources: Conference Board and University of Michigan

CE

O B

usi

ne

ss C

on

fid

enc

e In

dex

(Q

uar

terl

y)C

on

sum

er Sen

time

nt In

dex (M

on

thly)

ATA Mar-05 -- 24

500

600

700

800

900

1,000

1,100

1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

Fiscal Year

FAA Forecast FY01

FAA Forecast FY04

Volumes Up But Four Years Behind Pre-9/11 ExpectationsFAA Expects Demand to Exceed a Billion Passengers in Fiscal Year 2014

*Scheduled Revenue Passenger Enplanements (Millions), Certificated U.S. Carriers; Source: FAA Aerospace Forecasts, based on DOT Forms 41 and 298-C

Rev

enu

e P

asse

ng

ers

En

pla

ned

(M

illi

on

s)

www.airlines.org