Industry – Alla Serebrova Delta Airlines - Eugene Southwest Airlines - S hau n British Airways - Alex

1. Global Airlines Industry – Alla Serebrova Delta Airlines - Eugene Southwest Airlines - Shaun British Airways - Alex

2. Presentation Agenda • Industry Characteristics • Current State • Market Outlook • Companies in focus: • Delta Airlines • Southwest • British Airways • YIELD: Revenues divided by revenue passenger-kilometers; it represents an aggregate of all the airfare and airline charges and is measured on a per-kilometer basis.

3. Glossary • ASK: The number of seats available for the transportation of revenue passengers multiplied by the number of kilometers these seats are flown. • RPK: One-fare paying passenger transported one km. RPK is computed by multiplying the number of revenue passengers by the km they fly. • PASSENEGR LOAD FACTOR(%): Percentage of seating capacity which is actually sold and utilized. RPK divided by ASK • UNIT COST:The average operating cost incurred per ATK • YIELD: Passenger revenues divided by revenue passenger-kilometers. PR per RPK. It represents an aggregate of all the airfare and airline charges and is measured on a per-kilometer basis. • BREAK-EVEN LOAD FACTOR: The LF at which operating revenues cover operating costs. Unit Cost divided by Yield.

4. Industry Characteristics • Highly Concentrated Market Dominated by North America (41%) • Half of the World’s Fleet is operated by just 17 airlines (of 650) • Half of all ASK are focused on the top 6% of routes (33 airports) • The Intra-North American Zone Represents 1/3 of the Total • Intra-Asia traffic (10,6%) • Intra-Europe traffic (8,5%) • Europe-Asia travels (7,4%) • Transpacific flights (6,6%) • North Atlantic traffic (11,6%) • The International Traffic accounts for 57% of total PK Source: Airlines Gate

5. Airline Industry is Maturing Worldwide RPK Growth Rates are Declining

6. Industry Characteristics • Capital Intensive • High Cash Flow • Labor Intensive • Highly Unionized • Thin Profit Margins • Cyclical/Seasonal • Travel agencies Source: Rolls-Royce

7. Airline costs

8. Labor Costs Per Employee

9. Aircraft Replacement • Profitability Triggers New Orders • Younger fleet - higher profits

10. Aircraft Replacement Trends

11. Business vs. Personal/PleasureRevenue and Traffic Shares Source: Air Transport Association

12. Not an Industry Free of Risk • Volatility • Geopolitical Instability • Oil disruption fears

13. Jet fuel prices remain high • Historically airline stocks have tended to trade in the same direction as fuel prices • Exceptions: supply shocks or wars • Refining margins at $11.9/ bbl

14. Deregulation and its effects • The US experience - 1978 • International traffic - bilateral agreements • Hub and spoke networks development • Europe (1993) and Asia are still lagging behind • State aid distortion • Government indifference • Airport constraints • Restriction of slot sales • Logical outcomes of deregulation: • Regional LCC: • Alliances

15. The Basic Business Model of the Network Carriers is Broken • LCC have 30% cost advantage • Non-unionized workforce • Better business practices: • Simple point to point • Higher utilization, shorter turns, no waiting at hubs, red-eyes • No transfers • Tickets - internet • Charge for food and drink

16. Even Constrained to the American Landscape, LCC’s ≠ Point-to-Point • Look at the successful LCCs which operate a core, old-line, network hub operation • Air Tran at ATL • Frontier at DEN

17. Global Airlines Alliances - STAR ALLIANCE (21%)(United, Lufthansa, Air Canada, Air New Zealand, ANA, Austrian, British Midland, Lauda Air, Mexicana, SAS, Singapore, Thai, Varig) - ONEWORLD (17%)(American, British Airways, Cathay Pacific, Iberia, Qantas, Lan Chile, Aer Lingus, Finnair) - SKYTEAM(12%)(Air France, Delta, Alitalia, Korean Airlines, Aeromexico, CSA Czech Airlines - QUALIFIER GROUP (Swissair, Sabena, LOT Polish Airlines, TAP Air Portugal, Air Europe, Air Littoral, Turkish Airlines, Volare Airlines, PGA Portugana Airlines, Crossair).

