Consolidation Mergers and the Merger Process Airline Industry Council Meeting

1. ConsolidationMergers and the Merger ProcessAirline Industry Council Meeting Washington, DC June 16, 2005

2. Why Do Airlines Merge?Three Major Reasons: • Additional revenue/assets • Increased connectivity and presence (size) lead to additional revenue – additional value from: • Larger carriers achieve a disproportionate share of revenue (S-Curve) • Better schedule optimization • Less pricing competition • Improved operating efficiencies • Strategic Acquisition

3. Examples of Areas of Potential Cost Synergies From a Merger • Rental Expense (other than aircraft) • Combining space, ground equipment, etc. • General and Administrative Expenses • Combining office space, joint purchasing of supplies, etc. • Labor costs for aircraft & traffic handling • Combining of redundant staff

4. Key Merger Considerations Mergers involve four fundamental challenges • Different systems • Different fleet types • Workforce integration issues • Cultural differences

5. Merger/Fragmentation Models • Two Structural Merger Models • The full operational integration model with employees merged • No operational integration. A holding company with operational entities (the double breasting model) • Fragmentation Models involving the sale of part of an airline • A transaction between two carriers involving assets only • A transaction between carriers involving assets and people

6. US Consolidation Since Deregulation • In the 1980’s numerous mergers and at least two examples of fragmentation transactions • In the 1990’s no mergers - numerous fragmentation transactions • In 2000’s one earlier merger (TWA/American) and one recent fragmentation transaction • Pending US Airways/America West merger may be the tip of the iceberg

7. European Union • In the 2000’s there have been four recent mergers • Air France/KLM & Lufthansa/Swiss • Austrian/Lauda & SAS/Brathens

8. The Labor Element • Labor is the key element in determining successful integration of merging companies • Labor laws need to be understood and applied across borders for this to happen • Merging companies have to include labor in the process • As a participant, with input into the process, not as an observer • Without labor as a player, consolidation will not succeed

9. The Labor Element • Labor issues to consider: • Pay Scales • Work Rules • Seniority Lists • Corporate Cultures • Consolidating Pay Scales and Work Rules • In most cases labor costs differ between merging companies • Large labor cost differences can be significant hurdle • Differing work rules and productivity levels also need to be addressed • Companies may attempt to keep operations separate or run one company as “subsidiary”

10. The Labor Element • Why is Labor Integration So Important To Airline Consolidations? • Airline labor, especially pilots, are highly skilled and long training cycles make labor a valuable asset • Airline labor unions often deal directly with the customer • Labor costs are a large enough portion of expenses to have a major impact on cost structure • Labor issues can often lengthen consolidation timeline and financially weaken the merged company

11. The Labor Element • Merging Seniority Lists and collective agreements • Difficult and sensitive process • ALPA has a “Merger Policy” that is intended to: • Preserve jobs • Avoid windfalls to either group • Maintain or improve pre-merger working conditions • Minimize detrimental changes to career expectations

12. The Merger ProcessPhase 1 – Announcement of Transaction to Closing • Need to review legal framework to protect pilots interests • Engage in bi-lateral negotiations with management, as necessary • Meet and Develop Protocol of Cooperation between pilot groups

13. Basic Objectives of Protocol • To establish an ongoing exchange of information related to the __/__ transaction between the signatory Unions; • To share our knowledge and experience in the airline industry, including details of our collective bargaining agreements, national laws and regulations; • To share other information important to protect and enhance our professional interests; • To avoid any action that could reduce the leverage available for the __ or __ pilot groups; • To develop common bargaining positions to be pursued with each management concerning a fair distribution of growth/job opportunities; • To prepare for the further development of the corporate combination of __ and __; • To work together to ensure that in the event of an operational merger of __ and __, the __ and __ pilots will be treated in a fair and equitable manner.

14. The Merger ProcessPhase 2 – From Transaction Closing to Integration • Develop Transition Agreement covering the following terms: • Status of Pilot Signatory Unions and Collective Agreements at _____ and _____ during this Agreement • Separation of Aircraft and Personnel during this Agreement • See Attachment A • No Layoff of Pilots during Term of this Agreement • New Hires during Term of this Agreement • New Aircraft during the Term of this Agreement

15. Transition Agreement • Seniority Integration Process and Procedure • Designation of Merger Representatives • Preparation of Employment Data • Exchange of Employment Data • Negotiations/Mediation/Arbitration • Relative Position on Pre-Merger Lists Maintained • Preservation of Rights • Reimbursement of Merger-Related Expenses

16. Transition Agreement • Company Acceptance and Implementation of the Seniority List • Process to Negotiate Combined Collective Agreement for the Combined Companies • Resolution of Disputes arising under this Agreement • Enforcement of Arbitration Decisions under this Agreement • Mutual assistance during this Agreement • Duration of this Agreement

17. Transition AgreementATTACHMENT A • List of Aircraft Operated by ____ on Date of this Agreement (identified by manufacturer, type and tail designation) • List of Aircraft on Order by ___ on Effective Date of this Agreement (including manufacturer, type, anticipated delivery date) • List of Aircraft Operated by ___ on Effective Date of this Agreement (identified by manufacturer, type and tail designation) • List of Aircraft on order by __ on Effective Date of this Agreement (including manufacturer, type, anticipated delivery date)

18. Phase 3: Post Integration • Implementation of final integrated seniority list • Implementation of combined working agreement • Establishment of an appropriate Union structure

19. Some Labor Relations Considerations to Address in Mergers and Fragmentations of Airlines • A process to maintain proportionality during the transition period • A seniority integration process with real timeline • A timely contract amalgamation process • Addressing Union representation issues • The adverse impact of job abolishment or dislocation of employees • Different corporate cultures adversely affecting labor relations and the handling of human resource issues • Consult on process • Communicate with rank and file

20. QUESTIONS