Global Airline Industry Update

Ed McKennaDirector, Ultramar Strategic Solutions

November 19th, 2015

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NJBTA Education Day: Agenda

Introduction

GDP Growth

1H15 Global Commercial Aviation Results

Regional Updates Europe / Middle East Asia Latin America North America

2016 Buyer’s Landscape

Q&A

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Introduction

35+ years in strategic roles in the travel industry, both on the travel agency and corporate sides

20 years travel agency experience in: Technology Reporting Operations

15 years corporate experience in: Travel Program Management Procurement (Regionally & Globally)

Joined Ultramar Strategic Solutions in September, 2015 as Director of Strategic Solutions

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Global Airline Industry Overview: GDP Growth

Region 2014 2015 2016

United States 2.4 2.7 2.8

Latin America 0.9 0.4 2.0

Brazil 0.1 -1.3 1.1

United Kingdom 2.8 2.6 2.6

Germany 1.4 1.5 1.6

Japan 0.0 1.1 1.7

China 7.4 7.1 7.0

Australia 2.2 2.4 2.9

India 7.3 7.5 7.9

Africa (Sub-Sahara) 4.6 4.2 4.6

Worldwide 2.6 2.8 3.3

Source: World Bank (November 2015)

Gross Domestic Product (GDP)

Primary indicator used to gauge the health of a country’s economy

Consists of 4 components: Investment Net Exports Government Expenditure Personal Consumption Expenditures

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1H15 Global Commercial Aviation Results

Financial Results - 1H15

Carrier Revenues Profits

American Airlines $20,700M $3,100M

Delta Airlines $18,600M $2,200M

United Air Lines $18,500M $1,900M

Air France / KLM $13,161M $1,127M

Lufthansa Group $16,441M $1,021M

Japan Air Lines* $5,588M $996M

Emirates ** $13,150M $600M

IAG / British Airways $11,088M $594M

Singapore Airlines* $5,137M $256M

Cathay Pacific $6,500M $254M

Why are the Financial Results so good?

All Oil and Ancillary Fee related?– Airline Spend $823B (1% of Global GDP)– Fuel represents 30% of total costs ($1 flux in barrel of

oil generates $100M in incremental cost/savings)– Carriers will spend $70B less in fuel in 2015 vs 2014 (-

33%)– 2014 ancillary fees generate $39B incremental revenue

(+17%)

Are Customers Benefitting from the Newly Found Fortunes?– New aircraft (1,700 to be delivered in 2015 alone)– Lower Air fares– Enhanced premium product offerings– Amenities (On Board & Lounges)– Carriers introducing more non-stop to secondary

markets

Today’s Airlines are Profit Driven– Minimal government assistance– Cost structure is based on $100 oil (per barrel)– Becoming very lean & efficient thru intense competition

* Results based on April 1, 2015 – September 30, 2015 time frame** Based on April 1, 2014 – March 31, 2015 and normalized

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Europe / Middle East Outlook

Aer Lingus part of IAG (British Airways, Iberia)

Ultra Low Cost Carriers (ULCCs) impact: Norwegian Airlines challenging British Airways in London Ryan Air & EasyJet establishing corporate type programs

Capacity Expansion Aggressive capacity expansion from Middle Eastern carriers Significant expansion on the North Atlantic from both legacy-network carriers

(BA & LH), as well as ULCC such as Norwegian

Uneasy political situation, especially in Southern Europe / Middle East

Labor issues, most notably at Air France and Lufthansa German Airlines

Currency fluctuations impacting earnings Strong US Dollar and GB Pound Sterling Weaker Euro

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Asia Outlook

Cathay Pacific aggressively adding new cities in Europe & North America

Korean Air facing intense LCC competition and pressure from Chinese carriers

Singapore Airlines experiencing sluggish growth, profits and yield Emphasis on Scoot Airlines expansion (Singapore’s LCC)

Japan Airlines predicting strong growth Strengthening its oneWorld relationship with new DFW to Tokyo service

Qantas restructuring has produced record breaking earnings JetStar expansion into Asia

Slower economic growth in China will impact long-term growth China has experienced blistering economic growth for many years

Expansion of non-stop service from secondary cities in China to Europe & North America

