MIDDLE EAST LATIN AMERICA ASIA PACIFIC CHINA EUROPE NORTH AMERICA

Hottest Airlinesto Watch in 2011

INTROAirlines:Surviving in a changing worldAs the international airline industry evolves from a heavily protected,government-run activity into a commercial hybrid, individual airlines areconfronted by massive challenges, each of them unique to the companyconcerned. At the same time, the industry overall remains constantly atrisk from any number of external threats.

Some are adapting more effectively than others to their new environment.

In these conditions, what makes an airline Hot to Watch? What motivatessome airlines to be agents of change, while others adopt a much morecautious approach? Difficult times can bring out the best in somecompetitors, who innovate and grow - yet at the same time others cling toolder, safer models.

The standouts in 2011 will possess a sound – and flexible – strategy.Many will introduce one or more of the following ingredients:

• rapid fleet and network development;

• a new business model;

• innovative products and services;

• consolidation or cross-border JV activity;

• financial outperformance (or financial distress?)

INTROThe shifts in the industry are by no means standard, largely mirroring theway global economic change is occurring. For example:

• Asia ascends in importance, with sometimes remarkable growth rates, a growingnumber of new entrants appears, legacy airlines are reinventing themselves, often withlow cost subsidiaries and liberalisation is moving relatively rapidly;

• Latin America begins to assert itself, but there the focus is more on consolidationacross borders;

• Europe and north America, after a decade of rapid low cost airline growth, arewitnessing low growth rates and the major airlines seek to protect themselves againsttheir short haul cost inadequacies by relying on global alliance membership andconsolidation;

• The Middle East airlines, aided by liberal policies, integrated aviation strategies andnew generation long haul aircraft, are showing how a future airline system – based onpracticality, rather than relying on ageing protectionist bilateral restrictions – shouldperhaps function; and

• Eastern European airlines are beginning to assert themselves on the world stage astheir national economies too expand.

For all contestants in these various markets the challenges are different,but similar, as the industry becomes both more global and more local (withsectoral focus on short haul point-to-point operations).

CAPA’s inaugural list of the 75 Hottest Airlines to Watch does not apply arigid scientific formula, but in selecting the carriers involved, it does takeinto account the regional differences and the varying strategies adopted.

INTROOur intensive daily research over the past 12 months has produced a list ofthe carriers most likely to be the movers and shakers in 2011 - drivingchange, moving the industry forward.

Their impact will be immediate – on their competitors and on theirmarkets. And competitors will be placed in the position where they areforced to react. But there will be implications for airports, airways and forall suppliers to the industry.

Picking where the action will be is vital to commercial success in 2011. Wewould like to help guide you through the year. We hope it will be a good onefor you!

Use CAPA Alerts for customised news, analysis and data reports, dailyby email. Any combination of airlines, airports, suppliers, countries,regions or issues, depending on requirements, in one very handy dailybulletin.

CAPA Alerts is our new publishing platform that drives rich andrelevant content in a highly customised daily email briefing to you,our clients. It puts the reader in control, saving crucial time, as wellas informing of key developments that are vital to your business thatmay otherwise have been missed.

I invite you to experience the CAPA Alerts difference today– contact Jon Bond (jbond@centreforaviation.com) andwe’ll be happy to set up a free trial for you today!

MIDDLE EASTERNAirlines

MIDDLE EAST

Middle Eastern airlines are making major competitive inroads in long-haul intercontinental markets,making their presence felt particularly in Europe and Asia. Short/medium-haul LCCs are also springing upacross the Middle East, challenging several of the region's second-tier flag carriers.

Innovative carriers such as Air Arabia continue to expand within and outside the region, utilising cross-border JVs. For airports and suppliers worldwide, Middle Eastern airlines are an exciting opportunity to befollowed closely.

The Middle East’s sixth-freedom hub carriers have benefited from the global economic crisis, growing their shares ofpremium traffic (and to a lesser extent premium revenues) since the onset of the crisis in late 2008. This has beendriven by long-haul connections over key Middle Eastern hubs, according to IATA.

IATA Middle East premium revenue share vs premium traffic shareJan-08 to Jul-2010

Source: Centre for Asia Pacific Aviation and IATA

MIDDLEEAST

Air Arabia

Air Arabia, MENA’s first and largest LCC, has continued to report profits throughout the global financial crisis and1H2010, emerging as one of the best positioned carriers in the region. Air Arabia continued to expand throughoutthe crisis, operating to 65 destinations, up from 45 at the end of 2009 – 48 from Sharjah, 12 from Casablanca (itsMoroccan JV) and five from Alexandria (its Egyptian JV) – for a 48% increase in its network from 2008. This pace ofexpansion is set to continue, with 44 A320s on order, to support its three bases: Sharjah with 18 aircraft,Casablanca three aircraft and Alexandria two. The airline has stated these orders may not be sufficient as it rollsout its expansion, particularly if new JV opportunities arise.

Air Arabia JV airlines

Arabia recently announced plans to establish a Jordanian airline, to challenge Royal Jordanian's stranglehold inthat important market. The cross-border JV model represents a key part of Air Arabia's aims to expand its presencebeyond its home market of Sharjah, where it faces rising competition from flydubai in the neighbouring emirate ofDubai. The carrier was also previously involved in FlyYeti, a Kathmandu-based carrier, as part of a push into Asianmarkets, although the Nepalese operation was suspended in early 2008 due to the uncertain political and economicsituation prevailing in Nepal.

Air Arabia Egypt: Formed as a cross-border JV with the Travco Group in Jun-2010, Air Arabia Egypt is an LCC basedat Burj Al Arab International Airport in Alexandria. With its fleet of A320 aircraft, the airline offers scheduledservices to destinations in Africa, with plans to commence service to the Middle East and European destinations.Airports across Southern Europe will be watching Air Arabia Egypt with interest, given the strong potential forbusiness and VFR/leisure travel to/from Egypt.

Air Arabia Maroc: Formed as a cross-border JV with Moroccan investors, Air Arabia Maroc is an LCC based atMohamed V International Airport in Casablanca. With its fleet of A320 aircraft, the airline is expanding its networkinto Europe to take advantage of Morocco's vertical open skies agreement with the EU, with the carrier alsoplanning services to West Africa, initially to Tunis, Tripoli and Egypt. The carrier stated the Moroccan Governmenthas been "very supportive" of its expansion plans.

Air Arabia Jordan: In the latest JV development, Air Arabia in Jun-2010 signed a JV agreement with JordanianTantash Group, an Amman-based diversified investment company active in the travel sector, to launch Air ArabiaJordan, the country's first LCC. The new carrier, to be managed by the Air Arabia Group and based in Amman'sQueen Alia International Airport, will provide direct service to a range of destinations across Europe, the MiddleEast and North Africa. A launch date and destinations for the carrier are yet to be announced.

The Air Arabia group has 22 aircraft scheduled for delivery by the end of 2012, according to Ascend, ranking 42ndglobally in terms of the number of aircraft on confirmed delivery. In all, four Middle East airlines are representedin the global Top 50, including two (Qatar Airways and Emirates - see below) within the Top 20.

MIDDLEEAST

Airline Due in 2012

1 Air China 67

2 American Airlines 60

3 Turkish Airlines 59

4 Ryanair 57

5 ANA All Nippon Airways 52

6 China Southern Airlines 50

7 Atlant Soyuz Airlines 49

8 easyJet 47

9 Alitalia 46

10 Lufthansa 46

11 Azul 43

12 China Eastern Airlines 43

13 Aeroflot Russian Airlines 41

14 Southwest Airlines 39

15 Hainan Airlines 38

16 Qatar 38

17 airberlin 36

18 Emirates 36

19 Korean Air 35

20 AirAsia 33

21 Lion Air 33

22 Qantas 33

23 Xiamen Airlines 31

24 Air France 30

25 Norwegian Air Shuttle 30

Airline Due in 2012

26 Nenan Airlines 29

27 Tianjin Airlines 29

28 Avianca 28

29 Continental Airlines 28

30 JetBlue Airways 28

31 LAN Airlines 28

32 Malaysia Airlines 27

33 S7 Airlines 27

34 Jet Airways 26

35 Air Nostrum 25

36 Garuda Indonesia 25

37 Sichuan Airlines 25

38 Virgin Blue 25

39 Japan Airlines 24

40 Air Europa 23

41 US Airways 23

42 Air Arabia 22

43 Cathay Pacific 22

44 Kingfisher Airlines 22

45 Shenzhen Airlines 22

46 TAM Linhas Aereas 22

47 Tiger Airways 22

48 Ethiopian Airlines 21

49 Austral 20

50 Saudi Arabian Airlines 20

Airlines with largest aircraft deliveries by 2012

Emirates

Ten years ago, Emirates handled 5.7 million passengers with a fleet of 35 aircraft, making it roughly the samesize as El Al or Hawaiian Airlines. Last year, the airline handled 25.9 million passengers and finished the yearwith a fleet of 142, making it one of the largest international carriers in the world. The airline operates morethan 100 routes to more than 60 countries, touching every continent non-stop from Dubai. In addition to itscontinued network expansion, Emirates is now thickening up existing routes with extra daily frequencies.

The carrier has doubled in size roughly every three-and-a-half-years, with “explosive growth” set to continuethrough the next decade. With just under 200 widebody passenger aircraft scheduled for delivery over thenext 15 years, Emirates has more widebody aircraft to be delivered than any other carrier globally. It isalready the world’s largest operator of B777s and A380s.

Amazingly, Emirates has stated the carrier’s orders for 90 A380s are insufficient to meet it’s projecteddemand, with CEO Tim Clark stating in Sep-2010: "The way things are going for us at the moment, the 90certainly won’t be enough. Demand for our services seems to be continuing to grow apace. We’re movingforward very robustly." The A380 is key to the carrier’s strategy, allowing it to bring in additional seats intofrequency-limited markets. The carrier currently operates 12 A380s on services to London Heathrow,Manchester, Paris, Sydney, Auckland, Toronto, Bangkok, Seoul, Jeddah and Beijing. Hong Kong was added tothat list from 01-Oct-2010 and on 31-Oct-2010 the aircraft will resume services to New York.

Even more impressive for Emirates is that it has maintained profitability throughout the global downturn.Although passenger revenue grew only marginally in 2009-10, up just 1%, operating profits grew 56.6% toapproximately USD1 billion, with an operating profit margin of 8.2%. Competitors and airports around theworld are watching Emirates' every move.

MIDDLEEAST

Etihad

Founded in 2003, Abu Dhabi-based Etihad Airways is the flag carrier of the UAE and one of the fastest growingand most internationally recognised of the Middle East carriers thanks to a massive marketing and brandinginvestment.

Etihad, which operates a fleet of around 55, plans to expand significantly, adding more than 100 aircraft, as itseeks to broaden its worldwide footprint. The airline, under CEO James Hogan, is also utilising bilateralcodeshare alliances to develop its presence. The carrier, while believing it is a "natural fit" for a globalalliance, has no plans to join an alliance until it has matured as a business, which will not be until at least2015-17 when it envisages being a mid-size carrier with a fleet of 120 aircraft.

The carrier is anticipating a break-even result in 2011 as it sees yield improvements related to a return ofbusiness travel. While recognised as one of the world’s leading premium carriers, Etihad introduces its first"all economy" class configuration to its fleet in Oct-2010 to be the only non-LCC in the Middle East providingsuch a service. The product bears some similarity to the Gulf Traveller concept Mr Hogan introduced whileheading Gulf Air. The purpose is mainly to tap into high volume but low yielding markets more effectively.Etihad's fleet expansion will ramp-up more significantly beyond 2013. Nevertheless, the airline and its homeairport Abu Dhabi are on watchlists boardrooms worldwide.

MIDDLEEAST

Saudi Arabian Airlines

Based in Jeddah, Saudi Arabian Airlines is the national airline and wholly owned by the Kingdom of SaudiArabia, although the carrier has stated that an IPO would be conducted in 2011 covering 30% of the company.The government has continually stated the much-awaited privatisation of the carrier would strengthen SaudiArabia’s aviation industry and services, with plans to make the kingdom a leading hub for commercial aircraftmaintenance in the Middle East.

The carrier is also in the process of modernisation ahead of the eventual privatisation aimed at improving thepassenger experience and enhancing operational efficiency. This programme includes upgrading its fleet,implementing new technologies, improving work methods and enhancing distribution and marketing. As partof this and like many of its Middle East neighbours, Saudi Arabian Airlines has plans to grow its fleet over thenext decade, and seek additional aircraft on top of the 70 already on order-including 35 A320s, 15 A321s,eight A330s and 12 Boeing aircraft, all due for delivery by the end of 2014. The carrier, which operates 1468domestic and 239 international services per week, took delivery of its first long-range Airbus aircraft in almost30 years in May-2010, the first to be delivered from an order for eight aircraft signed in Jul-2008.

