westjet airlines

1. Air Transport Association of Canada Victoria, BC November 5-7, 2006 Dr. Hugh Dunleavy Executive Vice President Commercial Distribution WestJet

3. Those not fully familiar with WS, scheduled in green and charter in orange – thus we are flying to may destinations outside Canada and US, and have a strong vested interest in ensuring competitiveness of our industry domestically but also vis a vis foreign competition. Those not fully familiar with WS, scheduled in green and charter in orange – thus we are flying to may destinations outside Canada and US, and have a strong vested interest in ensuring competitiveness of our industry domestically but also vis a vis foreign competition.

4. Airline Economics:Structure of the Aviation Industry: Sam outlined tax / fee differences between our industry and US. Want take few moments look at overall economic realities within aviation industry. Sam outlined tax / fee differences between our industry and US. Want take few moments look at overall economic realities within aviation industry.

5. Airline Economics: Long term pressure on Yield: SLF wächst jedes Jahr um gut 0,6%P. (d.h. wir erreichen die 100% zwischen 2040 und 2050...) Yield fällt jedes Jahr um 2,5-3% LH ist anderen Carrier seit 1993 um ca. 3 Jahre voraus beim SLF (!!)SLF wächst jedes Jahr um gut 0,6%P. (d.h. wir erreichen die 100% zwischen 2040 und 2050...) Yield fällt jedes Jahr um 2,5-3% LH ist anderen Carrier seit 1993 um ca. 3 Jahre voraus beim SLF (!!)

7. Airline Industry Profitability: Airline environment based on a boom-bust cycle Traditional airline over-optimism If I provide the capacity – the customers will come recent buying by traditional airlines for Boeing and Airbus is a continuation of the behaviours of the past 30 years Traditional airlines may not be the long-term survivors Likely reduction in the number of traditional airlines The business model of the survivors will be significantly different than today Need to position products and services: Appeal to the cost-conscious airlines and cost conscious passengers The above graph is overly optimistic for the traditional airlines Remove the results for Southwest and the profits reduce dramatically – similarly the losses increase significantly.Airline environment based on a boom-bust cycle Traditional airline over-optimism If I provide the capacity – the customers will come recent buying by traditional airlines for Boeing and Airbus is a continuation of the behaviours of the past 30 years Traditional airlines may not be the long-term survivors Likely reduction in the number of traditional airlines The business model of the survivors will be significantly different than today Need to position products and services: Appeal to the cost-conscious airlines and cost conscious passengers The above graph is overly optimistic for the traditional airlines Remove the results for Southwest and the profits reduce dramatically – similarly the losses increase significantly.

8. Airline Economics: Erratic Passenger Demand:

9. Airline Economics: Airline Pricing Domain Reduced range of fares in all competitive markets Low fare business model starting to dominate the landscape Simpler rules, combinable one-way fares Removal of many fare restrictions, no Saturday night stays LCC’s starting to attack the traditional airline’s stronghold routes and customer segments Results: Reduced airline ability to segment the market between traditional business and leisure traffic Reduced range of fares in all competitive markets Low fare business model starting to dominate the landscape Simpler rules, combinable one-way fares Removal of many fare restrictions, no Saturday night stays LCC’s starting to attack the traditional airline’s stronghold routes and customer segments Results: Reduced airline ability to segment the market between traditional business and leisure traffic

10. Classic Low Cost Business Model: Short-medium haul route structure Low Cost emphasis on airline functions / Low cost airports Point-to-point Low Fare Pricing Single price-point available at any instant in time for a flight event High frequency point-to-point service Emphasis on stimulation of passenger demand High density population base Massive stimulation of price sensitive passenger demand Tendency towards Load Factor maximization (throughput) No frills service, minimum cost operation Merchandising model to drive ancillary revenue Within this overall environment, lets look briefly at the classic low cost business model. Within this overall environment, lets look briefly at the classic low cost business model.