United added San Francisco to Chengdu and will add Xi’an in 2016 Xiamen and China Southern Airlines keen to expand 787-8 Dreamliner

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Latin America Outlook

Uneven Regional Economic Performance Brazil’s economy still in the doldrums

Brazilian carriers are cutting domestic Brazil capacity significantly Olympic Games in Rio should provide additional relief

Continued turmoil in Venezuela Currency devaluations in Brazil & Colombia leading to double-digit inflation Commodity prices has fallen significantly

United Airlines 5% stake in Azul SA United looking to strengthen its footprint, especially in Brazil Similar strategy to Delta’s relationship with GOL

Aeromexico / Delta Joint Venture Increase flight options with both carriers in the US and Mexico Strengthens Aeromexico position in the face of LCC competitors (InterJet & Volaris)

Increased non-stop service to US and Europe LATAM building up Sao Paolo service to Europe in response to their move to

oneworld Azul added non-stop flights from Sao Paolo to Orlando and Fort Lauderdale

Evaluating Sao Paolo service to/from New York/JFK in 2016

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North America Outlook

Day of Week Analysis for NYC to Hong Kong TravelModerate economic growth expected to continue in 2016 & 2017

American / US Airways merger complete

Continued Consolidation at Hub airports United transfer of JFK / West Coast service to Newark

Capacity Expansion Addition of new flights, especially over the North Atlantic and Pacific Upgauging of equipment

Enhanced Product Offerings NYC/Boston to West Coast Expansion of JetBlue’s Mint service

Air Canada: Strong International Growth Targeting US travelers with connections in Toronto PRASM and load factors in Western Canada are down significantly due to oil crash

Ultra LCC Impact Frontier, Sprit and Allegiant establishing routes in Chicago and Seattle

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2016 Buyer’s Landscape

Geopolitical Events The Great Unknown

What is Old is New Again! Revenue-based performance contracts with certain carriers Carriers want more “premium” business

Market Share Performance Remains Important Ability to move international travel will impact positively domestic discount

structure

JV/JB Corporate Deals Now the Norm Single carrier & world-wide alliance programs are a thing of the past

Increased Capacity = Opportunity? After years capacity discipline, carriers are adding more flights/seats North Atlantic, in particular, becoming hyper-competitive

Ultra Low Cost Carriers (LCCs) Expanding into new markets like Chicago & Seattle Limited ability to leverage expanded ULCC networks with legacy carriers

Benefit of lower published pricing to be competitive

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Take the Pulse & Determine Scope

Whether utilizing 3rd party consulting services or doing internally, the first steps of any airline sourcing initiative include determining the company mindset/culture, data collection and scope of

work

Before taking action, take the “Pulse” What’s the appetite for change? What’s the traveler’s satisfaction threshold?

Understanding your Top Markets Where are the opportunities within these top markets? What international markets can I shift to obtain stronger domestic discounts?

Past and Present will dictate the Future

Can I “turbo source” or is a formal sourcing initiative more appropriate?

Do I need 3rd party consultants to assist me?

Is my sourcing initiative a North American / US only exercise or is my company looking for additional points-of-sale pricing?

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What to Expect When Negotiating

What do airlines look for from buyers?

Above and beyond FMS/QSI Premium Spend and Segments Commitments to not “Overcommit”

Which agreement(s) do I choose?

Hard Savings vs. Cost Avoidance Route Coverage or Spend Coverage Carrier Friction

What is FMS/QSI?

Fare Market Share (FMS) or Quality Service Index (QSI) is a measurement frequently used by carriers which represents a carrier’s “expected” (given no corporate agreements exist) market share in an individual market or combined set of markets.

Many factors are considered in determining these numbers, including, but not limited to:

1. Non-stop versus connections2. Frequencies offered3. Total number of seats available4. Departure / arrival times and the appeal to the

traveler5. Equipment utilized6. Airline hubs

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Post-Implementation Management

On your Market, Get Set …. and GO

Internal Marketing

Status Matching

Performance

Content Customization … Don’t be afraid

Always Remember … Nothing is Permanent

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Q & A

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Thank You!

Ed McKenna

Director, UTM Strategic Solutionsed.mckenna@ultramartravel.com

212-856-5635