Qatar Airways

Over the past five years, Qatar Airways has more than doubled its fleet size to around 80 aircraft with plansto add close to 40 aircraft by 2013, maintaining a delivery schedule of more than one aircraft per month. Withmore than 200 aircraft worth more than USD40 billion on order, Qatar Airways sits on one of the largestaircraft order backlogs of any airline in the world. Yet, it is apparently not satisfied with its current fleetplan, and has been examining several options in recent months to augment particularly its freighter andnarrowbody fleets.

The carrier’s ambitious fleet plans are part of an overall goal to become the number one airline in the MiddleEast – no small task considering this means displacing some well established neighbours. Qatar Airways iscurrently the third largest carrier within the Middle East, and plans to develop a strong regional network tofeed its extensive sixth freedom long-haul network through its Doha hub. The carrier operates a network of 92destinations, rising to 120 destinations by 2013.

Meanwhile, it remains to be seen if the carrier will launch an LCC, after last year warning that it wouldlaunch its own LCC quickly if any rivals "intrude" on its market. In mid-Jun-2010, CEO Akbar Al Baker warnedLCCs in the region "not to intrude on our market with your crap airline, crap product and crap yields". "IfQatar Airways' market share is eroded by these low-cost airlines, we are ready to move within 90 days. Wehave a model ready with an A320. If [LCCs become] the fashion, we will join the fashion show.” Alwaysfascinating, ever growing, Qatar Airways is clearly one of the world's Hottest Airlines to Watch in 2011.

MIDDLEEAST

Maintenance, logistics or production, AAR can help you improve your efficiency and control your costs.More capabilities, more support. More of what you need.

Maintenance, Repair and Overhaul

Landing Gear Services

Engineering Services

Cargo Systems

Composite Aerostructures

Precision Fabrication

Commercial and Defense Logistics Support

Airframe and Engine Parts Supply and Repair

Integrated Communication Technologies

Aircraft Sales and Leasing

PMA Development and Supply

Mobility Products and Services

aarcorp.com +630-227-2000 U.S.

+971-50-504-7698 BahrainAviation Supply Chain | MRO | Structures & Systems | Government & Defense Services

LATIN AMERICANAirlines

LATIN AMERICA

Latin America was the only aviation market in the world that maintained profitability throughoutthe global financial crisis, with a combined regional net profit result of USD500 million in 2009,according to IATA. Profitability is expected to continue, with a forecast of USD1 billion this year,followed by an expected USD600 million profit in 2011.

The region has also maintained its growth throughout the crisis, joining the Middle East as the only regionswhich grew capacity (ATKs) in 2009. The region recorded capacity growth of 9.6% in 2010 (not far behind therapidly expanding Middle East), and 6.3% growth is anticipated for 2010 and 2011. Traffic (TKPs) is expectedto increase by doubledigits this year (15.2%), slowing to 6.1% in 2011.

While Latin America did not escape the effects of the global economic crisis, it has stood up to it with a newresilience, with the region’s economy rebounding from the shock more rapidly than the majority of developedeconomies. Most importantly, it is doing so without compromising its significant progress towards its long-termdevelopment goals, according to the IMF. The rate of recovery is expected to be substantial in 2010, even ifshort of the typical growth rates of more than 5% that characterised the 2004-08 period.

Based on this, the region is seen as a high-potential and high-growth market, with a few key andinternationally competitive airlines, in addition to a fast-growing LCC segment. Meanwhile, internationalcarriers have also seen the potential in the market, with a recent increase in the number of carriers operatingto this region.

The region's traffic and infrastructure will get a further boost from an expected influx of visitors to Brazil forthe 2014 World Cup and the 2016 Rio De Janerio Olympics. The anticipated considerable increase in demandhas prompted GOL CFO Leonardo Pereira to state that the carrier may purchase more B737NGs toaccommodate the forecast additional demand.

“If Brazil continues to grow at a faster pace than we thought, we’ll have to review our fleet plan. 2014 addsan additional component to this review, because 2014 and 2016 are going to be big events. And if you want toorder a plane for 2014, you have to do it today,” he said. Other carriers in the region will likely beconsidering their options as well.

Meanwhile, the alliance battle will heat up in the coming years: LAN is a member of oneworld and TAM is amember of the rival Star Alliance, meaning one of the groupings will lose its South American representativewhen the merger is completed. While GOL has no plans to join an alliance in the near future, AerolineasArgentinas has signed with SkyTeam, which has AeroMexico as a member, this year.

LATINAMERICA

Avianca

Avianca, Colombia’s national airline, is one of the major players in the fast-growing and high-potential LatinAmerican market. To capitalise on these opportunities, the carrier has expanded organically and via theacquisition of its parent conglomerate, the Synergy Group. Key to this expansion was Avianca's agreementwith TACA Group, signed in Oct-2009, to merge and create Latin America’s leading aviation group, expectedto generate net earning of USD100 million and EBITDA of USD300 million in 2010 on revenues of close to USD3billion.

However, Avianca’s dreams of dominating Latin America received a set back last month, with LAN Airlines andTAM announcing plans in Aug-2010 to merge and create a new Latin American airline group. The combinedairline would dominate much of South America, and be the world’s 11th largest in terms of passenger trafficand 15th largest by revenue. In 2009, the carriers had combined revenues of USD8.5 billion, carrying morethan 45 million passengers.

Azul

Established by JetBlue founder David Neeleman in 2008, Azul is a rapidly expanding Brazilian LCC, whichoperates an extensive network within Brazil. The carrier, which expects to be profitable this year, handled2.2 million in its first year of operation, with Mr Neeleman adding that he believes Azul is the first airline tocarry more than 2 million passengers in its first 12 months.

The expansion is expected to continue, with the carrier due to expand its fleet by seven in 2010 and itsnetwork from 16 to 20 destinations. Looking further ahead, the carrier plans to operate a fleet of 40 aircraftby the end of 2011, introducing the first of 20 ATR 72-600s during the year, to complement its fleet ofEmbraer regional jets. Azul is projected to have a 42-aircraft fleet by 2012 and 76 aircraft in five years.

LATINAMERICA

GOL

The superiority of Latin America’s largest LCC in its low-cost sphere is increasingly being challenged by theNeeleman upstart LCC Azul, now with more than 5% of the domestic market, and Webjet, with the trajectoryof these currently small yet growing new entrants of concern for GOL. However, GOL still holds dominantposition in the Brazilian market, with a market share of approximately 40% and access to 45%-50% of theavailable slots in Brazil's most important airports. The carrier is set to continue to benefit from this solidposition in an improving market, particularly with the upcoming major international sporting events.However, the carrier will also continue to be pressured by TAM and also the new LATAM, which are expectedto prevent GOL from making significant market share and yield gains in the Brazilian and Latin Americanmarket.

LATAM

LAN (oneworld member) and TAM (Star Alliance member) in Aug-2010 caused a stir in the Latin Americamarket, announcing their intention to combine to form a new Latin American airline group which would beamong the leading in the world in terms of size, profitability and market reach. The merger between LAN andTAM not only affects the Latin American market, but will likely influence thinking in other emerging markets,such as China, India and eastern Europe.

The combined airline group will become a sizeable force providing passenger services to more than 115destinations in 23 countries, with a combined fleet of more than 200 aircraft (and more than 200 aircraftscheduled for future delivery). The airlines of the group would operate a fleet of more than 220 aircraft, andhave more than 40,000 employees. In 2009 these carriers had combined revenues of USD8.5 billion, carriedmore than 45 million passengers and carried combined cargo of 832,000 tons. This would make the carrier theworld's 11th largest in terms of passenger traffic and the 15th by revenue.

LATINAMERICA

TRIP (Transporte Aéreo Regional do Interior Paulista)

Brazilian regional carrier, TRIP, is a relatively small yet integral operator in the Brazilian market, operating acomprehensive regional network which ties into the national and international cities served by TAM and itsalliance partners. TRIP (partly owned by Aquia Branca Group with Skywest holding a smaller 20% stake), likeother start-ups in the Brazilian market such as Azul and Webjet, TRIP has been quietly expanding its presencein the domestic market over the past 12 months, with this set to continue. The carrier has seven aircraft onorder and intends to increase its network to 100 by 2011, up from around 70.

LATINAMERICA

ASIA PACIFICAirlines

ASIA PACIFICAirlines

ASIA PACIFIC

Several airlines are making major competitive inroads into the markets they serve this year, whileothers have made it into this year’s CAPA’s Hottest Airlines to Watch list as they begin aggressivefleet and network expansion drives. In every region, there are airlines (of all models) that should beclosely followed by airline, airport and supplier managements for competitive and businessdevelopment reasons.

AirAsia

AirAsia is the world's lowest cost producer of airline seat kilometres, an innovator in distribution and ancillaryrevenues and is expanding rapidly. As such, it is perennially a mouth-watering airline to watch for airports,suppliers and competitor airlines in 2011.

AirAsia has been expanding throughout the global economic crisis, conducting major discounting promotionsas part of its determination to “grow traffic, market share and profits”. The airline has achieved double-digitcapacity growth across its network over the past two years. While this strategy weakened yields and ticketprices in 2009, there have been signs of recovery in 2010, supported by a gushing revenue stream ofancillaries, which has enabled the carrier to maintain strong profits.

The power of the AirAsia associate (cross-border JV) model has been revealed this year, with the benefitsexpected to be realised more fully in the years ahead. JV airlines in Indonesia and Thailand (and shortly inVietnam) present a huge opportunity for the carrier to tap into ASEAN market growth. Both the Thai andIndonesian operations were in the black in the quarter to Jun-2010. With these subsidiaries on track, AirAsiacan now look elsewhere, first with its Vietnam JV, and then potentially into other markets. Despite AirAsia'sASEAN preoccupation (which is based on realism of what has been achievable to date), the attractions of Indiaand the North Asian triangle (Japan, Korea and China) for JV operations will rise, as each of these marketsbecomes more receptive to LCCs.

ASIAPACIFIC

AirAsia X

Owned by a consortium including Tony Fernandes’ Aero Ventures and the Virgin Group, AirAsia X is based atKuala Lumpur International Airport and is entering a rapid expansion phase and proving the low-cost long-haulsceptics wrong.

The carrier, which was launched in 2007, has been embarking on continuous and rigorous network andcapacity expansion, at a time when most carriers cut capacity in response to the economic downturn. Thisgrowth has meant the carrier has reached sufficient scale economies to stand on its own, with the carrier noweyeing a public listing in the 2H2011. The carrier’s growth trajectory is set to continue, with the carrierdescribing its agenda as “Growth! More planes, more destinations and more profits”. AirAsia X plans to growin network to approximately 30 destinations across the Asia Pacific region by 2013 with Tokyo Hanedaoperations the next major network breakthrough from Dec-2010, with a foundation fleet of 25 A330s. Thisexpansion will not only occur within the Asia Pacific region, but also further afield in Europe and the US.International airports around the world are watching AirAsia X with interest.

All Nippon Airways

Japan has been one of the countries hardest hit by the global economic crisis, with the meltdown proving tobe a catalyst for change in the North Asian nation’s aviation market. The year started dramatically, with JALfiling for bankruptcy protection, an event that will provide significant growth opportunities for ANA. ANAovertook JAL as the largest Japanese carrier in Jun-2010 and plans to boost international flights by 15% in thecurrent fiscal year after an increase in capacity at Tokyo Narita and Haneda airports. ANA operates fiveinternational routes from Haneda since 31-Oct-2010 to Los Angeles, Honolulu, Singapore, Bangkok and Taipei.

ANA is also planning to establish an LCC based at Kansai Airport with First Eastern Investment (a self-proclaimed "pioneer of direct investments in China”). This move has been a long time coming, but ANA’smoves to establish an LCC reflects another part of its strategy to maintain its newly found dominance inJapan. The carrier has also had success in luring business passengers away from JAL with an increasinglyimproved business product and is eagerly awaiting delivery of its first and much-delayed B787. In all, ANAplans to take delivery of 52 new aircraft by the end of 2012, ranking it fifth globally, behind Air China (67),American Airlines (60), Turkish Airlines (59) and Ryanair (57).

ASIAPACIFIC

Japan Airlines

The year 2010 has proven to be a decisive one for Japanese aviation, with the changes and impact of the JALbankruptcy expected to continue over the next few years. JAL’s restructuring plans, revealed in Sep-2010, isa significant plan involving the elimination of approximately a quarter of its debt, 40% of its fleet, 30% of itsglobal workforce, one in eight international routes and a quarter of its domestic routes. The carrier is alsoconsidering the creation of an LCC as part of its restructuring. Chairman and CEO, Kazuo Inamori said "JAL'sflop has caused a lot of trouble to shareholders and financial institutions. Today is a new start for us."

While the rehabilitation plan is much as expected, following months of speculations and reports, there issome concern in Japan that the plan may be going too far, especially in the area of the drastic routereductions, opening up the way for ANA and other international carriers to increase their presence in themarket. However, the plan does assure that there is a future for the carrier, with JAL to eventually emergefrom bankruptcy with a lower cost base and a more efficient operation. JAL will be on airport and supplierwatchlists for cutbacks.

