The State of the Industry – and what AEA can do

1. The State of the Industry – and what AEA can do The current crisis – A catalyst for a structural change of European aviation European Aviation Club 12 March 2009 Brussels Ulrich Schulte-Strathaus AEA Secretary General

2. The Association of European Airlines 34member airlines 369 million passengers 11,500 flights a day 605destinationsin161countries 7 million tonnesofcargo 422,000employees Totalturnoverof€78 billion AEA member airlines' brands give credibility and weight to the Association… AEA leverages this weight and gives it back, multiplied, to each individual member.

3. The worst crisis since the 1930s

4. Economies worldwide are suffering

5. Concerted governmental action to … contain the financial problems Global Action • Government bail-outs of banks and financial institutions • Targeted assistance to e.g. Fannie Mae, Freddie Mac, AIG, Fortis, Bradford & Bingley, Glitnir, Kaupthing, RBS, Lloyds TSB,… • Government guarantees for interbank lending • Government guarantees of savings deposits • Interest rate cuts to counter economic slide • IMF provides financial support to Iceland, Ukraine, Turkey • IMF, EU and World Bankprovide financial support to Hungary. Eurozone rescue package EUR 1000 bn UK rescue package GBP 387 bn (EUR 480 bn) US rescue package US$ 700 bn (EUR 550 bn) Source: AEA staff research, BBC

6. World economic outlook weakens further IMF has progressively revised its world forecast for 2009 down, from +3.0% to +0.5%. On 10 March 2009, Strass-Kahn warned that the world economy could shrink in 2009, suggesting an even gloomier outlook than the current official forecast of 0.5% growth.

7. Confidence Levels are at historic lows In early 2009 the ESI for Euro Area and EU continued to fall. Both indicators stand at their lowest levels since the series was launched in 1985.

8. Airlines

9. Traffic Trend Turnaround since mid-year

10. Traffic Volumes are in free fall since mid year 2008

11. All routes from Europe are affected

12. Passenger traffic will fall by 4% in 2009 ▼Passenger traffic levels started to fall in H2 2008 ▼AEA forecasts -4% growth in RPK in 2009 ▼ Over a ‘normal’ baseline -4% equates to -6% loss in RPK

13. Freight is an indicator of economic health ▼Freight traffic levels started to fall mid-2008 ▼AEA forecasts -5% growth in FTK in 2009 ▼ Over a ‘normal’ baseline -5% equates to -10% loss in FTK

14. Premium traffic is losing importance Short haul Long haul *AEA Airlines, International routes Source: AEA RB2

15. European Capacity cuts go deep

16. Fewer aircraft are needed

17. Employment: 15,000 jobs lost already

18. Aviation in its entirety is losing traffic

19. Access to aircraft financing has been curtailed The aircraft leasing sector has not been unaffected by the financial crisis. Although lease rates are falling, access to capital has become an issue which could touch airlines and manufacturers alike. The stock of white-tails and aircraft entering the market from bankruptcies will also depress the assest value of aircraft.

20. AEA Airline financial outlook is dismal

21. 2008 marks the beginning of recession • Fuel: Single biggest, and most volatile cost factor • Economic downturn will reduce demand increasingly • Cost factors such as airport charges, ATC likely to increase • Volume-dependent no-frills likely to maintain overcapacity • Governments could impose further taxes to fund bail-out of other sectors • EU ETS could lead to trade sanctions from third countries

22. External costs of utmost urgency Global recession makes it even more imperative to drive down external costs: • An ETS in 2012 – from a cap-and-trade system to a disincentive tax measure • A proliferation of national taxes • Volatility of fuel price: from 9% of our operating costs in 1998 to 34% in 2008 • AndATM fragmentation costs the environment €16mln tons of CO2 and airlines € 5 bln a year • Airport charges and ATM Unit Rates willincrease in 2009 despite the recession

23. ANSP Unit Rates rise, less traffic

24. Europe needs a Single European Sky • For passengers:delays caused by bottlenecks in the sky, circuitous routings and holding patterns above airports… • For the environment: unnecessary emissions of 16 million tons of CO2 a year • For the airlines: unnecessary costs of around €5 billion a year

25. EU ATM : more costs… inferior performance USA Europe ATM Airspace: 9,8 million km² ATM Airspace: 10,5 million km² 1ATC Organisation (civil + mil.) 21En-Route Centres 1Operating System 47ATC Organisations (civil + mil.) 58En-Route Centres 22Operating Systems 480 Movements per Air Traffic Controller $800 ATM Cost / Flight 900 Movements per Air Traffic Controller $400 ATM Cost / Flight

26. Airport Charges increases 2008/2009

27. Consequences of ETS post 2012 • Buying 15% of carbon allocation will massively increase the cost base → additional financial hardship; • Increase of administrative burden with regard to the MRV guidelines + additional requirements by individual Member States; • ETS will fundamentally change the operating economics of every route and flight: Many communities will lose service; • International distortion of competition; • Some non-EU competitors will see traffic diversion as a gift; for others, the EU ETS will be unacceptable, and will spark trade wars.

28. 2009 crisis management to ensureEurope’s global sustainable competitiveness Europe as a region must confront unnecessary regulatory burdens: ETS & MRV as economic instrument Proliferation of national taxes (UK, NL, Ireland) Non-safety EASA rulemaking proposals Surge of costs for security measures Further unnecessary administrative burdens Role of EU institutions in airline restructuring process Structural inefficiencies of the value chain to be addressed jointly: Cost efficiency of airport services Cost efficiency of ANSP services Sufficient and well organised infrastructure Review of market orientation of all aviation service providers