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CARGO OPERATIONS REPORT

Arizona State UniversityAirline Pricing &Yield Management Team

Jonathan KurantFutoshi NakagawaMarguerite ODriscollMilos PavicevichJonathon NieldThe Arizona State University Airline Yield Management graduate students performed a SWOT analysis of US Airways cargo operations against major passenger airline cargo operations. The methods of the analysis include:Literature reviews of past researchAnalysis and comparison of competing airline cargo productsAnalysis of current state of competitor cargo airline managementForecasting future trends using historical data

The objective of this analysis is to provide a high level snapshot of how US Airways cargo operations are positioned relative to its competitors.

SWOTSTRENGTHSAirline Cargo ProductsCargo StatsFuture ForecastsTechnology & SustainabilityMarketing & Sales StrategiesWEAKNESSESAirline Cargo ProductsCargo StatsFuture ForecastsTechnology & SustainabilityMarketing & Sales StrategiesOPPORTUNITIESAirline Cargo ProductsCargo StatsFuture ForecastsTechnology & SustainabilityMarketing & Sales StrategiesTHREATSAirline Cargo ProductsCargo StatsFuture ForecastsTechnology & SustainabilityMarketing & Sales StrategiesAdd slide for introAirline Cargo ProductsJonathan Kurant

High TierMiddle TierLower TierDeltaDash$65-$124/Shp

DASH Heavy$.88 - $1.43/lbStandard$.52-$.84/lbUS AirwaysPremier$42.35-$112.94/Shp

Priority$.53-$.67/lbGeneral$.32-$.44/lbSouthwest Next Flight Gtd.$60.00-$120.00/ShpRush Priority$.68-$1.01/lbFreight$.51-$.93/lbDomestic Products6Premier 100% Priority to the actual service rendered General none

International ProductsHigh TierMiddle TierLower TierDeltaEquation$1.70-3.15/kgDimension$1.00-$1.85/kgUS AirwaysPremier$4.15/kgPriority$2.15/kgGeneral$1.95/kg

7Premier 100% Priority to the actual service rendered General noneLufthansa CargoProductsTd.flash and Td.pro

Performance1.5 million tons of freight in 2009 with 7.4 billion RTK830,000 tons of freight and mail carried in first six months of 2010 around 20% more than in 2009Volume up 24.6% in Asia/Pacific and 31.1% to AmericasCapacity up 2.3%, sales up 24.9% and load factor up to 72.3%

8ProductsPrioritize and Perform

PerformanceCommercial Revenue 550.3 million down 18.2%Volume down 2.2%Capacity down 4.2% (4/09 3/10 figures)

British Airways9Singapore Airlines CargoProductsSwiftrider 100% guarantee uplifted as confirmedDedicated cargo timetableEight NA gateways: ATL, ORD, DFW, EWR, IAH, JFK, LAX, SFOEuropean destinations: AMS, BRU, CPH, FRA, MOW

Performance (June 2010 vs 2009)Freight carried 87.9% - up 6.8%Capacity up 12.4%Load factor up to 63.9%

10Cargo StatisticsFutoshi Nakagawa Value of US Merchandise Trade by Land, Water, and Air Gateways: 1990 and 20081990 (%)2008 (%)US Total Land Trade22.924.4US Total Water Trade48.947.8US Total Air Trade22.723.7Other and Unknown5.64.2Top 10 US Air Gateways for International Freight, Ranked by Weight: 1990, 2000, and 2008 (Tons)Rank in 1990Rank in 2000Rank in 2008US Airport199020002008Average annual growth rate 1990-2008111Anchorage, AK908,1881,968,752,487,2705.8322Miami, FL742,7091,250,4821,652,3564.5233JFK, NY899,3281,021,028908,1830.1444Los Angeles, CA348,739643,243771,7104.5555Chicago, IL272,037556,049625,3394.710796Memphis, TN14198,624383,69276.3987Atlanta, GA85,719249,733292,5907.11178Newark, NJ74,633353,072275,3137.5669San Francisco, CA185,355367,690259,1261.9101510Houston, TX82,152121,155192,6744.8Commodity breakdown of global air freight markets, 2007Product NameShare of FEU-kms%High-Tech Products27Capital Equipment19Apparel, Textiles, Footwear17Consumer Products16Intermediate Materials12Food: Refrigerated/Non-Refrigerated6Primary Products2All Commodities100Air Freight via JFK, NY: 2000-2008RITA Bureau of Transportation Statistics (Tons)

