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STATE OF THE EUROPEAN AIRLINE INDUSTRY Ulrich Schulte-Strathaus Secretary General

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

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STATE OF THE EUROPEAN AIRLINE INDUSTRY Ulrich Schulte-Strathaus Secretary General

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  1. STATE OF THE EUROPEAN AIRLINE INDUSTRY Ulrich Schulte-Strathaus Secretary General ECAC TRIENNIAL SESSION – 8 July 2003

  2. Current Membership 30 Major European Airlines across Europe

  3. 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

  4. State of the European Airline Industry  DISMAL  HORRID  AWFUL

  5. The Worldwide Economic Downturn is in its Third Year

  6. State of the European Airline Industry

  7. State of the European Airline Industry

  8. State of the European Airline Industry

  9. State of the European Airline Industry LIST OF HORRIBLES • Costs  / Revenues  / Yields  / Premium Passengers  • Capacity  / Demand  / New Competition  • Complexity  / Desire Simplicity  / Perception of Our Business Model  Internal: 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.

  10. State of the European Airline Industry  Economic Recession

  11. State of the European Airline Industry  Economic Recession    Gulf War II

  12. State of the European Airline Industry  Economic Recession    Gulf War II    Low-Fare Airlines + Consumer Purchasing Shift

  13. State of the European Airline Industry  Economic Recession    Gulf War II     Low-Fare Airlines + Consumer Purchasing Shift SARS

  14. State of the European Airline Industry      How do we get out of this industry tailspin?   

  15. Primary External, Non-Government Developments Facing European Carriers Factor No. 1: No frill Carriers

  16. Growth of No Frill Carrier Capacity in Europe Is Robust +45% per annum Weekly Seats (000)

  17. 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

  18. Ryanair Traffic Growth at Brussels Charleroi Passengers (Millions)

  19. 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

  20. A Few European Low Fare Airlines Will Develop Non-Hub-and-Spoke Networks Like Their US Counterparts Have Ryanair EasyJet Stavsta  Glasgow  Stansted  Shannon Luton      Amsterdam Stansted Dublin  Charleroi   Hahn Orly  Geneva  Bergamo

  21. 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

  22. Primary External, Non-Government Developments Facing European Carriers Factor No. 2: Restructured US Carriers

  23. Restructuring Costs – Annual Savings Duration of Labour Agreement Labour(annual) Non-Labour American Pilots US$660MGround Workers US$620MCabin Attendants US$340M Work Rule changes and benefits reductions. Through 12/2008 United Pilots US$1.1BMachinists US$349MCabin Attendants US$364M Substantial pilot/machinist productivity enhancements. Scope Clause relaxation allows more RJs. UA allowed to start low cost airline. Large benefit reductions. Six years US Airways Pilots Machinists US$1BCabin 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 ContinentalDeltaNorthwest Labor Concessions in Process of Negotiation

  24. What Are the Structural Changes Airlines Are Making in Their Business Models? Major Expense ComponentsPre-Restructuring Major Expense ComponentsPost-Restructuring Labor (down 22%) Labor - 42% Aircraft Fleet - 8% Aircraft Fleet (down 20%) Fuel(down 25%) Fuel - 14%

  25. What Are the Structural Changes Airlines Are Making in Their Business Models? Pre-Restructuring Post-Restructuring Expenses Expenses

  26. 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

  27. 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!!!!

  28. US Government Handouts Iraq War Funding (includes May 2003 “Reimbursement” and Waiver of Security Fees) Post-9/11 Grant Loan Guarantee Total American US$694M n/a US$465-485M US$1.159-1.179B United US$774M n/a US$400-420M US$1.174-1.194B US Airways US$307M US$900M US$145-165M US$1.352-1.372B Delta US$636M n/a US$355-375M US$911M-1.011B Northwest US$428M n/a US$250-270M US$678-698M Continental US$361M n/a US$210-235M US$571-596M US Government handouts permitted US carriers to continue, at first, and recently restore much transatlantic capacity in an already over-crowded market

  29. US Government Handouts No Government Handouts+No Government Assumption+Non-Reimbursement of US Security Costs US Government Handouts+Government Assumption of Some Terrorism-Related Security Costs+Airlines’ Internal Restructuring A future transatlantic competitive landscape that is heavily weighted against European airlines – adding further pressure to the intra-European problems we face =

  30. State of the European Airline Industry InternalIssues ExternalIssues IndustryIssues What Needs to Be Done:The Aviation System must become coherent

  31. 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?

  32. 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

  33. 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!

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

  35. 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

  36. State of the European Airline Industry InternalIssues ExternalIssues IndustryIssues What Needs to Be Done:A Comprehensive Industry Oriented Policy

  37. 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

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