18. Alliances: Rational and Benefits • Rational - very effective at traffic redirecting • Increasing the geographic scope of the network • International market entry restricted by bilaterals • Most cost effective way to develop a new market • Maintain presence in a key market • Benefits • Revenue Growth • Cost Savings

19. 2003 – Positive Result despite SARS • bbb • ccc Source: Rolls-Royce

20. 1st Half 2004 Traffic – Rebound vs. 2003

21. Global Economic Growth • Economic growth is the major contributor to air travel demand • 2004 - 5% highest in 3 decades (China, Japan, US)

22. Traffic Revenues against H1/ 2000

23. 2004 Cargo Traffic Strong • Freight represents 28% of total tonne-kilometres • Europe-Asia (23,6%) Transatlantic flights (19,8%) • Transpacific flights (19,4%)

24. Traffic by Region

25. Productivity – Recovery in 2004 • Many FC items: 2 ways to increase productivity • to increase aircraft utilization • to increase # of seats

26. Passenger Aircraft Productivity 1982 - 2008

27. Economic and Traffic Growth 2004–2023 • Worldwide economic growth will average 3.0%/year • Passenger traffic growth will average 4-5% per year • Cargo traffic growth will average 6.2% per year

28. Market Outlook • Infrastructure develops alongside air travel demand • The world fleet will more than double over the next 20 years reaching 34,770 aircrafts (25,000 new) • Economic and traffic growth rates vary by region

29. Summary • 2004 traffic forecast now +13.5% (18% ytd) • Driven by strong GDP growth in N America • Recovery from SARS in Asia • Aircraft overcapacity being eliminated • Productivity recovered to pre- 9/ 11 levels (75%) • Airline profits recovering in Asia • But yields still very weak in US and Intra- Europe • Costs impacted by $ fuel price • Inability to pass on rises to consumers in US domestic market • Delivery upturn in 2005- 2007 consistent with traffic and • productivity projections • Longer term growth increasingly driven by Asia

30. Delta Airlines

31. Current Stock Information • Stock Price: US $7.26 • Stock Symbol: DAL • Exchange: NYSE • Shares Outstanding: 123.545 million • Market Capitalization: 911.93 million • Dividend: $0.00

32. History & Facts • Started as crop-dusting operator • First flight in 1929 as Delta Airlines • Headquarters: Atlanta, Georgia • CEO: Gerald Grinstein • Employee: 60,000+ • Daily flights with partners: 7,500+ • Destinations: 496 cities in 88 countries

33. Management Team • Gerald Grinstein • Chief Executive Officer, 20yrs experience in airline industry • Michael Palumbo • Vice President, Chief Financial Officer, responsible for Trans World Airlines’ on time performance from worst to first • Joe Kolshark • Chief of Operations, served Delta for 16yrs, 757/767 Captain • Jim Whitehurst • Chief Network and Planning Officer • Curtis Robb • Chief Information Officer, 30yrs information technology experience

34. Business Structure • Connection carriers • American Eagle • Atlantic Southeast Airlines • Chautauqua Airlines • Comair • SkyWest • Shuttle • Northeastern States • SkyTeam Alliance • Global Alliance • Song • Low-cost Carrier • Codeshare Partners

35. Current Situation • Losing over $3 billion since 2001 • Facing bankruptcy protection, Chapter 11 filing • Expecting 2,000 maintenance, 3,000 customer service and 1,800 management job losses in 2005 • Agreed 32.5% pay cut, fewer benefits for pilots, saving nearly $1 billion

36. Reasons for Delta’s Suffering • Low cost carriers with minimal debt loads offering low fares • Use of high-cost hub-and-spoke operation • Increase in fuel price • Greater choices to select from • Sept. 11 incident causing less demand • SARS outbreak • Highest operating per unit cost • Inability to maintain sufficient liquidity • Significantly higher pilot salaries

37. Transformation Progress • SimpliFares • Interior Service Upgrade • Redesign of Atlanta Hub • Growing Cincinnati and Salt Lake Hubs • SkyMiles Program • New Aliances – Continental Airlines, Northwest Airlines & KLM Royal Dutch Airlines • Growing Song

38. Income Statement - Revenues

39. Income Statement - Expenses

40. Operating Expenses

41. Other Expenses & Net Earnings Basic and Diluted Loss per Share (’03) : -$6.40

42. Earnings Trend

43. Balance Sheet

46. Contractual Payment Due by period

47. Fleet Structure & Average Life 9.76

48. Cash Flow Statement Free Cash per share (’03) = $1.54

49. Performance Factors (% from ’02 to ’03) • Operating revenues: $13,303 () • Operating expenses: $14,089 (3.6%) • Operating margin: -5.9% (3.9pt) • Net earning (loss): -$773 (40.06%) • Opt revenue per available seat mile: 9.90¢ (5.4%) • Opt cost per available seat mile: 10.48¢ (1.6%) • Passenger load factor: 73.4% (1.4pt) • Breakeven passenger load factor: 78.1% (1.5pt) • Cargo ton mile yiled: 33.08¢ (8.0%) • Avg aircraft fuel price per gallon: 81.78¢ (22.2%) • End of yr full-time equivalent employees: 70,600 (6.0%)

50. Ratios