ASIAPACIFIC

Garuda Indonesia

Surging competition on regional, domestic and short-haul international routes - from LCCs and full servicecarriers - has intensified the pressure on Garuda Indonesia. A long-time poor performer, Garuda has, however,enjoyed a return to form in recent years under President Director, Emirsyah Satar. Under his leadership,Garuda implemented a Business Transformation Programme in 2005, which resulted in losses progressivelyreduced in subsequent years, until net profits returned in 2007. Garuda also benefited when the globaleconomic crisis had a minimal effect on the Indonesian economy, with demand remaining strong in thedomestic market.

The carrier is bullish on its future, stating it is targeting a net profit of USD370 million by 2014, byaggressively increasing its fleet and expanding its route network. However, question marks remain over thesustainability of its profits over the short and medium term, as Garuda attempts to fend off rising competitionfrom Lion Air and the LCCs (both foreign and international).

As part of the “2024 Quantum Leap” programme, Garuda is planning a massive fleet rejuvenation andenhancement strategy, as part of which the carrier plans to more than double its current fleet of 67 aircraftto 116 aircraft over the next five years. Meanwhile, the carrier is completing its long-running debtrestructuring paving the way for the carrier to conduct an IPO on the Jakarta Stock Exchange in late 2010.Simultaneously, the carrier’s global aspirations are slowly returning to reality, resuming services to Europefollowing the lifting of an EU ban. A bigger step, however, would be Garuda’s future alliance plans, as it isexpected to be the next carrier to join the SkyTeam Alliance, having secured a commitment by cooperationpartner and SkyTeam founding member, Korean Air, to endorse the Indonesian airline’s application. Indonesiahas been a fascinating and fast-moving domestic market over the past few years. That activity willincreasingly spill over into international markets this year and next, making Garuda Indonesia one the key AsiaPacific Airlines to Watch in 2011.

IndiGo

Indigo, India’s largest LCC and the third largest carrier in the domestic market, is a solid player in the Indiandomestic market. The carrier, which was the only Indian carrier to report profits in FY2008/09, is close toovertaking Air India/Indian Airlines as the second largest carrier in the domestic market, and also has itssights set on international expansion in 2011. To support this growth, the carrier plans to take delivery ofmore than 70 aircraft by 2015, with the government in Aug-2010 giving in-principle clearance for IndiGo topurchase 150 new aircraft over the next two to three years, for delivery after 2015. The carrier has a goodreputation in the market and has a well-organised operation, which has positioned it well. Airports in theIndian subcontinent, Gulf and Southeast Asia take note: Indigo is coming.

ASIAPACIFIC

Lion Air

Indonesia's largest private airline, Lion Air, commands a 40% domestic market share, considerably more thanGaruda Indonesia. Lion Air describes itself as a hybrid low-cost operator, offering economy and- business-classseating. Lion Air, wholly owned by Rusdi and Kusnan Kirana (Indonesia’s 22nd richest people in 2009, with anet worth of USD480 million), took to the skies from Indonesia in 2000 with just one aircraft. Within eightyears, Lion Air now operates to more than 36 destinations in Indonesia and other destinations in the region(including Singapore, Malaysia and Vietnam) with up to 160 daily services.

Lion Air plans to aggressively expand its international network from 2010, focussing in particular on theChinese market. The carrier is also seeking offshore partners/bases to expand within Asia, with somedevelopment in the cross-border JV market possible in 2011. Lion Air is on track to become one of the largestairlines in Southeast Asia this decade, based on current orders, with 150 B737NGs on order (the carrier wasthe launch customer of the B737-900ER. Deliveries will rise from one per month in 2010 to two per month in2011-2015. It is a breathtakingly bullish growth profile that will require considerable financing to achieve.

Jet Airways

Jet Airways is the strongest of the “Big Three” Indian carriers, benefitting from a revival in domestic demandin the Indian market and international demand to/from India. The carrier, which is expected to report fullyear profitability in FY2010/11, has witnessed a rapid recovery since 3QFY2009/10, including high load factorsin domestic and international operations (international has exceeded 80% in recent months), combined withstrengthening yields and the impact of cost-reduction programmes. Lufthansa is courting Jet Airways as afuture Star Alliance member, although Air India is a future member of this alliance. SkyTeam meanwhile is theonly alliance without an Indian airline member.

The carrier is now focussing on improving reliability of its fleet, its branding in the domestic market (JetLiteand Jet Konnect will likely be combined under the Jet Konnect brand) and is evaluating new routes toincrease aircraft utilisation. Encouragingly, Jet plans to resume its international expansion, as part of itsambitions to have the strongest global network from India.

ASIAPACIFIC

SpiceJet

SpiceJet is expected to deliver consistent profitability as demand continues to recover in the growing Indianmarket. This year is proving to be a banner year for the carrier: a new owner in Sun TV Network Ltd ChairmanKalanithi Maran; a return to profitability; a much-anticipated launch of international operations in Oct-2010and an order with Boeing for 30 B737-800/900 aircraft for delivery from 2014, as part of the carrier’s target tooperate a 50-aircraft fleet by 2014. SpiceJet is also likely to be a key player in the expected consolidation inthe industry, and has been driving this agenda.

Korean Air

Korean Air has been buoyed in 2010 by surging cargo demand and rising international passenger traffic andyields. In the short term, the now strongly profitable carrier recently stated its cargo business has "returnedto normal to make a profit" and the passenger business has "recovered to well above where it was before thecrisis started". Cargo accounted for 36% of total revenue in 2Q2010 (its cargo operation is the third largest inthe world) and it now plans to explore new markets in Nordic states, Central Asia and the "untapped" LatinAmerican market.

The carrier’s passenger business is witnessing record traffic levels and Korean Air is in expansion mode onceagain. The airline also has an LCC subsidiary, Jin Air, at its disposal to support operations in the domestic andshort-haul international markets. Korean Air is well positioned to respond to rising competition and capacityin China/Japan and it should benefit from its strong international network, which covers 130 cities in 45countries (the carrier, for example, is the largest Asia-North America operator).

ASIAPACIFIC

Malaysia Airlines

Malaysia Airlines, the national carrier of Malaysia, is one of Asia's largest airlines, handling more than 14million passengers p/a (or nearly 50,000 passengers per day) to more than 100 destinations across sixcontinents, with its network focussed predominantly in the high-growth ASEAN/Middle East/NorthAsian/Oceania region. After keeping a lower profile during the financial crisis and enduring a painfulrestructuring exercise, MAS is again positioning itself to capture growth in light of signs of recovery.

MAS has again entered a rapid fleet and network growth phase (the carrier has around 40 aircraft on order,including 27 by the end of 2012). The new fleet mainly comprises B737s, but also six A380s, to increase thecarrier’s operational flexibility and reduce its average fleet age from 15 years at present. Emboldened byfresh funding support under a well-supported rights issue and a return to profitability, MAS is taking the fightup to AirAsia/AirAsia X.

Thai Tiger

Thai Airways and Tiger Airways in Aug-2010 announced plans to form a JV, Thai Tiger, to operate internationaland domestic Thailand point-to-point services (within a five hour flying radius of Bangkok), scheduled tocommence in Mar-2011. The JV, to be owned-51:49 by Thai Airways and another "Thai entity", plans toacquire 15 A320s in 2011 and 2012 to support its expansion in the fast-growing Thai market.

The proposed JV, which is facing some government opposition, raises the bar in low-cost airline competitionin Asia and could have a major impact on the pace of airline liberalisation in the region. Meanwhile, thefuture of Nok Air, in which Thai currently holds a 39% stake, remains uncertain, with Thai Airways stating NokAir was unable to develop a marketing strategy to expand its operations and was not in a position to expandinternationally.

ASIAPACIFIC

Tiger Airways

Tiger Airways is very well positioned in a competitive marketplace, reporting a solid set of financial results inthe three months to Jun-2010. The Tiger Australia operation now appears to be starting to pull its ownweight, enabling the carrier to focus on its new JV with Thai Airways, Thai Tiger. As the carrier has dulynoted, “spreading our paw-print means greater economies of scale for Tiger Airways, which in turn enables usto lower costs and fares even further”. Importantly the JV will give Tiger Airways far more options inallocating the large number of A320 aircraft due for delivery over the next few years. Not only doesestablishment of a new base mean more operating options for the airline, but also spreads the carrier’s riskmuch more effectively, allowing it the luxury of allocating aircraft as its markets vary in opportunity andgrowth rates.

Tiger is still a relatively small operation in comparison with the big two (AirAsia and Jetstar), with just 10A320 -family aircraft in service in each of Singapore and Australia, for a total of 20 aircraft. But it has bigplans, with another 50 aircraft arriving between now and 2015. The carrier has been seeking to speed up thisdelivery process to support its growth plans.

Tiger, one of the lower cost operators in the region, is establishing itself as a major future force in the region,with the potential to become one of three large non-flag carrier operations, along with AirAsia and Jetstar.The carrier acknowledges its expansion regionally will be a key to long-term success. While Tiger has had onefalse start in the North Asian market (in Incheon Tiger Airways) it is possible the carrier may again try toaccess the North Asian market, possibly under a Thai Airways-style partnership with another established NorthAsian carrier.

Tiger Airways Australia

The entry of Tiger Airways Australia into the Australian market in late 2007 put, and continues to create,significant pressure on all incumbents. Tiger is now well established in the price-leadership position in theAustralian market. The carrier, which currently operates a 10 A320 fleet, plans to continue its expansion inthe market, stating there is still a "huge opportunity" for the carrier to grow in Australia. The carrier alsobenefits from having what it claims is the “lowest cost base in Australia”. The carrier has also stated it isexamining routes within a five-hour flying range from Australia for its A320 aircraft, including destinations inIndonesia, New Zealand and the Pacific islands.

ASIAPACIFIC

Jetstar / Qantas

Qantas' strategy and development is watched closely by airline managements around the world, particularlyits two-brand flying strategy with its Jetstar LCC offshoot and its massively successful frequent flyerprogramme. Qantas Group’s low-cost carrier, Jetstar, is a growing jewel in the Qantas crown. The LCC,established in 2003, plays a pivotal role within the Qantas Group to defend and expand its share of themarket, while providing effective segmentation to shield the mainline carrier’s yields. The two-brand strategyhas helped the Qantas Group maintain an optimal 65% Australian domestic market share and provides theplatform for expanding its international network - much to the interest of airports in Asia, and increasinglythe Middle East, Europe and North America.

Jetstar has diversified its operations since launch and now operates an extensive domestic network. It is nowone of the world's largest long-haul LCCs, operating to destinations in the Pacific and Asia. The airline alsooperates domestic services in New Zealand (which were given a boost through Pacific Blue's plannedwithdrawal), and the brand is also operating in Singapore (as Jetstar Asia) and Vietnam (as Jetstar Pacific).The carrier will also likely be involved in the establishment of a potential Japan Airlines LCC, with Qantas inlate 2009 pledging to advise the struggling Japanese carrier in successfully establishing a low-cost offshoot.Another key area of profitability and prospect for Qantas Group is its FFP, which achieved a record UnderlyingEBIT of AUD328 million in the 12 months to Jun-2010, up AUD102 million over the comparative full-year.Qantas' mainline operation, which contracted again last year, is seeing improved yields as the global economyrecovers and corporate travel returns. The strong Australian dollar positions it and Jetstar well for solidgrowth in outbound travel over the near term, although the slump in inbound tourism looks set to continue.

ASIAPACIFIC

Virgin Blue

Australia’s second-largest airline, Virgin Blue, will be an interesting carrier to watch in the next 12 months, asit develops into a more corporate entity under new leadership. The carrier has transformed from beingAustralia’s first LCC when it launched in 2000 to become a hybrid-LCC now targeting higher-yielding corporatetraffic. Virgin Blue has changed its business model accordingly, and the airline now extensively codeshares,has a frequent flyer programme, three-class offerings, lounges, an international subsidiary, among others. Thecarrier, along with affiliates Polynesian Blue, V Australia and Pacific Blue, has had a tough time through thefinancial crisis, although under new management, it is attempting to turn this situation around.

In one of the more dramatic announcements in a never-peaceful Australian aviation market, Virgin Blue’s newCEO (and former Qantas exec), John Borghetti in Aug-2010 announced an array of measures that could go along way to equalising the balance with major competitor Qantas. A “game changing” partnership with AbuDhabi’s powerful Etihad Airways and a declaration of war in next year’s domestic market (with an increasedfocus on the corporate market) add up to a statement that Virgin Blue will become a much more powerfuldomestic and international force in the next 18 months. The carrier also has deals in the offing with Delta -on the Pacific, US routes - and with Air New Zealand covering the trans-Tasman market, which has now beenapproved by competition authorities. Based on the app-arent focus of the new management, Virgin Bluewould also likely be seeking similar agreements to tap into fast-growing Asian markets.

ASIAPACIFIC

CHINESEAirlines

CHINA

China's airlines were the first to experience difficulties during the recent downturn, stemming froma series of external events and natural disasters in China from early 2008. But they have been thefirst to recover, reporting spectacular growth rates from mid-2009 to the present.

Consolidation is ever present in China as its airlines seek to address fragmentation of the marketplace andpursue a more efficient future. Surging economic growth and rising incomes are driving an air travel boomacross China, though the outlook is not without its share of challenges.

