STATE OF THE EUROPEAN

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STATE OF THE EUROPEAN AIRLINE INDUSTRY Ulrich
Schulte-Strathaus Secretary General ECAC
TRIENNIAL SESSION 8 July 2003
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Current Membership
30 Major European Airlines across Europe
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State of the European Airline Industry

• Not only is it not Business as Usual, it is not
  the usual business model
• Instead, it is an entirely new world ahead for
  us, and we need new approaches to our business .
  . . Both from inside our companies and industry,
  and from the stakeholders outside our industry

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State of the European Airline Industry
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DISMAL
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HORRID
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AWFUL
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The Worldwide Economic Downturn is in its Third
Year
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State of the European Airline Industry
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State of the European Airline Industry
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State of the European Airline Industry
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State of the European Airline Industry
LIST OF HORRIBLES
Internal

• Costs ? / Revenues ? / Yields ? / Premium
  Passengers ?
• Capacity ? / Demand ? / New Competition ?
• Complexity ? / Desire Simplicity ? / Perception
  of Our Business Model ?

External

• Economic Recession Fear of Gulf War II Gulf
  War II SARS
• Terrorism/Security Extraordinary Costs
  Governments Unwillingness to Assume Financial
  Burden Imposed on Airlines
• US Government Handouts (grants, subsidies,
  reimbursements) not Once, but Twice
• Consumer Purchasing Shift Total Internet
  Pricing Transparency
• Plethora of Low-Fare Carriers Spread of
  Low-Fare Offerings Across Europe

Internal External Factors Requirement for
model overhaul. This is not a crisis that will
pass on its own. Self-help, and fundamental
change, are required.
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State of the European Airline Industry
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Economic Recession
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State of the European Airline Industry
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Economic Recession
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Gulf War II
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State of the European Airline Industry
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Economic Recession
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Gulf War II
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Low-Fare Airlines Consumer Purchasing Shift
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State of the European Airline Industry
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Economic Recession
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Gulf War II
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Low-Fare Airlines Consumer Purchasing Shift
SARS
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State of the European Airline Industry
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How do we get out of this industry tailspin?
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Primary External, Non-Government Developments
Facing European Carriers
Factor No. 1 No frill Carriers
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Growth of No Frill Carrier Capacity in Europe Is
Robust
45 per annum
Weekly Seats (000)
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No Frill Carriers Are Capturing a Rapidly
Growing Share of the European Market
No Frill Carrier ASK Share
No Frill Carriers Share of Total European ASKs
Has Grown 370 Since 1997
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Ryanair Traffic Growth at Brussels Charleroi
Passengers (Millions)
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No Frill Carriers Are Causing the Disappearance
of Premium Traffic at Network Carriers
Proportion of Domestic Revenue from Premium
Passengers -- United Airlines
Note Data from second quarter of each year.
Premium fares include first class, business
class, and unrestricted coach.Source US DOT
DB1A Database
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A Few European Low Fare Airlines Will Develop
Non-Hub-and-Spoke Networks Like Their US
Counterparts Have
Ryanair
EasyJet
Stavsta
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Glasgow
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Stansted
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Shannon
Luton
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Amsterdam
Stansted
Dublin
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Charleroi
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Hahn
Orly
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Geneva
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Bergamo
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No Frills Limits to Growth

• Not only sustainable, but will be a major part of
  the market (DoT 25-30 in the US. And in Europe
  15 25)
• However, explosive growth will be capped
• Increased competitiveness network carriers
• Staff Cost (labour unions)
• Infrastructure and Service Cost (unsustainable
  discounts, competition scrutiny and stronger
  airport position)
• Marketing Cost (minimum reached)
• Harmonisation in EU, leads to less cost
  differential (e.g. DBC)
• Environmental Concerns

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Primary External, Non-Government Developments
Facing European Carriers
Factor No. 2 Restructured US Carriers
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Restructuring Costs Annual Savings
Duration of Labour Agreement
Labour(annual)
Non-Labour
Pilots US660MGround Workers US620MCabin
Attendants US340M
Work Rule changes and benefits reductions.
Through 12/2008
American
Pilots US1.1BMachinists US349MCabin
Attendants US364M
Substantial pilot/machinist productivity
enhancements. Scope Clause relaxation allows more
RJs. UA allowed to start low cost airline. Large
benefit reductions.
Six years
United
Pilots Machinists US1BCabin Attendants
Substantial productivity/scheduling
enhancements. Scope Clause relaxation allows
more RJs (about 300 to be ordered). 5 pay
deferral due to Iraq War.
Through 12/2008
US Airways
ContinentalDeltaNorthwest
Labor Concessions in Process of Negotiation
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What Are the Structural Changes Airlines Are
Making in Their Business Models?
Major Expense ComponentsPost-Restructuring
Major Expense ComponentsPre-Restructuring
Labor (down 22)
Labor - 42
Aircraft Fleet (down 20)
Aircraft Fleet - 8
Fuel(down 25)
Fuel - 14
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What Are the Structural Changes Airlines Are
Making in Their Business Models?
Pre-Restructuring
Post-Restructuring
Expenses
Expenses
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What Are the Structural Changes Airlines Are
Making in Their Business Models?
YESTERDAY
TODAY
TOMORROW
Distribution
Labour Aircraft Rentals Taxes Fees
Taxes Fees A/C Production/Maintenance
Costs Airport Costs
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Distortions US Specifics post 9/11 and in War
against Terrorism