Air Freight Rankings by Country

20002005200620072008Import598533540529472Export423393402445436Total1,021926941974908RankExport DestinationTonsRankImport OriginTons1United Kingdom741United Kingdom802Belgium702Belgium493Germany523Germany41RankExport DestinationTonsRankImport OriginTons1London 631London632Brussels492Luxembourg353Paris283Paris28RankExport CarrierTonsRankImport CarrierTons1American Airlines Inc.381American Airlines Inc.522World Airways Inc.372Cargolux Airlines Intl. S.A.403British Airways Plc.303World Airways Inc.32Air Freight Rankings by CityAir Freight Rankings by Airline16Purchasing Managers Index (PMI)Based on five major indicators:Production levelNew orders (from customers)Frequency of supplier deliveriesInventoriesEmployment level

PMI SummaryNEW ORDERSPRODUCTIONEMPLOYMENTDELIVERIESINVENTORIESPMIBetterSameWorseIndex*BetterSameWorseIndex*HigherSameLowerIndex*SlowerSameFasterIndex*HigherSameLowerIndex*IndexMar-1041481161.536531161.121691055.12773064.926611355.359.6Apr-105240865.74944766.92668658.52276261.320611949.460.4May-1050381265.751371266.62866659.82966561.013662145.659.7Jun-1036501458.540471361.426631157.82371657.313662145.856.2*Most recent four month snapshot of PMI18US AirwaysCargo Operating revenue2008: $144 million2009: $100 millionResult: 30.3% decreaseThe decrease in cargo revenues was driven by declines in yield and freight volumes as a result of the contraction of business spending in the current economic environment as well as a decrease in fuel surcharges in 2009 as compared to 2008.

First Quarter 2009: $24 millionFirst Quarter 2010: $33 millionResult: 37.1% increaseThe increase in cargo revenues was driven by an increase in freight volume as a result of the recovering economic environmentAmerican AirlinesCargo Revenues: decrease of 32.9% from 2008

2008: $215 millions2009: $144 millions

Cargo ton miles: decrease of 26.6% from 2008

2008: $505 millions2009: $371 millions

Cargo revenue yield per ton mile (cents)

2008: 42.552009: 38.90

Source: 2009 annual report

UNITED AIRLINESUnited cargo generated $536 million in freight and mail revenue in 2009.United Cargo offers both domestic and international shipping through a variety of services:

United Small Package DeliveryExpress General cargo services

Approximately 88% of cargo shipments are mails.During 2009, United Cargo accounted for approximately 3% of the Companys operating revenues by generating $536 million in freight and mail revenue, a 37% decrease versus 2008.Operating revenue:

2008: $854 million2009: $536 millionResult: 37.2% decreased

Cargo revenues declined by $318 million, or 37%, in 2009 as compared to 2008, due to four key factors.

United took significant steps to rationalize its capacity, with reduced international capacity affecting a number of key cargo markets. United was sharply impacted by reduced air freight and mail volumes driven by lower recessionary demand, with the resulting oversupply of cargo capacity putting pressure on industry pricing in nearly all markets. Lower fuel costs in 2009 also reduced cargo revenues through lower fuel surcharges on cargo shipments as compared to 2008 when historically high fuel prices occurred. United was impacted by lower mail volumes and pricing beginning in third quarter of 2009 arising from US international mail deregulation.

BRITISH AIRWAYSCargo revenue:Overall revenue for the year was 673million Up 9.4% on the prior year777,000 tones of cargo to destinations in Europe, the Americas and throughout the world.

FutureForecastsMilos PavicevichActual Performance DataCauses for decline of air cargo World air cargo traffic grew 5.1 percent in 2007, which followed 3.2 percent growth in 2006 and 1.7 percent growth in 2005, making the those three years the weakest growth period for the industry since the first Gulf War, 1990-1992. (T) World air cargo traffic has declined for two consecutive months through June 2008. (T)Record high jet fuel prices (T)Weak economic growth, (T)Turmoil in financial markets have reduced demand for air cargo services.

Slow Growth to Historic GrowthHigh fuel prices from late 2003-July 2008 Q1-Q2 2008 prices rose nearly 50% over Q4 2007 A long-term economic growth rate of roughly 3%Inventory-reduction strategies and operating cost reductions in the freighter fleetSlow traffic growth can be largely attributed to high fuel prices, which were increasing from late 2003 through July 2008 -- particularly during the first half of 2008 when prices rose nearly 50 percent over December 2007 levels. These high fuel prices, in turn, have made air freight expensive for many shippers. A long-term economic growth rate of roughly 3 percent, and the continuing globalization of industryIncreasing adoption of inventory-reduction strategies, and anticipated operating cost reductions in the freighter fleet should help world air cargo traffic growth return to historic norms.