China is predominantly a domestic market. Its airports handled almost 11 times more domestic passengersthan international – including Hong Kong/Macau "regional" – in 2009. A combined 486 million passengerspassed through in 2009, up 19.7% year-on-year, as well as 9.5 million tonnes of cargo, up 7%.

China is now the largest international market, overtaking Japan, and domestic aviation market in Asia.Implicit government support (ie ownership) for the sector means funding for expansion is virtually guaranteed,though Beijing has suggested the recent round of airline bailouts would be the last.

The "big three" Chinese airlines – Air China, China Eastern and China Southern – headline our list of Airlines toWatch in 2011 - and are very much on the watchlists for airline and airport strategists within the region, aswell as in Europe, North America and the Middle East/Africa. But there are several second-tier carriers on themainland and Hong Kong that are flexing their muscles and seeking bigger futures.

CHINA

Air China

Air China, one of the "big three" Chinese carriers, is well positioned to benefit from China's rapid economicgrowth and increasing wealth which will drive continuous demand for domestic air traffic. International airtravel is now also recovering with the global economy, with the carrier planning to leverage its strategicpartners, such as Cathay Pacific, and gradually strengthen its operational capabilities to attack theinternational market. Air China's position will be further enhanced with an increased interest in thestrategically located Shenzhen Airlines, which complements the carrier’s ongoing hub strategies in the Pearland Yangtze River deltas and Beijing, and will help to further bolster its network and domestic marketposition.

The carrier’s strengthened partnership with Cathay Pacific and the joint IR initiatives are also expected todeliver numerous operational benefits and synergies. Air China has a 29.99% shareholding in Cathay Pacific,which in turn has a 19.27% shareholding in Air China, with further increases probable in the future.Meanwhile, to support its organic growth plans, Air China expects net capacity to increase 10-12% year-on-year in 2010, with plans to add 67 new aircraft to its fleet by 2012, more than any other airline worldwide.The carrier’s fleet totalled 262 at the end of 2009, with a fleet order backlog of 139 aircraft.

Chinese airlines occupy nine of the top 50 spots globally for total aircraft scheduled for delivery by the end of2012 - more than any other country. The US is second with just five carriers on the list.

Air China faces a few key challenges, including the rapid increase in domestic capacity and the growingoptimism and expanded capacity of rivals, which will further intensify competition in the Chinese aviationmarket. In addition, high-speed rail will begin to affect certain domestic city pairs, while fluctuations in oilprices and exchange rates will create further uncertainties in the airline’s operations.

CHINA

China Eastern Airlines

Shanghai-based China Eastern is one of China's largest airlines, operating two hubs at Pudong and Hongqiaoairports. With the Chinese government holding majority ownership via a holding company, the airline operatesa fleet of around 250 Airbus, Boeing, Embraer and Bombardier aircraft to support an extensive network,serving more than 350 domestic routes and 41 international destinations. The carrier also has more than 100aircraft on order.

China Eastern merged with Shanghai Airlines in 2010 and has announced plans to join the SkyTeam Alliance in2011 as part of efforts to further strengthen its presence domestically and internationally. The government,throughout the financial crisis has dipped deeply into its pockets to address some of China Eastern's - and thewider sector's - structural shortcomings, with the company admitting that China’s airlines are still laggingbehind their international rivals in terms of competitiveness. A lack of coordination with the nation’s high-speed rail network, which is providing significant competition on some domestic routes is also a key concern.The carrier predicts that 60% of China’s domestic airlines will be affected by high-speed rail links by 2012.Other shortcomings noted by the carrier include constraints on civil airspace, underdevelopment of theregional aviation sector and inadequate airport infrastructure.

China Eastern will continue to benefit from the ongoing recovery of the global economy, led by its homemarket, through the “golden opportunity” of World Expo 2010 and synergies related to the completion of theabsorption of Shanghai Airlines. China Eastern has stated it expects the merger to result in a CNY1 billion(USD146 million) increase in profits. These two factors, coupled with the appreciation of the yuan – whichreduces its significant US-dollar-denominated expenses – should enable the carrier to report its first annualoperating profit in at least five years in 2010, with an anticipated profit of USD410 million in 3Q2010 alone.The year has definitely been a key one for the carrier, with rapid traffic growth, a recovery in earnings,alliance moves and consolidation activity, with more exciting developments to come in 2011.

CHINA

China Southern Airlines

China Southern Airlines is the largest airline in China with strong hubs in Guangzhou and Beijing and keysecondary hubs in Shenzhen, Kunming, Chongqing, Changsha, Dalian, Zhengzhou and Urumqi. The carrier alsohas a presence in some of the smaller, lower yield second-tier cities through subsidiaries, which includeXiamen Airlines (60% owned and controlled by China Southern) Sichuan Airlines (now 39% owned by ChinaSouthern) and various regional branch companies. Using a massive fleet of more than 400 Airbus, Boeing andEmbraer aircraft, China Southern has the leading domestic network, as well as international services to theMiddle East, Asia, Africa, Europe, North America and Australia. Its international expansion will become a focusagain in 2011, supported by its membership in the SkyTeam Alliance. It will be interesting to see how theentry of China Eastern into SkyTeam in 2011 unfolds and how China Southern will adapt to its rival's accession.

China Southern is planning a strategic transformation into a global network-focussed airline, partly as a resultof domestic high-speed rail competition but also as part of its strategy to become a leading internationalbrand. It is the only Chinese airline to so far order A380 aircraft, with the flagship expected to operate keysectors to the US.

China Southern Airlines staged a solid turnaround in profitability in 2009 on the back of a rapid recovery indomestic demand and considerable government support, with conditions improving further in 2010. Thecarrier is expected to report net profits of around USD293 million in 3Q2010 alone, with sales, passengertraffic and cargo volumes expected to grow by more than 10% in the full-year 2010. Volumes in the domesticmarket, where China Southern is the most exposed of the “big three”, has already surpassed the pre-financialcrisis levels.

CHINA

Hainan Airlines

Hainan Airlines, the fourth largest airline and largest private airline in China, is no exception to the resurgentmarket conditions in 2010, although its capacity growth profile has been modest by its standards. In 1H2010the carrier reported a 42% jump in revenues to USD1.4 billion, with operating and net profit growth of 36%and 219% respectively, to USD72 million and USD82 million. The carrier’s rise within the Chinese market hasbeen an impressive one: Since 1993, in additional to Haikou, Hainan Airlines has established seven airlinestations in Beijing, Xi'an, Taiyuan, Urumqi, Guangzhou, Lanzhou, Dalian and Shenzhen, as well as an extensivenetwork across China, and connecting Asia, Europe, America and Africa. It has opened almost 500 domesticand international routes flying to more than 90 cities.

To further support its global plans, which are expected to take on more prominence in 2011 as its fleet grows,the carrier is pursuing a global alliance membership to reinforce its position and boost its competitivenessagainst its larger rivals. Fiercely independent, Hainan Airlines is one of the few second-tier Chinese carriersnot have had one of the “big three” take an equity stake.

The carrier will benefit from an expected further appreciation of the yuan, the government’s aim to developthe Hainan region into a top international tourism destination and the support of its parent, HNA Group,which is one of the most fascinating growth stories in Chinese aviation, tourism and related sectors and now alarge multi-industry conglomerate company with a total asset base of approximately USD25 billion.

CHINA

Henan Airlines

Henan Airlines, a small domestic Chinese carrier based at Zhengzhou Xinzheng International Airport, has beenin the news for all the wrong reasons of late, a fatal crash in Aug-2010 involving one of the carrier’s E190aircraft at Yichun Airport. The incident, China’s first fatal commercial aircraft accident in almost six years,not only prompted an industry-wide safety drive by the CAAC but also may prompt another name change forthe carrier. Henan Province's Administration for Industry and Commerce has reportedly ordered Henan Airlinesto change its name following the incident. The carrier changed its name from Kunpeng Airlines to HenanAirlines in Sep-2009, due to the carrier's relocation of its headquarters to Zhengzhou, the capital of Henan.The carrier is 51% owned by Shenzhen Airlines, which is 51% owned by Air China, while Mesa Air Group and USTrust Company Holding holds 25% and 24% stakes, respectively.

The carrier had been hoping to shake up the regional Chinese market over the next decade, with ambitiousplans to operate a fleet of 200 aircraft by 2016 (with deliveries averaging at least one per month) up from itspresent fleet of five. However, the carrier, like many of the nation’s smaller and regional carriers, has beenaffected by the nation’s expanding high-speed rail links. Regional aviation in China has much potential, butparticipants have struggled to make the equation work. Should Henan Airlines overcome its immediatechallenges, it could be a key carrier to watch in the Chinese market in years to come.

CHINA

Sichuan Airlines

Based at Chengdu Shuangliu International Airport with an additional hub at Chongqing Jiangbei InternationalAirport, Sichuan Airlines is owned by a consortium including the Sichuan provincial government and ChinaSouthern Airlines. Using a fleet of 47 narrowbody Airbus aircraft (and three ERJ145s), Sichuan Airlinesoperates an extensive network of domestic services within China. Further expansion is occurring this year withthe addition of a Yunnan branch company at Kunming Wujiaba Airport and a base at Shijiazhuang Airport.Meanwhile, Sichuan Airlines Group in Jun-2010 increased its stake in the unprofitable Northeast Airlines from33.5% to 97%, through a CNY400 million investment, with the carrier seeing potential in the carrier to capturemore market share as it plans to deploy a restructured Northeast in Guangxi and Liaoning. In Jun-2010 SichuanAirlines Group also entered an agreement with Hebei Municipal Government to restructure the carrier and re-establish it as a Hebei-based airline, to be renamed Hebei Airlines, with the carrier using the assets ofsubsidiary Dongbei Air.

Sichuan Airlines is targeting more than CNY10 billion in assets and revenue and more than 100 aircraft by2015, with 27 narrowbody Airbus aircraft on order. Most of them are scheduled for delivery in the next twoyears, making it a key carrier to watch for airports in China and neighbouring countries.

Tianjin Airlines- a unit of HNA Group, parent of Hainan Airlines, and formerly Grand China Express Air- is afast-growing regional carrier based at Tianjin Binhai International Airport. The carrier, which was created asthe vehicle to merge the major aviation assets of Hainan Airlines, China Xinhua Airlines, Chang'an Airlines andShanxi Airlines, plans to increase its presence in the market in the years ahead, not only as a domestic carrierbut also operating to Hong Kong and Macau SAR and surrounding countries. The carrier plans to take deliveryof at least one new aircraft per month in 2011, with its 72 aircraft fleet, which includes 24 E190 jets, to riseto about 150 aircraft by 2013.

CHINA

Hong Kong Airlines

Hong Kong Airlines, and sister airline, Hong Kong Express, are relatively small players in the Hong Kongmarket. However, the carrier, like its parent company in HNA Group, appear to be serious about making theirmark in the region. As part of this, the carriers are completing an equity restructure to draw a cleardistinction between passenger and cargo operations and to avoid unnecessary duplications in its operations.

At Farnborough Air Show the carrier announced a new order for ten aircraft and the conversion of an orderfrom A330 to A350XWB equipment, with additional freighter deliveries also occuring. As new aircraft arrive,the carrier plans to ramp up its international network , as part of efforts to make a name for itself in theCathay-dominated Hong Kong market. The carrier launched its first long-haul services to Europe in Jun-2010although the launch of other European services has now been delayed from the end of 2010 to next year. Thecarrier, which expects to break even or post a small profit in 2010 on revenue gains of an estimated 30-40%, isalso studying the feasibility of an IPO to support is growth trajectory as it seeks to capitalise on its position inthe Hong Kong market.

CHINA

AFRICANAirlines

AFRICA

African airlines are projected to return to profitability in 2010 for the first time since 2002,reflecting stronger economic activity and bolstered by what IATA describes as "a decade of cost-cutting, restructuring, and re-engineering”. Many of Africa's 53 countries are experiencing rapideconomic growth, spurred by global demand for commodities, led by China's insatiable need for rawmaterials. Reflecting these developments, projections for African airline profits stand at acombined USD100 million profit in 2010 with a break-even result anticipated for 2011. It follows anestimated USD100 million loss in 2009. In this installment in CAPA's series on the world's HottestAirlines to Watch in 2011, we focus on the movers and shakers in Africa.

In Oct-2010, the IMF stated that growth in most African countries is accelerating as most economies aresuffering few after-effects from last year's global recession. Economic growth on the continent is forecast toaverage 5% in 2010 and 5.5% in 2011, making Africa one of the few regions not expected to see a slowdownnext year. The recovery is being led by oil-exporter Nigeria (growth of 7.4% expected in the next two years)while South Africa, the largest economy in sub-Sahara, is projected to grow 3% this year and 3.5% in 2011.

The African air travel market is scheduled to return to its long-term growth path in 2010, with a capacity(ATKs) increase of around 9.5% anticipated for 2010, followed by growth of 5.3% in 2011, with similar trendslikely for traffic (TKPs).