• Airline Loss Compensation 4.5 Billion
• Cargo Loss Compensation 0.5 Billion
• Federal Credit Instrument (10 Billion)
• Essential Air Services Fund 0.12 Billion
• Security and safety Measures 3 Billion
• Insurance Facility (0.9 Billion)
• Cockpit doors 0.2 Billion
• Security Tax Refund and Waiver Security Fees 2.4
  Billion
• TOTAL 11.08 Billion SO FAR!!!!

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US Government Handouts
Iraq War Funding (includes May 2003
Reimbursement and Waiver of Security Fees)
Post-9/11 Grant
Loan Guarantee
Total
American
US694M
US465-485M
n/a
US1.159-1.179B
United
US774M
US400-420M
n/a
US1.174-1.194B
US Airways
US900M
US307M
US145-165M
US1.352-1.372B
Delta
US636M
US355-375M
n/a
US911M-1.011B
Northwest
US428M
US250-270M
n/a
US678-698M
Continental
US361M
US210-235M
n/a
US571-596M
US Government handouts permitted US carriers to
continue, at first, and recently restore much
transatlantic capacity in an already
over-crowded market
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US Government Handouts
US Government HandoutsGovernment Assumption
of Some Terrorism-Related Security
CostsAirlines Internal Restructuring
A future transatlantic competitive landscape that
is heavily weighted against European airlines
adding further pressure to the intra-European
problems we face

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State of the European Airline Industry
InternalIssues
ExternalIssues
IndustryIssues
What Needs to Be DoneThe Aviation System must
become coherent
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State of the European Airline Industry

• Internal Issues
• Labour Costs/Productivity
• Aircraft Lease Rate Restructuring
• Technology-Producing Savings
• Distribution
• Airport Check-in
• Meals and Meal Delivery
• Segmentation of Customer Products into Separate
  Value Centres

Key Issues
What is the size of the premium that Network
Carriers will be able to earn over Low Cost
Carriers fares, and will that premium be
sufficient to enable the network carriers to
continue their Network Business Models and earn
an adequate return for their shareholders?
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State of the European Airline Industry
Resolution of these issues in dialogue with
stakeholders

• External Issues
• Government-Imposed Tax, Fee and Security-Related
  Burdens
• Airport Charges
• ATC/Navigation Charges
• Aircraft Lease Rate Issues

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VALUE CHAIN SOLUTIONS AIRPORTS

• For Big Airports effective economic regulations
  and checks and balances preventing abuse of
  mono/oligopoly positions
• For medium/small airports business flexibility
  and tailor made solutions
• For aid transparent and harmonised rules for
  Public involvement in airports EU Guidelines!
• In General the need for airports and airlines to
  work in partnership and to achieve lowest cost,
  maximum efficiency and tailor-made solution!

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THE VALUE CHAIN ATM/ATC

• Single Sky implementation based on clear division
  of responsibilities Rulemaking (Agency),
  Implementation/service provision (NASPs), Safety
  (EASA), Ancillary services (Private).
• Effective economic regulations and checks and
  balances preventing abuse of mono/oligopoly
  positions
• For ANSPs business flexibility and tailor made
  solutions
• In General the need for ANSPs and airlines to
  work in partnership and to achieve lowest cost,
  maximum efficiency and tailor-made solution!

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State of the European Airline Industry
Resolution of these issues vital and Government
dependent

• External Issues
• Too Much Capacity
• Low Barriers to market entry
• Regulatory complexity
• Barriers to cross-border acquisitions and mergers

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State of the European Airline Industry
InternalIssues
ExternalIssues
IndustryIssues
What Needs to Be DoneA Comprehensive Industry
Oriented Policy
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Conclusion

• We are facing an aviation crisis, not an airline
  crisis
• It is thus a structural crisis
• AEA airlines are adjusting their business models
• ATC, airports and other service providers must
  also become flexible and cost efficient
• We must redefine our business relationships
• We need intense dialogue with regulators

ATC/Airports
Airlines
Other service providers