The Next Twenty YearsWorld air cargo traffic will expand 5.8%Current traffic rates will tripleWorld air cargo traffic will expand at an average annual rate of 5.8 percent for the next two decades, tripling current traffic levels.

WHERE WILL THE GREATEST GROWTH TAKE PLACE?Asia's air cargo markets will continue to lead the world air cargo industry in average annual growth rates, with the intra-Asia market expanding at 8.1 percent per year.In general, markets connecting developing economies to established economies will either approximate or exceed the average world growth rate.

World OutlookWorld FTK 5-Year forecast: 4.7% CAGRIntercontinental average: 4.9%Regional average: 4.2%

World FTK 10-year forecast: 5.3% CAGR (compound annual growth rate)Intercontinental average: 5.5%Regional average: 4.6%

Key FactorsTrade with the US accounts for over 60% of global air cargo FTKsA rebound in the US is vital for cargo market recoveryHousing CrisisCredit CrisisForeign Currency Exchange FluctuationsCorporate ProfitabilityInterest RatesOil and Jet Fuel PricesChinese EconomyBecause trade with the US accounts for over 60 percent of global air cargo FTKs, a rebound in the US economic outlook would be welcomed by the industry. Key factors that observers must monitor include:Housing CrisisCredit CrisisForeign Currency Exchange FluctuationsCorporate ProfitabilityInterest RatesOil and Jet Blue PricesChinese Economy

Credit Crisis. The US economy has been hit with a Perfect Storm that has restricted economic growth. As the housing bubble began to burst and erode a major source of US economic growth in mid-2007, a lot of the structured finance vehicles used to subsidize and finance this growth began to implode, taking the American financial system with it.As Wall Street began taking huge financial losses due to speculative and non-traditional financial instruments, the US financial system was pushed to the brink. The correction of that system resulted in a restriction of credit available to consumers and businesses; yet it was these credit facilities that had provided the grease for the economic engine. Dollar Exchange Rate. A devalued dollar makes foreign goods more expensive for US consumers. In addition, US corporate investment dollars do not stretch as far as in previous years due to dollar declines across world markets. Overall Macroeconomics. The US economy has not only been dependent on an overleveraged consumer, but also on foreign investment. As the dollar depreciates and US interest rates remain at historical lows, the overall US economy is adversely affected as foreign investors may take flight to more lucrative investments.Corporate Profitability. The Dow Jones Industrial Average has struggled to be anything more than erratic of late as many market sectors continue to absorb the aftershocks of the burgeoning economic slowdown. However, there seems to be light at the end of the tunnel as the past three profit quarters have been strong, possibly signaling an end to the US economic slide.Interest Rates and US Recession. While a devalued dollar improves the overall trade imbalance, which helps the US macroeconomic outlook, a push for lower interest rates counters that impact as foreign investment finds the currency less attractive. The Federal Reserve has dropped the Fed Fund rate two points since August 2008, making US government backed securities less attractive for foreign investment.

Chinese Economy. China alone has fueled much of the global economic and air cargo expansion since 2001. There are several factors that will affect Chinas future GDP growth including foreign owned manufacturing facilities on Chinas Eastern Seaboard moving from lower value commodities such as shoes and apparel, into more high-tech goods and encouraging companies to move lower value manufacturing into Western China to increase jobs and fuel continued economic expansion.The inclusion of China in the World Trade Organization (WTO) has forced China to increase health, safety, environmental and work standards that have increased costs for many producers. Interestingly, Chinese-owned facilities are not subject to the same standards as foreign-owned entities.Oil and Jet Fuel Prices. Credit issues make it difficult to hedge fuel positions, yet fuel and oil continue a steady climb up, which challenges profitability for air cargo carriers. The airlines will have to review networks and fleets in light of where and how the economy recovers and where the associated demand for air cargo resides.

Regional OutlookIntra-NA10-year forecast: 3.7% CAGRKey Factors: A Mature MarketCompetitive against overnight and LTL trucking networksIntra-NA10-year forecast: 3.7% CAGRKey Factors: A Mature MarketIntra-NAn airfreight continues to be competitive against the expanding overnight and LTL trucking networks as companies reduce cost out of their domestic supply chains without having to sacrifice significant transit time loss.