Boeing forecasts Africa will require around 700 aircraft worth USD80 billion over the next 20 years toaccommodate rising air traffic as the continent's economy picks up. There is also a need to modernise thecontinent’s fleet which averages nearly 20 years, to raise competitiveness on routes historically dominated byforeign carriers.

Airbus’ outlook for Africa is more bullish, with the manufacturer expecting 1270 aircraft deliveries in the 2009to 2028 period, comprised of 341 aircraft under 100 seats and 929 aircraft with more than 100 seats. Thisrepresents a more than a doubling of the African passenger aircraft fleet. However, only three airlines in theregion have orders for more than 20 aircraft at present: Ethiopian Airlines (41), Arik Air (29) and South AfricanAirways (26).

AFRICA

African airlines with nine or more aircraft on order: Oct-2010

Source: Centre for Asia Pacific Aviation and Ascend

A key area for concern and improvement in African aviation is safety. In 2009, Africa had the worst record at4.09 hull losses per million flights, according to IATA. While this was an improvement over the previous year,it is still six times the global average. Another area for improvement is in the area of infrastructure, with IATAcommenting: “Despite high user charges, in many parts of Africa infrastructure is poorly funded and not up tointernational standards. Lack of transparency is a critical issue that is costing lives.”

AFRICA

Air Arabia Egypt

Formed as a cross-border JV between Sharjah-based Air Arabia and the Travco Group in Jun-2010, Air ArabiaEgypt is an LCC based at Burj Al Arab International Airport in Alexandria. With its initial fleet of A320 aircraft,AirArabia Egypt offers scheduled service to destinations in Africa. Egypt is an ideal market for Air Arabia, dueto a lack of surface transportation and significant two-way business and leisure travel and lack of LCCcompetition. EgyptAir has no plans to launch an LCC subsidiary in the near term, with the national carrierstating: "There may be some planning, but there is no project for now. We are thinking what is the solutionfor facing low-cost carriers.”

The start-up plans to operate from “multiple Egyptian airports” to destinations across the Europeancontinent, as well as more locations in Africa and the Middle East. Airports are watching Air Arabia's moves inEgypt with keen interest.

Air Arabia Maroc

Formed as a cross-border JV between Sharjah-based Air Arabia and Moroccan investors, Air Arabia Maroc isbased at Mohamed V International Airport in Casablanca. With its fleet of A320 aircraft, the airline isexpanding its network into Europe to take advantage of Morocco's vertical open skies agreement with the EU.The carrier is also planning services to West Africa, initially with routes to Tunis, Tripoli and Egypt. Thecarrier commented the Moroccan Government has been "very supportive" of its expansion plans - as areairports across Europe.

AFRICA

Arik Air

An aggressive privately owned Nigerian carrier, Arik Air is the largest operator in the high potential Nigerianmarket, offering domestic, regional and intercontinental services to destinations in North America andEurope. The carrier, which in 2006 took over the assets of the bankrupt national airline Nigeria Airways, hasone of the largest fleet orders among the region’s airlines (behind only Ethiopian Airlines) to support itsgrowth plans.

Arik Air is seeking to establish a stronger network, with the clear intention of becoming a serious Africanforce. However, all carriers in the Nigerian market have struggled financially through the global economiccrisis, with Nigeria’s Central bank in mid-2010 extending a USD3.3 billion bailout for the country’s domesticcarriers, to enable them to refinance their loans for 10 to 15 years. Meanwhile, the carrier believes it wouldbe a candidate for global alliance membership once its credentials are well established: the carrier’s formerCEO has made it quite clear that Arik is open to offers and as one of the few eligible airlines available, therewill undoubtedly be interest.

Ethiopian Airlines

Addis Ababa-based Ethiopian Airlines is the national airline of Ethiopia and one of the leading and most stableairlines on the African continent. Ethiopian Airlines serves 56 international destinations across Africa, Asia,Europe, The Middle East and North America, as well as operating an extensive domestic and internationalcargo network, with a fleet of just under 40 aircraft.

The carrier is planning considerable long-haul expansion having around 45 aircraft on order – for the largestfleet order in the region - including B777s, B787s and A350s, coinciding with the rise of the Addis Ababa hubfor the continent. The carrier has received a further boost in its international aspirations, gaining approval tojoin the Star Alliance at the end of Sep-2010 and full membership within the next 12 months.

Ethiopian Airlines will become the third Star Alliance member carrier on the African continent, joiningEgyptAir and South African Airways. The Star Alliance stated the acceptance of Ethiopian Airlines is anintegral part of its African strategy, with the continent forecast to have the second-highest growth rate in airtraffic over the coming years. According to its 2009 annual report, the airline has been firmly in the black forthe past three years with increasingly healthy margins (operating profit margin reached 8% in 2009).

AFRICA

Kenya Airways

Nairobi-based Kenya Airways is the flag carrier of Kenya. With a fleet of Boeing narrowbody and wide-bodyaircraft and E170 regional jets, Kenya Airways operates an extensive network of regional services withinKenya and Africa, as well as services to Asia, the Middle East and Europe. Kenya Airways is an associatemember of SkyTeam sponsored by KLM which also has an ownership position in the carrier. Kenya Airwaysreported a profit before tax in the 12 months ended Mar-2010 of USD74 million and expects to carry 3 millionpassengers and 60,000 tonnes of cargo 2010.

Looking forward, the airline’s CEO Titus Naikuni in Oct-2010 commented that the carrier is benefiting as a“number of countries continue to open up their skies, which is tied to the deepening democracy and freemarket [policies]”. The airline, which has a continually growing network, outlined its intention to focusinvestment on developing its fleet, people and systems "to enable the airline respond to these threats with aneven more competitive product”. As part of this, the carrier has orders for nine B787s.

1time

1time is South African’s largest LCC by seat capacity and has its main bases at Johannesburg OR Tambo andCape Town International airports. Launched in 2004 as one of South Africa's first LCCs, 1time operates a fleetof MD80 aircraft across a domestic network linking the country's main metropolitan areas of Johannesburg,Cape Town, Durban, Port Elizabeth, East London and George.

1Time CEO Rodney James is calling for authorities to allow South African LCCs to operate more routes into therest of Africa, adding that it could significantly boost traffic if they were permitted to grow their capacity.The carrier in the six months ended Jun-2010 reported revenues of USD77 million with parent company1TimeHolding reporting a 71% slump in profits to USD2.0 million in the period. The carrier, while witnessing a4% increase in passenger numbers and revenue growth in the period saw this being largely been offset byincreases in fuel (+12%) and airport costs (+40%). 1time, which has approximately a 10% capacity share inSouth Africa and operates a fleet of around 11 aircraft- with an average age of over 25 years and no aircrafton order- was profitable in 2009.

AFRICA

Forecast your fuel better

Save over $100,000 for every million bags handled each year

Lower your communications costs by up to 20%

Increase your revenue by up to 10% through smarter pricing

Save up to $5 per passenger check-in transaction

Significantly reduce costs using advanced passenger processing

Take a moment to consider your profitability and costs. How much do you spend on passenger processing? What about baggage handling? We think you could spend less. In fact, we can help you improve revenues and find efficiencies across your business, from better communications and fuel forecasting to automated processes that save you time and money. It’s all done with SITA know-how. Our extensive portfolio of products and solutions covers every aspect of running an airline, from passenger, baggage, border and cargo operations to communications, customer loyalty and revenue optimisation. With each one, you’ll be able to take the optimum route and at lowest cost.

Visit www.sita.aero/content/airlines

And SITA know-how can help.

Specialists in air transport communications and IT solutions

To protect your airline’s future, you need to fly the profitable routes.

EUROPEANAirlines

EUROPEANAirlines

EUROPE

The European airline market was battered by the global financial crisis, recording a combined lossof USD4.3 billion in 2009, according to IATA. Europe's tepid economic recovery, the ash cloud crisis,the end of year blizzards, difficulties in cutting capacity and massive structural changes within theshort-haul market have conspired to make 2010 another challenging year. Losses are anticipated atUSD1.3 billion in 2010, making it the only region to be unprofitable in an otherwise strong year forrecovery elsewhere. But there are some bright spots in the region. In this report, CAPA reviews theEuropean airlines expected to make waves in 2011.

The powerful customer preference for low-cost travel continues. Eating into the market share of Europe’snetwork carriers, LCCs are reducing intra-Europe yields (which slumped 25% in 2009), and network carriershave little option but to subsidise their short-haul operations with long-haul profits.

LCC penetration across Europe now stands at more than 35% - a remarkable growth story from less than 5% in2001.

LCC Penetration in Europe: 2001 to 2010*

* Jan-Oct-2010Source: Centre for Asia Pacific Aviation & OAG FACTS

EUROPE

EUROPELCC Penetration in Western Europe: 2001 to 2010*

* Jan-Oct-2010Source: Centre for Asia Pacific Aviation & OAG FACTSLCC penetration in Eastern Europe is also continuing to grow and remains a massive opportunity for thesegment.

LCC Penetration in Eastern Europe: 2001 to 2010*

* Jan-Oct-2010Source: Centre for Asia Pacific Aviation & OAG FACTS

EUROPEAegean

Athens-based Aegean Airlines is a full-service airline, having a dominant domestic position in Greece and agrowing presence in international scheduled routes between Greece and destinations in Europe andneighbouring countries. Currently the airline serves 17 domestic and 20 international destinations over 54routes with a fleet of 28 aircraft; 4 A321s, 18 A320s, 6 RJ-100s. Two ATR-72s wet-leased from Spain’s Swiftairserve shorter domestic sectors. Aegean has accounted for most of the growth at Athens in recent years andhas created a network that now serves 19 out of the top 30 travel markets.

Aegean Airlines became a member of the Star Alliance in Jun-2010 and recently commenced codeshareservices with alliance partner Continental Airlines. In another key development, Aegean Airlines and OlympicAir announced on 22-Feb-2010 that each company's shareholders have reached an agreement to merge thetwo airlines, and create a new company to be listed on the Athens Stock Exchange. The agreement, which issubject to the approval of the European Competition Commission, will see the main shareholder of Aegean,Vassilakis Group and the sole shareholder of Olympic, Marfin Investment Group take an equal shareholding inthe combined entity. The combined company will carry the name and logos of Olympic Air, with Chairman MrVassilakis of Aegean and Chairman Mr. Vgenopoulos of Olympic to lead the company.

The company has shown profits over the past seven years, registering net earnings in 2008 of EUR29.5 millionand in 2009 of EUR23 million. However, in 2H2010, the general downturn, coupled with unrest in Greece,resulted in a net loss of EUR32.6 million with passenger numbers remaining stable at 2.9 million. Revenuesdeclined 3%.

Over the next few years as a sick Greek economy restructures, Aegean's strategy will be to focus on short-hauloperations with its own metal, while relying on its Star partners for wider links. In a more commercial world,and with the strictures of European competition laws to prevent government support and uneconomicoperations, this model conforms much more to a modern airline role than the former Olympic carrying theGreek flame around the globe. Meanwhile, as Aegean awaits EU approval for a merger with Olympic, theoutlook remains distinctly cloudy. Competition from slimmer, more aggressive airlines is unlikely to go awayand the months ahead will be crucial to the future of the Greek aviation industry.

EUROPEAer Lingus

Dublin-based Aer Lingus is the national airline of the Republic of Ireland. A former member of oneworld, AerLingus is now a semi-low cost, point-to-point airline with a network of services within Europe, the UK and theUS (the latter having been reduced for winter 2010-11). It is a publicly listed company with Ryanair and theIrish Government major shareholders. However, Ryanair has stated it would be “willing to sit down with anyrival interested in buying the airline” should it want to acquire Ryanair's 29% stake in the carrier, ruling outplans to launch a third bid for Aer Lingus, at least for now. Aer Lingus has also reportedly held informal talkswith a number of competitors to purchase the Irish Government’s 25% stake in the airline.

Much remains uncertain about the carrier’s future which has stated that while it can survive as a standaloneairline it may consider selling a stake to a larger airline identifying Lufthansa’s acquisition of a minority stakein Brussels Airlines as a good model for such a move. The carrier is also in preliminary talks to rejoin a globalalliance recognising that “consolidation around the three alliances will continue”. oneworld (of which it waspreviously a member) is reportedly the preference for Aer Lingus over the Star Alliance and SkyTeam, withBritish Airways acting as Aer Lingus' intermediary with oneworld. Aer Lingus has initiated preliminarycontracts with Embraer, Bombardier and Airbus to determine the pricing of smaller capacity aircraft it mayconsider introducing on European routes where demand does not justify larger aircraft types.

Financially, Aer Lingus expects to report a performance of “no worse than break-even” with the carrierbenefitting from the delivery of staff productivity savings related to its Greenfield cost reduction programmeand improved yields as the carrier continues with its “no growth” strategy particularly in its home marketwhich has seen traffic decline by 40% over the past two years. Reacting to this situation, the carrier hasentered a franchise agreement with struggling regional carrier Aer Arann.

