PROJECT: WRIGHT BROTHERS

1. PROJECT: WRIGHT BROTHERS Exploring Opportunities to Develop an Air Transport Contract John Allario

2. Current Market Conditions in the Airline Industry • Airline market valuations are very low. Airline stocks are • trading near (some below) their book values. • Some carriers have hinted that they may privatize. • On average, airlines are trading at a poor 3.5X EBITDA (In • the late 1980’s, EBITDA multiples reached 8X’s).

3. Current Financial Conditions in the Airline Industry • Most airlines are generating surplus cash flows and • expect to continue to do so. • Most airlines are not aggressively expanding and are plowing • excess cash flows into stock repurchase programs in • order to maximize shareholder value. • Aircraft acquisitions are now more easily financed through • structured EETC’s or sale and lease-backs, which require • limited up-front capital.

4. Why the Current Industry Malaise • Uncertainty of future earnings performance. • Focus is now on financial performance since past troubles • (war, recession, terrorism) are a distant memory.

5. What causes Uncertainty in the Airline Industry? • Volatility of jet fuel prices • Chasing the dream of 100% load factor • An Airline’s perceived & real performance (on-time & • number of cancellations) • Labor Unrest • Air craft Accidents

6. How do the Airlines plan to create Value Today? 1. Stock Repurchase Programs - A slow road to Privatization 2. Airline E Commerce Activities such as: a) Third party initiatives (ie) Priceline.com, Expedia, Travelocity b) T2 - the airline industry’s upcoming on-line travel agency partnership (UAL, DAL, NWAC, CAL). C) E-commerce ownership stakes ( AMR owns 4% and DAL owns 9% of Priceline.com) 3. Heightened Marketing Efforts utilizing Frequent Flyer Programs (ie) Aadvantage/ AOL partnership (ie) Affinity Partner sales of FF miles total over $100 million 4. One-on-One Marketing - the New Frontier of Price Discrimination

7. What is the Potential Value Proposition to Enron of a Air Transport Contract? • ENA should explore the possibility of creating a commodity future’s product • formed from the relationship between passenger air-fares and an airline’s • yield per RPM. This contract is a Service Contract for the Airline Industry. • ENA has the opportunity to combine its trading acumen with its E-Commerce • capabilities to provide the Airline Industry and Corporate America with an • integrated solution to help each party manage its operating risks: • Airlines #1 Risk - How to hedge its jet fuel purchases. • Airlines # 2 Risk - How to guaranty a predictable Passenger Load Factor. • Corporate America’s Travel Budget - Allows Companies to fix their travel • expenses for any term they would want.

8. Why is this Opportunity Worth Investigating? Air-fares seem to behave like a commodity products and seem to have some of the basic commodity contract characteristics such as: a) A Standard form of service - an airplane which has fuel inputs, similar routes, similar personnel skills, similar service. b) A semi-fungible product - airline tickets c) An independent and long-standing public posting of vital industry statistics (55 years) (ie) air-fares and yields per revenue passenger mile. d) Willing and motivated buyers (travelers) and sellers (airlines) e) A potential governing body (FAA?) f) Price Transparency g) Motivated Market Makers

9. Why would Enron wish to Create a ATC? 1. A viable ATC would create a new business for Enron and would introduce airline industry players to the supermarket of products and services offered by Enron. 2. Enron has the preeminent Risk Management desk in the country to manage and understand esoteric risks (ie) Weather contracts 3. The ATC follows in the foot steps of the transactions related to cargo transportation 4. A viable ATC would fit neatly into Enron On-line’s E-commerce platform.

10. Who? The Participants and Market Characteristics? • The Airline Industry posted total revenues of $80 billion in 1998 and revenues • have grown n average of 3 to 5% per year the last 10 years. • Total Industry Assets as of 12/31/97 for U.S. Carriers totaled $105 billion of which • airplanes represented approximately $67 billion. • As of 1997 there were approximately 5,200 commercial and freight jet air-crafts in • service which collectively flew 605 billion passenger miles. • There are approximately 10 Major airline carrier companies (Delta, United, • American, U.S. Airways, Southwest, Northwest, Continental, Trans World, • American West and Alaska Air) and an additional 15 regional players. • There are at least 5,000 companies which use airlines in the normal course • of their business and approximately 80% of North Americans have flow in • an airplane.

11. Concept: Link the Airlines need to fill available seats and to lock in predictable revenues with the wish of airline passengers and their corporate travel departments to fix expected air-fare expenditures. Data: Twenty years of deregulated airline air-fare and operating statistics available and 35 additional years prior to deregulation. Contract Specifics - To Be Determined, but may include: - ATC tied to ATA’s airline air-fare data (postings) and consumer price indices. - Financially settled against posted averages - targeting 30 largest domestic US routes, thus 30 separate contracts to start. Basis contracts will develop from these major routes. Description of Air Transport Contracts

12. Hurdles to ATC Implementation 1. Reluctance of the Airlines to allow us access to their proprietary statistics and revenue management calculations. 2. Complexity of quantifying a single ATC contract. For instance, each flight has a unique origination, destination, month, day, and hour of departure, class of service and days prior to departure to which the ticket was purchased. (Possible Solution - ATC would be viewed as a company call option contract based on an posted, adjusted index for that particular route and time). 3. Open & Free Market - Foreign carriers are heavily subsidized by their home governments and some view the U.S. Airline industry as semi-regulated due to the FAA’s close oversight and restrictions. 4. Due to FAA intercession, the Airlines cannot be considered both competitive and financially healthy.

13. Action Plan / Next Steps 1. Continue to research the airline industry, paying particular attention to Independent Data Provider’s content and various industry correlations. 2. Determine through discussions with various internal groups if their is a potential product here. 3. Build on Internal Network Resources. A) Work with Kim Watson of ET&S and her Revenue Management model to understand the revenue strategies of the airline industry. B) Work with Tracy Ramsey of the Corporate Travel Department and learn the various new discount programs that are being implemented at Enron and throughout corporate America. C) Engage the help of Enron’s research group. D) Leverage off any current existing Enron airline relationships. 4. Establish a strong external Network with the Airlines (Continental is next door) and form a close partnership with independent industry associations/ data providers. (ie) ATA, FAA.