NAWestern Europe10-year forecast: 3.3% CAGRNA-W. Europe 3.3% CAGRW. Europe-NA 3.3% CAGRUK, Germany, France, Italy and the Netherlands account for 70% of trafficUK, Germany and France account for over 50%Key Commodities: MachineryMedical instruments Jewelry/valuablesPharmaceutical productsKey Factor: exchange rates

Regional OutlookNAWestern Europe10-year forecast: 3.3% CAGRNA-W. Europe 3.3% CAGRW. Europe-NA 3.3% CAGRUK, Germany, France, Italy and the Netherlands account for 70% of trafficUK, Germany and France account for over 50%Key Factor: exchange rates. The strength of the GBP and euro against the dollar will support trade in this regionKey Commodities: machinery, medical instruments, jewelry/valuables and pharmaceutical products. Pharmaceutical exports are growing in airfreight importance due to the combination of low weight and high-value.

NA Latin America10-year forecast: 4.6% CAGRNA-LA 4.1% CAGRLA-NA 4.7% CAGRMajor trade lanesColombia (cut flower imports into US) Brazil (exports industrial machinery to US)Venezuela (oil)Mexico (largest trade partner with US)

Regional OutlookNA Latin AmericaKey commodities northboundPerishables (fruit and flowers)Consumables (liquid beverages)Precious stonesChemicalsLive plants Key commodities southboundChemicalsIntermediary goods (metals, rubber and pulp)MachineryKey Factors: Growth between bordering economies, strong perishable exports, and high-tech export and intermediate goods traded

Regional OutlookNA Latin AmericaKey commodities northboundPerishables (fruit and flowers)Consumables (liquid beverages)Precious stonesChemicalsLive plants Key commodities southboundChemicalsIntermediary goods (metals, rubber and pulp)Machinery.Key Factors: Growth between bordering economies will continue through the next ten years as Latin American countries benefit from rebounding economies, strong perishable exports, and high-tech export and intermediate goods traded as multi-nationals build production facilities in South and Central America.

NA-China10-year forecast: 8.0% CAGRNA-China 7.8% CAGRChina-NA 8.1% CAGR85%+ westbound commodities to China are manufacturing related:Machinery and chemicalsIntermediary goods (fabrics, leathers and oils)Other 15% Printed matter and consumer productsNearly 90% of all exports from China to NA are consumer-product related Electronics, apparel, footwear, toys and consumer appliancesKey Factors: Chinas GDP growth

Regional OutlookNA-China 10-year forecast: 8.0% CAGR NA-China 7.8% CAGR China-US 8.1% CAGR85%+ westbound commodities to China are goods related to manufacturing or production including machinery, chemicals and intermediary goods such as fabrics, leathers and oils). The remainder is primarily printed matter and consumer products (pharmaceuticals, toys and musical instruments). Nearly 90% of all exports from China to NA are consumer-product related including electronics, apparel, footwear, toys and consumer appliances.Key Factors include China GDP growth. Overall Chinese GDP is forecast to grow 6.5% per year. However, it is important to note that this is a drop from over 9% annually.

NAAsia (excluding China)10-year forecast: 5.4% CAGRNA-Asia 5.7% CAGRAsia-NA 5.2% CAGRKey Trade Partners: Japan, Singapore, Taiwan, and KoreaExports from US: Manufacturing Machinery/Instrumentation (20%)Commercial Machinery (10%)Perishables/Live Animals (15%)Intermediary Production Materials (25%) Imports to US: 75% of imports are consumer productsKey Factors: exchange rate

Regional OutlookNAAsia (excluding China)10-year forecast: 5.4% CAGRNA-Asia 5.7% CAGRAsia-NA 5.2% CAGRKey Trade Partners: Japan, Singapore, Taiwan, and KoreaExports from US: Manufacturing Machinery/ Instrumentation (20%)Commercial Machinery (10%)Perishables/Live Animals (15%)Intermediary Production Materials (25%) Imports to US: 75% of imports are consumer productsKey Factors: exchange rate. The devalued dollar assists the trade imbalance, as exports from the US are more affordable compared to Asian domestic goods in Korea, Japan, Taiwan, and Singapore.