EUROPEAeroflot

Aeroflot is the national airline of Russia with its main base at Moscow Sheremetyevo International Airport.Formerly wholly state-owned, the airline has been partially privatised although the Russian Governmentcontinues to hold 51.17% equity. The carrier also continues to be the dominant carrier in the countryaccounting for about 20% of the Russian passenger market. Aeroflot, a member of SkyTeam, operates anextensive network of domestic services within Russia, as well as international services to Europe, Asia, theMiddle East and North America.

Aeroflot has been a leading voice behind consolidation in the Russian airline industry and has supported theGovernment's plan to address the fragmentation that has been a central feature since the fall of the SovietUnion. Aeroflot CEO, Vitaly Savelyev, in Apr-2010, commented that consolidation is required in the Russianaviation industry with approximately 60 operators serving 45 million passengers. Accordingly, Aeroflot hasannounced plans to take over management control of six Russian airlines including Rossiya, Orenair,KavminVodyAvia, Vladivostok Avia, Saratov Airlines and SAT Airlines with the merged entity expected to have35% of the Russian passenger market.

In this sense, Aeroflot will be the largest beneficiary of the significant structural changes that is occurring inthe challenging, yet potentially lucrative Russian market. Aeroflot also plans to launch an LCC and chartersubsidiary as part of plans to quadruple traffic figures by 2025. Aeroflot plans to move into all passenger andcargo markets to increase its revenues USD18 billion by 2025 and passenger traffic to 79.5 million supportedby a fleet expansion from around 90 aircraft at present to 120 aircraft.

The airline generated USD4.5 billion in revenue in 2009 and carried 19.9 million passengers. In the short term,Aeroflot will invest USD10 million to improve onboard and airport service quality noting that service quality is“becoming the main area of competition between different airlines”.

EUROPEAir Berlin

Air Berlin is Germany's second-largest airline ranking among Europe's largest airlines. The carrier operates anextensive intra-European network with particular strength in the Spanish, Italian and Austrian markets. Aformer pure LCC, Air Berlin is increasingly moving away from this model and image. While the airline’snetwork remains largely leisure-oriented, the carrier operates on some key business sectors, offers long-haulservices with a mixed-aircraft fleet and will become a member of the oneworld alliance in 2012 with thecarrier planning codeshares with a number of its future alliance airlines. Air Berlin has grown both organicallyand through acquisitions, acquiring LTU and dba and 49% stakes in Belair and NIKI in addition to TUIfly Cityroutes, with the carrier commenting that this expansion and acquisition strategy is now paying dividends.

Air Berlin was also relatively proactive in protecting its position throughout the financial crisis and has hadconsiderable success in one of the most challenging periods for international aviation. This has been achievedthrough the effective implementation of a focussed business plan aimed at reducing the impact of, andcapitalising on, the opportunities arising from the global economic crisis. Accordingly, the carrier isanticipating a 5% increase in passengers in 2010 to bring the number of passengers travelling on Air Berlin in2010 significantly over the 30 million mark for the first time, driven by growth attributed to the inclusion ofTUIfly connections and Air Berlin’s focus on key intra-European services for which the carrier believes the“impulses are expected to be the strongest”. This should translate into improved financial performance withAir Berlin expecting a noticeable increase in profit for the 2010 business year.

Air Europa

The Madrid Barajas-based carrier is planning to more than double its fleet in the next few years with 40B737/B787 aircraft on order to supplement its existing B737/B767/E195 fleet of 38 aircraft. The carrier, aSkyTeam alliance airline and Spain’s third largest carrier, has in the past 18 months capitalised on market androute opportunities arising from the failure of some other Spanish carriers such as Air Comet, FlySur, Lagunairand Futura International Airways and the merger between Vueling and clickair.

The carrier, like many in Europe, is a wholly owned subsidiary of a tourism group, namely Spanish tourismgroup Globalia and is poised to enter an aggressive expansion phase.

EUROPEAir France-KLM

Air France-KLM, resulting from the merger of Air France and KLM in 2004, is one of the world's largest airlinesby traffic and revenue, carrying more than 74.5 million passengers in 2008-2009. The SkyTeam membercarriers serve almost 250 destinations in 105 countries across the world with dual hubs at Paris Charles deGaulle and Amsterdam Airport Schiphol to have the most extensive network between Europe and the rest ofthe world. The carrier has, like most European network carriers, been affected by the structural shift inEuropean aviation triggered by the global financial crisis.

In reaction to this, Air France is considering establishing a domestic LCC due to intensified competition fromLCCs in the French market. The new airline, reportedly to be named Air France Express, could be establishedin 2011 with bases in the southern cities of Marseille, Nice and Toulouse if an agreement can be reached withunions. The carrier already operates a low-cost unit in Transavia.

The carrier is also investing EUR110 million to upgrade its long-haul business product and plans to commencenegotiations before the end of the year to acquire up to 100 long-haul aircraft. The carrier currentlyoperates four A380s as part of this long-haul product focus. The carrier has also joined British Airways andLufthansa in calling on the European Union to curb the expansion of Gulf carriers, stating the region’s statusas an air-travel hub is under threat. Meanwhile, the carrier is expecting a positive operating result in FY2010-11 with the carrier seeing an acceleration in the recovery in activity levels, particularly in business travel andcargo. But structural question marks remain and Air France-KLM's methods for addressing them will make it akey carrier to watch in 2011.

Air Nostrum

Regional Spanish airline Air Nostrum, also known as Iberia Regional, is one of a few regional European carriersthat have developed a niche market in the highly competitive European market. The carrier is one of Europe’slargest regional airlines with a fleet of more than 65 aircraft operating to 67 destinations across Spain,France, Germany, Belgium, Italy, Morocco and the Canary Islands with more than 150,000 annual flights on120 different routes. The carrier handles approximately 5 million passengers p/a.

The oneworld alliance airline plans to continue its growth trajectory most recently announcing a firm orderfor 35 CRJ1000 NextGen aircraft at Farnborough Air Show in 2010, joining an existing order for 10 ATR72s.The carrier, since 1997, has been operating as an exclusive franchisee of Spanish flag carrier Iberia with allaircraft carrying Iberia's colours and bearing both the Iberia and Air Nostrum logos.

EUROPEAlitalia

Alitalia has had a turbulent few years but has gained more stability under its new ownership. The carrier ismajority owned by private consortium Compagnia Aerea Italiana (CAI) and Air France-KLM (25%), although theItalian airline has stressed that it has no plans in the immediate or near future to merge with Air France-KLM.

Alitalia is based in Rome and is the national airline and largest carrier in Italy operating an extensive domesticand regional network within Italy and Europe and international services to North America, South America,Africa and Asia. Alitalia is a founding member of SkyTeam and is part of the trans-Atlantic agreement withDelta, Air France-KLM and other Skyteam Airlines. Alitalia currently operates a fleet of more than 150 aircraftwith 60 Airbus aircraft on order to support its future expansion efforts.

The carrier - which reported a much improved net loss of EUR164 million in 1H2010 - is on track to breakeven in 2011 as planned under its restructuring which will reduce the carrier’s staffing levels fromapproximately 14,000 to 12,600 and sell non-core units.

Atlant Soyuz/Moskva Air Company

Atlant-Soyuz Airlines is a Russian passenger and cargo airline based at Moscow Vnukovo International Airport.The airline, which is being renamed and rebranded as Moskva Air Company, is 51% owned by the Moscow CityGovernment and is its official airline with Moscow's coat of arms appearing on the airline's logo and allaircraft. However, Finance Minister Alexei Kudrin has told City Hall to sell its key assets including “airlinesand banks” stating that municipal authorities should not own assets but manage them creating uncertaintyover the carrier’s future. While Western-manufactured aircraft from Boeing and Embraer comprise most ofthe airline's fleet, Atlant-Soyuz is pursuing a strategy built around locally manufactured aircraft,predominantly Antonov and Tupolev aircraft. The carrier is targetting a fleet of 80 aircraft, the majority ofwhich will be made domestically.

The carrier plans to achieve annual turnover of USD1 billion by 2015 with a profit of USD40 million and 7.5-8.0million passengers p/a, up from 1 million at present.

EUROPEAvianova

AviaNova is a Russian LCC based at Moscow Sheremetyevo International Airport. The airline, owned by AlfaGroup and US-based private equity firm Indigo Partners, operates a fleet of A320s to destinations acrosseastern Russia and claims it has created a “price revolution" in the Russian market after its first year ofoperations. The LCC has grown rapidly since commencing operations in 2009 and stated that it aims to lowerfairs to “nothing” and generate revenue solely through ancillary offerings. Avianova, which operates to 22destinations across Russia is targetting 1.2 million passengers by the end of 2010, up from 605,777 in theseven months to Jul-2010, making the carrier the fourth-largest domestic Russian carrier. Looking forward andthe carrier’s second year could be bigger still as the economic situation improves in Russia and Europe.

Carpatair

Romania’s Carpatair is the largest regional airline in south-eastern Europe. The carrier has benefitted fromoperating predominantly in niche regional markets ensuring it has not faced much competition from othercarriers. Carpatair has developed a key hub in Timisoara through the application of a hub and spoke concept,and now operates more than 250 weekly services to 30 destinations in six countries. The carrier, meanwhile,dominates on the Romanian-Italian route, offering the largest number of destinations in both countries (10from/to each country), as well as the largest number of flights, 94 flight a week. TAROM, however, remainsthe largest carrier in the Romanian market with a focus on key European sectors, but fast growing Carpatairwill be a key Carrier to Watch in 2011.

EUROPEEasyJet

Europe’s second-largest LCC, easyJet, has had a challenging 2010, facing more issues than just the globalfinancial crisis. The carrier has been dogged by internal strife with an ongoing and highly-publicised disputewith founder and major shareholder, Sir Stelios, although at least part of this – related to the carrier’sancillary revenue development and branding - has been partly resolved.

However, a key question remains surrounding the carrier’s pace of growth, a key point of contention with SirStelios, with new CEO Carolyn McCall reviewing the airline’s growth and resulting fleet requirements. Thecarrier plans to increase its fleet from a planned 192 at the end of Sep-2010 to 208 aircraft by Sep-2012 (anannouncement is expected in Nov-2010).

The carrier has also faced punctuality and staffing issues that have the potential to seriously impact thecarrier’s brand as a business-friendly LCC, increasingly attempting to attract the higher-yield business market.From a financial perspective, the carrier benefits from having a strong cash balance (in excess of GBP1 billion)and a profitable operation in 2010 with a pre-tax profit for the current year of slightly more than GBP150million. Even if capacity growth rates are trimmed, easyJet remains a crucial European Carrier to Watch in2011.

Finnair

The national carrier of Finland, Finnair is based in Helsinki and is majority-owned by the Finnish government.Operating a fleet that includes narrow and widebody Airbus, Boeing and Embraer aircraft, Finnair’s networkincludes regional services within Finland and Nordic states as well as flights to Europe, Asia, United States andCanada. Finnair, a member of the oneworld alliance, expects to make a profit in 2H2010 after facing achallenging financial situation throughout the financial crisis.

The carrier has stated its Asian strategy, helped by rapid connections at Helsinki and the shortest routebetween large parts of Europe and Asia, is “working very well” with the carrier to continue expansion in theregion. In summer 2011, Finnair will operate a record 74 weekly services to 10 Asian cities: Hong Kong 12flights per week, Tokyo, Osaka, Nagoya, Seoul, Beijing, Shanghai, Bangkok and Singapore daily and Delhi sixtimes weekly. The carrier has stated yields have been better on Asia Pacific services.

EUROPEFlybe

flybe, Europe’s largest regional airline and the UK’s largest domestic airline, has stated it was “one of onlythree major European airlines to report profits throughout the global recession” with the privately ownedcarrier gaining market share as other carriers were more seriously affected by the global economic crisis.

The carrier, which operates a network of 203 routes in 13 countries from 38 UK airports and 32 Europeanairports, is now planning a “string of exciting business developments which will accelerate the roll-out of theflybe proposition into Europe” with the carrier believing that "if you're making a profit during the recession,then that's the time to expand your business”. The carrier also believes partnerships with other airlines are anideal way to increase flybe’s presence and reputation in Continental Europe - flybe entered a codeshareagreement with Air France in Jul-2010 and a regional operations agreement with Olympic Air of Greece lastyear. The company is also in talks with Finnair about regional services in the Nordic region.

Looking forward, flybe has the fleet to support its proposed expansion with an order for up to 140 88-seatE175 and E-family aircraft made in Jul-2010. The first delivery of the firm orders is scheduled for Sep-2011through Mar-2017. The firm order comprises 35 E175 aircraft valued at USD1.3 billion, 65 options (USD2.3billion) and 40 purchase rights (USD1.4 billion – making USD5 billion in total).

EUROPEIcelandair

Having survived the global financial crisis which severely affected the nation’s economy and resulted in aseismic local currency devaluation (and resulted in the failure of numerous Icelandic companies includingthree major banks Sterling Airlines), Icelandair is now in a much better position now than it has been over thepast two years. The carrier’s financials have been boosted by an upswing in inbound tourists encouraged bythe exchange rate of the Krona with the carrier achieving an EBITDA of EUR47.8 million (+116.5%) in 2009,with better-than-expected results in 2Q2010, prompting the carrier to revise its forecast to be improved from2009 levels. The company has also benefitted from the fact that, despite the volcanic eruptions in Apr/May-2010 (and probably partly because of those eruptions), Iceland frequently features in the “top-10-must-visit”tourist destinations. Meanwhile, the carrier is continuing its international route network expansion, withplans to diversify its fleet from an all-B757 operation to include B787 equipment.