11. Realities of LCC Model in Canada: Airports as natural monopolies Limited alternatives at most cities Population does not support multiple airports at cities Airport Fee structures that do not encourage efficiencies Taxes and Fees Fuel Excise Tax, GST / PST , Security Charge Nav Canada Fee Airport Improvement Fees, Agriculture Inspection Fees Lets look at realities of the low cost model in Canadian context, in light of data Sam outlined in his presentation. All these factors reduce ability to drive fares downward, stimulate demand. Lets look at realities of the low cost model in Canadian context, in light of data Sam outlined in his presentation. All these factors reduce ability to drive fares downward, stimulate demand.

12. Price / Load Tradeoffs for an Airline: Passenger demand uncertain: Leisure tends to book further in advance of the travel date Business tends to book closer to departure Highly seasonal traffic patterns by Canadian air travellers Low season demands requires lower fares to stimulate travel Classical economic theory indicates that the demand curve will reduce with increasing price In the Canadian market, the demand curves tend towards those characteristic of an ologopolistic market The number of units sold increases dramatically as price drops below a threshold level Similarly, units sold decreases dramatically as price increases above a threshold value Leisure highly price sensitive Business increasingly price-sensitive Extreme seasonality but constant fleet size Ability to lower fares significantly hampered by fee structuresLeisure highly price sensitive Business increasingly price-sensitive Extreme seasonality but constant fleet size Ability to lower fares significantly hampered by fee structures

13. RISING AIRPORT DEBT: Due to outdated facilities and local expansion, airports have made significant investment in facilities assumed from Transport Canada. Airport debt per guest has increased by almost 100% since 2001. In terms of the airports themselves, Sam indicated the number of times over these facilities have been paid for. The debt per guest taken on by airports demonstrates just how serious the problem has become. In terms of the airports themselves, Sam indicated the number of times over these facilities have been paid for. The debt per guest taken on by airports demonstrates just how serious the problem has become.

14. RISING AIRPORT DEBT: Significant facility spending has resulted in a 205% increase in total capital assets . Inefficient use of airport facilities has resulted in accelerated requirements for facility expansion .

15. Airport Costs: What can we do? Airport infrastructure Sunk costs, need to maximize the benefits of these investments Solution is to increase the airport throughput (Guests) Suggestions: Increased efficiencies in use of Airport facilities Revenue Manage the use of Airport services Differential pricing for the use of Gates Airlines that utilize a gate for 3 hours should pay more than an airline that uses the gate for 30 minutes Differential pricing for the use of Slots Charge more for airlines that want to use peak times of day versus off-peak Increased efficiencies in take-off and landings Ensure Canadian airports operate at world class efficiencies Improved efficiency in use of runways Given the challenges we all face in this industry, what can be done . . . Given the challenges we all face in this industry, what can be done . . .

16. Air Traffic Control: What can we do? Adopt more efficient flow patterns for aircraft Current model triggers significant and unnecessary costs Noise profiles were generated some 15 years ago based on older technology noisier aircraft Next Generation aircraft have a much reduced noise footprint Aircraft profiles have not changed Result: Airlines continue to endure inefficient profiles Increased cost of operations

17. Open-Skies Agreements: Assumes a level playing field for all the participants Disparity in taxation system Disparity in fee structure Airport terminals at many US cities are owned by the airlines Many airports in the US are slot constrained Unequal access to slots and gates at constrained airports Access to slots at non-preferred times forces airlines to reduce fares to stimulate travel Incumbent and frequently inefficient airlines are protected from full competitive market pressures Canadian carriers open to further competition, but…. Must ensure that the competitive landscape is balanced Address the different cost structure issues Address the operational issues Finally, the government also needs to recognize that pursuing further liberalization and bilateral agreements also requires addressing the domestic cost issues and operational issues that impact the entire industry’s ability to operate in the international market. Finally, the government also needs to recognize that pursuing further liberalization and bilateral agreements also requires addressing the domestic cost issues and operational issues that impact the entire industry’s ability to operate in the international market.

18. Questions ?