ProjectionsWeak economy and fuel prices may hamper the cargo industryGood News! Cargo traffic will triple over the next 20 yearsThe US and Chinese markets are expected to prosper the mostThe Latin American market is projected to be profitableNew Technologies & SustainabilityMarguerite ODriscollTechnology & SustainabilityEstablished route networksUS domesticTransatlanticIsrael market PHL-TLVCaribbean and MexicoName recognition as a US Legacy carrierCargo vendor networkGood domestic and European route network and to Europe, even with limited range of European destinations, still solid coverage of major markets.Direct access to Israel market PHL-TLVGood Caribbean and Mexican Market coverageName recognition of being a US Legacy carrier.Good Cargo Vendor network

Technology & SustainabilityIneffective website to promote CargoCargo information is buried on website; not a selling point under Travel Tools?Cargo website has information, but little detailInstead of advertising Cargo, there is an ad for US Airways VacationsAirline driven by passengers sales not cargoExtent of companys commitment to cargo

Not a good website to promote CargoAirline Driven by Passengers sales not CargoCargo information is buried on website; not a selling point. Under Travel Tools?Cargo Website has information, but little detailInstead of advertising Cargo, there is an ad for US Airways vacations! If there was ever a place to get a plug for your product, it should be on your allocated web space!

Cargo is limited by what can be done on US Airways WebsiteConsider the possibility of a hyperlink to website content controlled by CargoInteractive features for select large shippersIntegrate barcode data to lock in delivery schedules for the shipperShipments arrive to Cargo ready to screen and verify

Technology & SustainabilityCargo is limited by what can be done on US Airways Website. Consider the possibility of a hyperlink to website content controlled by Cargo.Interactive features for select large shippers-a middle platform between accessing US Airways Cargo Operations, but current enough to allow some load planning and even customer generated paperwork and barcodes.Integrate barcode data to lock in delivery schedules for the shipper. Seamless transition off the plane and into the van helps everyone keep up to date and on schedule.Shipments arrive to Cargo ready to screen; simply verified by agent. After barcode is swiped, downloads all information entered by the shipper in the system.

Technology & SustainabilityPrice breaks to shippers looking for space to shift loads to less premium flightsMinimize carbon footprintsOffer Cargo Carbon Calculator and allow to purchase an offset for shipmentHighlight fuel-efficient Airbus fleetBank of America is looking to integrate US Airways into their supply chain

Site could offer price breaks to shippers looking for space to shift loads to less premium flights; almost real time view of available cargo space on given flights allows shipper to Select and Save helps even out cargo loads over number of flights to destination.Supply chain management groups are under increasing pressure to minimize carbon footprints. Offer Cargo Carbon Calculator and allow to purchase an offset for shipment.Bank of America, one of US Airways leading partners is looking to us as part of their supply chain to participate in a meaningful manner.

Zero emission electric trucks in local markets when feasibleSupply chain green accountability works both directionsBuilding sustainability into the operation saves money, the environment and can be a great marketing toolHigher cost structure can be reduced with technology and sustainability initiatives

Technology & SustainabilitySet up a link with delivery couriers with zero emission electric trucks in local markets when feasible.Supply chain green accountability works both directions. US Airways can utilize the pressure to show carbon neutral shipping options as a reason to use US Airways; in return, we can point to what our Cargo Operation is doing as we are pressured to operate in a more sustainable manner.Building sustainability into the operation saves money, the environment and can be a great marketing tool.

Technology & Sustainability OverviewDevelopment of an integrated website will not be cheap, but in comparison to lost market share it will be a strategic, long-term investment that pays offSales team could have added tools to increase cargo revenue; provide a complete solution to client cargo needs from load planning to arrivalSustainability in supply chain and cargo shipping is here-make it a sales tool instead of an obstacle

Marketing & Sales StrategiesJonathon NieldCompetitive EnvironmentFedEx, UPS, CargoluxEfficiencies of cargo-rail transportationLTL TruckingWater transport

Marketing & Sales StrategiesLeads and OpportunitiesSupply chain integrationIncreasing value of timeIncreasingly high value/ounce shipmentsJust-In-TimeDiverse knowledge of east and west coastInternationally: Get into Asia!

Marketing & Sales StrategiesIntegrate US Airways cargo operations into company supply chainsOffer integrated total logistic solutions with either homegrown services or via third party vendorsTailor the need of the company with a total product solution meeting the needs of the organizationMarketing & Sales StrategiesLooking ForwardAirline Cargo ProductsCargo StatsFuture ForecastsTechnology & SustainabilityMarketing & Sales Strategies

US Airways has a lot of strengths and opportunities in which resources should continue to be investedThe weaknesses and threats found in this investigation open the door to future strengths and opportunities with additional effortUS Airways is poised to ride the rising demand in cargo over the next 20 years