The original trans-atlantic fare discounter, Icelandair has also been able to increase its trans-atlantic trafficagain between North America as it adds new routes and capacity. However, there is both an active and latentthreat from the LCC Iceland Express, which has opened more European routes in 2010, whilst preparing toserve five cities in North America in 2011 offering, just like Icelandair, connections between that continentand Europe.

EUROPELufthansa

European giant, Lufthansa, has been busy in 2009 and 2010, integrating a number of new and financiallychallenged airlines into its operations ― SWISS, followed by Austrian Airlines, British Midland International(previously bmi) and Brussels Airlines ― as the carrier moves to consolidate its position in the German andEuropean market and take advantage of its comparatively strong balance sheet which enables it takeadvantage of market opportunities in a challenged aviation industry. The carrier is also rapidly expanding itsgeographic coverage, by acquiring interests (and often full ownership) in airlines as diverse as JetBlue in theUS and SunExpress in Turkey, along with the growing list of European flag carriers it has bought.

This cross-border ownership, a healthy step in the direction of globalisation, also implies an expansion ofLufthansa beyond the German market. Most strategically significant in this regard is the evolution, basedaround these acquisitions, of a multi-hub strategy. For Lufthansa, this international expansion throughownership of surrounding airlines has given it substantial market power although it has put some pressure onthe carrier at a challenging time for the entire European aviation industry.

Moving forward, more consolidation is possible, although the carrier will also grow organically, with a notable73 aircraft on order (although this is partly for fleet renewal) including 15 A380s. Meanwhile, Lufthansa’sflurry of acquisition means more than just overtaking Air France-KLM’s size and position within the Europeanmarket. Rather, it has a longer-term focus, with Lufthansa seeing its acquisitions as a way to enable it tobecome a leading force in the eventual consolidation of the global airline industry, once current regulatoryconstraints are removed.

EUROPEMontenegro Airlines

Montenegro Airlines is the national airline of Montenegro with bases at Podgorica and Tivat airports althoughthe Montenegro Government has confirmed plans to sell a 30% stake in the airline with the stake valued atEUR25.7 million. A consortium comprised of Eurofast, Raiffeisen Investment, Eurofast Global and Babic &Associations have been awarded the privatisation advisor tender although no one has yet expressed interest inthe purchase. Last year, El Al was a potential purchaser for the carrier but their request to control Podgoricaand Tivat was unacceptable to the Government. Airlines have up until mid-Dec-2010 to send in their bids andmust have at least five years experience in the airline industry, a fleet of at least 10 aircraft and have carriedat least 2 million passengers in 2009. This caveat is designed to stop small airlines from neighbouringcountries taking control.

Montenegro Airlines is based in the high potential Balkan region with the carrier part of the Balkan AirlinesAlliance with JAT Airways, with a number of other carriers in the region, including Skywings, also reportedlyintending to join the alliance. The carrier, which operates scheduled service to 15 destinations across easternand western Europe in addition to charter services with a small fleet of Fokker 100 and Embraer 195 aircraftwill benefit from the increasing growth of the tourism industry in the Balkans.

NIKI

NIKI was established in Nov-2003 and now handles approximately 2.6 million passenger p/a based on 2009data with a fleet of more than 10 aircraft operating a network covering approximately 30 destinations. For2009, NIKI reported a profit for the sixth consecutive year and claims to have been profitable since start-upwith 2009 its best ever year. Revenues are anticipated to increase to EUR400 million in 2010 based onprojected passengers of 3.8 million.

airberlin has increased its shareholding in NIKI Luftfahrt GmbH to 49% consolidating NIKI within the airberlingroup while it remains a legally independent company with its own management. NIKI has stated that “thecooperation between airberlin and NIKI marked the first European low-cost airliner alliance”. After AustrianAirlines, NIKI is already the second largest airline – and largest LCC – at Vienna Airport, though still small bycomparison. Its percentage share of passenger traffic is still in single figures with the intensified cooperationto increase NIKI’s size, competitiveness and profitability by enabling it to enter new markets to the eastwhere Ryanair is also going – or wants to go – and where AUA is still powerful and now backed by the might ofLufthansa.

Like German airlines, it faces a threat from the imposition of a copycat “green” passenger taxes by theAustrian government. NIKI will become an affiliate oneworld alliance member when air berlin joins thealliance in early 2012.

EUROPENorwegian Air Shuttle

Norwegian Air Shuttle has continued to capitalise on the weakness of its Nordic rivals throughout the globalfinancial crisis, with plans to increase capacity (ASKs) by 30% in 2010 mainly by increasing the fleet with B737-800s. The strategy has delivered an enhanced market presence, although profits, yields and cash reserveshave suffered. This situation is now stabilising with the carrier delivering solid 3Q2010 results, reportingdouble-digit revenue and profit growth and signs it is winning the battle to gain ground on rival SAS.

Yields remained weak in the period (-13%) although the carrier is giving positive signs on costs. With thebattle currently occurring in the Nordic and European market, the carrier will look to long-haul in the future(it already operates to Dubai) and plans to order widebody aircraft from either Boeing or Airbus in 4Q2010 asit prepares for the launch of its first long-haul routes. The company will choose between B787 and A350equipment to support its long-haul network which will include 15 long-haul sectors over the next few years.

Ryanair

Ryanair is Europe's largest airline, the largest low-cost carrier, and the world's largest airline measured byinternational passengers carried. Ryanair operates a network covering 44 bases and 1100 plus routes with 1400plus daily departures across 27 countries connecting 160 destinations. Ryanair operates a fleet of 250 B737-800 aircraft with firm orders for a further 64 which will be delivered over the next two years. Ryanair employsmore than 8000 people and expects its expansion to increase passenger numbers to 74 million for the 12months ending 31-Mar-2011, a 14% improvement on 2010. It also expects this growth to continue through toFY2013, when it expects to handle 85 million passengers.

Profitability this year is expected to increase in the 10-15% range to approximately EUR350 million-375million. While Ryanair is the airline best known globally for operating to secondary and tertiary level airports,the carrier has indicated strongly that it is considering opening routes to all major European airports with theexception of the “top three” – London Heathrow, Paris Charles de Gaulle and Frankfurt am Main – as slowinggrowth prompts it to modify its operating strategy. However, the carrier added that while its future growthrate is likely to slow to 5% or lower, this is partly because it is expanding from a massive base. Meanwhile,controversial CEO Michael O’Leary could further revolutionise the European aviation industry with a highlyanticipated long-haul venture, although no plans exist for the immediate future.

EUROPES7

Moscow-based S7 is the third largest Russian airline in the domestic market. The carrier is set to continue itsgrowth trajectory (currently in double-digits) with plans to double its fleet in the next few years. S7 Airlines,an associate member of the oneworld alliance, is one of five Russian carriers that Rosaviatsiya, Russia'sfederal air transport agency, describes as having a “stable” financial state, with the carrier to benefit fromany potential air licence cancellations related to the weakness of other operators in the high-growth andhigh-potential yet challenging Russian market.

Turkish Airlines

Turkish Airlines is a rising force in the European and Middle Eastern aviation industry capturing the interest ofinvestors, alliance partners and rivals alike. The fast-growing carrier has not only increased is its size at atime when the majority of its European counterparts are shrinking but also has been profitable whilst doingso. Turkish Airlines is not only a substantial full service and hub carrier in its own right but also maintains asolid position at the low-cost end of the market, domestically through AnadoluJet and its Lufthansa JV inSunExpress. This reinforcement allows the flag carrier to focus on its core, full service role, and to continuallygrow its position in the expanding eastern European, Middle Eastern and central Asian markets. The StarAlliance member (it joined on 01-Apr-2008) operates a network of 126 international and 39 domestic routesand has set an ambitious target of eventually becoming the largest carrier in Europe by operating to everymajor city on the continent.

The push is reflected in Turkish Airlines' massive order book of 90 aircraft that could have a considerablefinancial drain on the airline in coming years. The carrier plans to double its widebody aircraft fleet from 20to 40 by summer of next year and is scheduled to make a decision between a B787 or an A350 aircraft order inearly next year with the carrier also considering the feasibility of A380 and B747-8 equipment. The carrierplans to focus on operations, flight quality and punctuality in 2011. The carrier plans to increase daily servicesfrom 750 per day to 1000 and grow traffic by 20% in 2011 to double its long-haul presence in the next fewyears. The carrier is also interested in growing its profile through acquisitions and is considering strategicacquisitions and is considering opportunities including Serbian Airlines, although no further details areavailable.

For 2010, the carrier is expecting USD6 billion in sales adding that 10% of 2010 sales would be recorded asprofit for the company. The carrier has benefited from its network expansion ― adding 24 new destinations in2010, for a network of 94 international destinations ― with transit passengers expected to total 6 million in2010.

EUROPEVueling

The future is looking brighter for Spain's “new” Vueling, one of the few carriers in the European market whichhas, relatively smoothly and quickly, managed to combine two LCCs into a single more competitive entity. Inaddition to the revenue ― benefits of the merger (revenues, for example, doubled in 2Q2010, with passengernumbers reaching an all-time record of 1.3 million in Aug-2010), the carrier has also implemented a cost-reduction programme which has proven successful and helped the carrier deliver a profitable result in 2010.

At the same time as integrating Vueling/clickair operations and adapting to changes as a majority-ownedIberia subsidiary, Vueling has also continued to expand its product and focus to meet what it sees are currentand future market opportunities in a highly competitive industry. The carrier’s “New Sustainability Model”envisages further improvements to its product to better compete with the legacy carriers while also keepingcosts to an absolute minimum. An improving network will further boost its presence in the Barcelona market,where it is now the largest carrier. This strategy is likely to benefit not only Vueling but Iberia.

Wizz Air

Wizz Air, the largest LCC in central and eastern europe, celebrated its sixth anniversary on 19-May-2010. Overthis time, Wizz Air has become the largest airline in central and eastern Europe, operating from 12 bases inPoland, Hungary, Romania, Bulgaria, Ukraine and the Czech Republic through its operating airlines: Wizz AirHungary, Wizz Air Bugaria and Wizz Air Ukraine. The carrier is targeting more than 10 million passengers in2010 for a year-on-year growth rate of at least 28% as it continues its expansion drive with new bases, newroutes and additional capacity.

This growth trajectory looks set to continue as the carrier looks at opportunities to expand its network ofdestinations and provide low-cost air transport to and from Central and eastern Europe. The carrier, whichoperates an all-A320 fleet of 34 aircraft and has 108 on order, will grow its fleet to 132 aircraft by 2017,underpinning its ability to grow its existing markets and to enter new territories in the years to come. Thecarrier, with its “ultra low cost” business model, has weather the macro-economic storm better than most,with its low-fare, low-cost operations enabling it to stimulate the market and compete effectively with othertransport modes and airline rivals. The carrier claims it has been "one of the fastest-growing airlines in theworld over the recent years”, claiming 36% of the LCC market in central and eastern Europe and a 48% shareof the Hungarian market. The carrier is expecting this share to increase to more than 50% in 2010. The carrierstated it has operated from cash flows for four years and it requires no external financing.

NORTH AMERICANAirlines

North America

The North American airline industry suffered through a painful decade, starting with the tech wreckand 9/11 and culminating in the global financial crisis. Smaller and leaner, airlines in North Americahave made a comeback in 2010. Yields are up, profits are back and staff numbers are starting toclimb again. The deep cutbacks, which have seen almost one in three aviation workers in the USlose their jobs since mid-2001, appear to have helped stabilise the situation.

IATA anticipates net profits for North American carriers of USD3.5 billion in 2010 and USD1.4 billion in 2011 ―after combined net losses of USD9.6 billion in 2008 – the highest of any region in the world ― and a furtherUSD2.7 billion in 2009.

Fitch Ratings in its latest Airline Credit Navigator report noted that, more than a year into the cyclicaldemand recovery that began to drive improved operating results late in 2009, US airlines have been able toreport solid operating and credit quality trends in 3Q2010. Despite ever-present risks of external demandshocks and rising fuel costs, the largest carriers continue to report progress in their efforts to reduceleverage, generate strong free cash flow (FCF) and bolster liquidity, according to Fitch Ratings.

According to Fitch: "With the United-Continental merger now closed and the Southwest-AirTran deal expectedto be approved, the industry has now consolidated dramatically from a position of fragmentation andpersistent overcapacity five years ago."

Airline revenues are expected to continue to rise next year, though the significant increases in passengeryields seen in 2010 (off the low base in 2009) will moderate. Fuel will again be the wildcard, while capacitylevels are increasing, which are the main threats to profitability gains.

Capacity (ATK) growth in North America of 4.1% is expected in 2010, followed by 3.6% growth in 2011,following declines of 6.5% in 2009 and 2.8% in 2008, according to IATA. Traffic (TKPs) is expected to increaseat a faster pace in 2010 with growth of 10.8% anticipated for 2010 although traffic growth of 3.4% for 2011 isexpected to trail capacity growth, raising concerns over load factors and yields.

In the remainder of this report, we review the recent developments and outlook for North America's mostdynamic airlines.

NORTHAMERICA

NORTHAMERICA

Allegiant

Allegiant continues to expand rapidly, maintaining double-digit growth throughout the global financial crisis.As others downsized, Allegiant has become a rising force within the US airline industry. The carrier, whichgenerates some of the highest operating profits of LCCs worldwide, is one of the only US mainline carriers toreport net profits in every quarter through the GFC and reported its 31st consecutive quarter of profitabilityin 3Q2010.

As part of this success, Allegiant has been a leader in ancillary revenue generation, achieving the highestancillary revenue per passenger and highest proportion of ancillary revenue to total revenue in 2009worldwide. In 3Q2010, ancillary revenues surged 25% to represent 31% of total revenues, with averageancillary takings of USD31 per passenger.

Allegiant Air operates to 68 cities with 145 routes, of which 57 are "small cities" with six "major leisuredestinations" and five "other leisure destinations" and with direct competition on only eight routes. Thecarrier has also announced plans to acquire B757 aircraft to begin service to Hawaii.

The Las Vegas-based LCC is on track for another year of continued growth and profitability in 2010 and thetrend is expected to continue as long as fuel remains below USD100. But profitability is threatened by highfuel prices, as the carrier operates an ageing MD80 fleet and does not hedge its fuel. Allegiant is nowtrimming capacity growth to single digits from earlier spectacular levels, in an effort to maintain unitrevenues. The carrier commented: “This is critical as we continue to see increases in our energy costs perpassenger.”

Another concern is that Allegiant Air flight attendants have filed a petition with the National Mediation Boardseeking to vote on joining the Transport Workers Union of America. Allegiant has 420 flight attendants and is anon-union airline, although Allegiant Travel Co listed "unionisation efforts" as one of the risks to its business.

NORTHAMERICA

AirTran Airways

AirTran performed much better through the GFC than many of its peers, due to the solid execution of itsbusiness strategy. The carrier has continued to generate profits through its proactive and timely reaction tothe market conditions. AirTran dramatically slowed its growth profile, improved its capital structure,diversified its network and built a solid portfolio of fuel hedges.

Founded in 1992 as ‘Valujet’ and changing to its present name in 1997, Orlando-based AirTran has hubs inAtlanta, Milwaukee, Baltimore and Orlando. AirTran has a major presence in eastern and mid-western USmarkets, as well as a growing presence in the Caribbean. The airline is one of the largest operators of B717aircraft in the world and is among the largest LCCs in the US with a fleet of more than 130 aircraft.

However, the story of the year for AirTran is its planned integration with Southwest Airlines, announced inSep-2010 and to be implemented through a USD1.4 billion share repurchase by Southwest. AirTran'scommercial and operational integration is expected to culminate in 2012 with both carriers operating underSouthwest’s FAA operating certificate in Dallas. Until the completion of this transaction, AirTran Holdings Incwill continue to operate as a separate, independent company. Its integration with Southwest will be watchedkeenly by airports and rivals across the US.

NORTHAMERICA

American Airlines

AMR Corp, parent of American Airlines, reported its first quarterly profit in three years in 3Q2010 with theresult representing a reprieve for the carrier that has been a weak performer relative to its peers.

The year started badly for American Airlines posting its third worst first quarter loss in its history, losing morethan USD500 million. American has among the highest costs and lowest margins of the US majors and isexpected to be the only carrier to lose money this year.

American Airlines has also found itself as the only major US carrier to not undertake significant consolidationin recent years. The carrier plans to run as a stand-alone company with strong international alliances, butstated it is well positioned to participate in consolidation if the opportunity arises. AA is a founding memberof the oneworld alliance, which has enjoyed a string of wins in 2010, including gaining immunity forpartnerships in the crucial Atlantic and Pacific markets.

The development of these alliances and American's approach to the consolidating domestic environment willbe crucial elements to watch in 2011.

NORTHAMERICA

Delta Air Lines

Based in Atlanta, Delta Air Lines merged with Northwest Airlines in Oct-2008 to form the largest airline in theworld. While it will soon lose its “largest US carrier” title to the newly constructed United Continental, Deltaapparently remains unfazed and continues to extend its reach as well as strengthen its position in key homemarkets. As capacity comes back into the US market next year, Delta will discover whether it is pushingforward on too many fronts, or whether a fast grab for market presence has been enough to cement itsposition.

Delta, which serves more than 160 million customers each year, operates a fleet of more than 700 aircraftcovering services to 351 destinations (109 international and 242 domestic) in 64 countries on six continents.The airline's main hub is Hartsfield-Jackson Atlanta International Airport, the world's business airport largelydue to Delta's dominant presence. The carrier is revitalising its fleet of (former Northwest) B747-400 aircraft,as part of a USD1 billion investment in enhanced global products and services through 2013.

Delta, a founding member of SkyTeam, participates in a trans-Atlantic JV with Air France-KLM and Alitalia andoffers more than 13,000 daily services in conjunction with its worldwide alliance partners. However, thecarrier’s Asian strategy remains uncertain and a weakness, after the carrier missed out on an alliance withJapan Airlines. The carrier’s proposed trans-Pacific JV with Virgin Blue was tentatively denied in Sep-2010,although the US Dot has subsequently requested more information on the plan related to passenger and faresdata.

In Oct-2010 Delta stated it is “making progress” towards its goal of consistent profitability with 10-12% annualoperating margins. Delta blew the rest of its peers out of the water by producing nearly USD1 billion profit inthe third quarter. The carrier reported a net profit of USD363 million in 3Q2010 compared with a loss ofUSD1616 million in 3Q2009.

The carrier is focussing on building a sustainable industry model, one that is closely watched by airlineboardrooms worldwide. To that end, the carrier is continuing its debt reduction efforts and maintainingdiscipline on costs, while flexing its considerable muscle to grow or defend key markets.

NORTHAMERICA

JetBlue Airlines

JetBlue’s ongoing focus on cash preservation, liquidity and careful capacity management ensured it was ableto handle the very challenging environment of 2008/09. JetBlue earned a profit in every quarter of 2009 andgenerated positive free cash flow for the first time in the carrier’s history.

Most recently (in 3Q2010), JetBlue reported its best quarterly operating margin since 2004 with its highestever quarterly operating profit of USD140 million. Quarterly revenues exceeded USD1 billion for the first timein the company's history, as unit revenues and yields also increased by double digits. The carrier now expectsto report “one of our most profitable years ever”, reflecting the progress the carrier has made to strengthenits network, maximise revenues and control costs.

The carrier’s main focus in 2011 is to maintain its strong liquidity position which JetBlue claims is one of thebest in the industry, standing at around USD1 billion. The carrier is also waiting to see the impact of theSouthwest/AirTran merger, but has claimed it will likely result in less competitive capacity in many markets,including Florida.

JetBlue’s strategy is, however, changing and maturing. In an effort to smooth its forward growth profile, thecompany has downwardly revised its fleet plans for both E190 and A320 aircraft. The carrier is also expandingthe number and scope of its commercial agreements with other airlines, including American Airlines, AerLingus and Lufthansa, which has an ownership position in the carrier.

While the carrier continues to reiterate that JetBlue will remain independent with a focus to remain on“organic or natural growth”, the carrier has stated it is open to future alliances. JetBlue President DaveBarger previously noted: “Would we take a look at other opportunities? You bet. Our assets in New York,Terminal 5, I would argue are the most lucrative air transportation market with a number of connectionscoming across that gateway, perfect from Europe, South America, Asia”. He added: “We want to continue tobe able to be real receptive to that on behalf of our shareholders and also be respectful to our largestinvestors [like Lufthansa], as well."

NORTHAMERICA

Southwest Airlines

Southwest had a very challenging year in 2009 as it faced a strenuous test of its evolving strategy that nowplaces a greater emphasis on the business segment. However, the US' largest domestic carrier came throughthe financial crisis in a better state than its previous bout of unprofitability during the 1991 recession, thanksto the buffer from its significant cash reserves.

The carrier has rebounded strongly in 2010, with CEO Gary Kelly commenting: “Oh my, what a difference ayear makes!” In 3Q2010, the carrier reported a net profit of USD205 million, compared with a loss of USD16million in 3Q2009, with operating profits soaring 1514% to USD355 million as revenues surged 20% and yieldsand RASK strengthened in the double digits. The carrier commented that it was “encouraged by the sustainedmomentum”, with continued and sold unit revenue improvements and a “healthy” profit outlook.

With a strong liquidity position and balance sheet, the carrier is proceeding with its AirTran acquisition thatthe carrier believes will generate “very handsome returns” based on the expected synergies and profits. Themerger will increase Southwest’s route network by 25% and open up destinations including Atlanta and ReaganNational Airport, as well as adding 8000 employees to the carrier’s workforce. The integration is expected toculminate in 2012. The carrier is also readying itself to launch international services in three to four years.

Southwest Airlines has 116 firm B737-700s orders, 37 options and 98 purchase rights through 2017. The carrieris also expecting a decision before the end of 2010 regarding a move to add larger B737-800 equipment to itsfleet. Southwest is the largest operator of B737 equipment with 544 in service. The carrier has stated it isinterested in a re-engined version of the B737.

Southwest is adding capacity back into the market and seat growth is expected to be robust in 4Q2010 and1H2011 as business travellers continue to return to the air in numbers experienced before the recession. Loadfactors and yields are expected to rise concurrently, a nice combination for the grand-daddy of the global LCCscene.

NORTHAMERICA

United/Continental

United and Continental completed their legal merger in early Oct-2010 to become the world’s largest airline,an important milestone, although the carrier is facing pilot outsourcing and integration challenges. Unitedand Continental continue to operate as separate carriers, and will do so until they receive their singleoperating certificate, which they expect to achieve by the end of 2011.

Once completed, the carrier will be a dominant force, overshadowing Delta as the world’s largest carrier. Themerger will have a major impact on competitive strategy in the US and is reverberating around the world.United Continental Holdings will have a comprehensive network, a young and flexible fleet and order bookand an extensive frequent flyer programme. Ultimately, the aim of the merger is to create a carrier thatmakes a "sustained meaningful profit", with the goal of delivering USD1.2 billion in annual synergies by 2013.The carrier benefits from have “tremendous” traffic flows over the Atlantic, key mid-continent hubs, Houstonfor Latin America and is strong on the West Coast to the Pacific.

Together with United Express, Continental Express and Continental Connection, the new United operates 5800flights a day to 371 destinations throughout the Americas, Europe and Asia from hubs in Chicago, Cleveland,Denver, Guam, Houston, Los Angeles, New York, San Francisco, Tokyo and Washington DC. Formerly in theSkyTeam alliance, Continental became a member of the United-led Star Alliance in late 2009.

The scale of the combined carrier was also revealed upon the release of the combined carriers’ financialresults in the three months ended 30-Sep-2010. The carrier reported revenues of USD5.4 billion with anoperating profit of USD535 million (+508%) and a net profit of USD387 million (compared with a loss of USD57million in p-c-p). The carrier handled 22.3 million passengers in the three-month period and has a strong cashbalance of USD9.1 billion.

NORTHAMERICA

Virgin America

While it is continuing to gain rave reviews from travel bloggers, Virgin America earned its first quarterly profitin 3Q2010 of USD7.5 million, a big swing from the USD5.9 million loss in 3Q2009. At the same time, it reporteda record operating profit of USD21 million, a 314% improvement from 3Q2009 that resulted in a 10.4%operating margin.

Revenues reached USD202 million in the quarter, up 28%, while unit revenues at the privately held airlineexperienced a 17% increase to USD 10.37 cents, besting industry unit revenue growth which came in at 10% inthe quarter. Yield and PRASM both jumped by double digits at the carrier, which is the newest in the USmarket. The carrier was launched in Aug-2007 and has been plagued by ownership problems in the first coupleof years of its operations. The DoT in Jan-2010 ruled that the carrier remains a US citizen and is under theactive control of US citizens. The ruling re-affirms its 2007 certification when the carrier applied to beginservice.

The carrier previously projected reporting its first-ever annual profit for 2010 with expectations ofoutperforming the industry by "around 5% to 6% on the revenue side”.

The carrier intends to continue its growth with four new destinations in 2010, and continued growth in thefuture as it seeks to expand its fleet from 28 Airbus aircraft to 40 by the end of 2011 and 90 aircraft by 2016.The carrier also plans to expand its services to Chicago O’Hare International Airport and Newark LibertyInternational Airport. The carrier signed an MoU with Airbus in Jul-2010 covering 40 new A320 aircraft withoptions for an additional 20, with plans to expand its fleet. The new aircraft are to delivered from 2013through 2016 at an average rate of 10 p/a. This would make Virgin America possibly the fastest growingcarrier in the US market.