Global Airline Industry Overview
Ana McAhron-Schulz
IFALPA Industrial Advisor
April 2005
1
Global & Regional Economies
2
Global Economy Continued to See
Growth in 2004
 Global economy saw robust expansion in the past year
 Global growth estimate is 5% for 2004 and forecasted at 4.3% for
2005
 Inflation appears to be a growing concern for some countries
 China takes measures to slow down growth for fear of inflation
 Despite multiple interest rate increases, inflation still seen as a
threat
 Energy cost increases are a continuing concern

Impacting consumer confidence
3
Fragile state of the upswing
 Reliance on the US and China for global growth
emphasizes a need for structural reforms in many
countries
 Labor and product market reforms needed in Europe
 Corporate and financial restructuring needed in Japan
despite strong performance mid 2003 – early 2004
 China and emerging Asia need greater exchange rate
flexibility
 Countries would have greater monetary control
 Facilitate emergence of more dynamic economies
 Contribute to orderly reduction of global imbalances
4
Fragile state of the upswing
 Unemployment still remains a concern in many parts
of the world
 Geo-political environment still a threat to global
growth
 Terrorist act or significant military action would
negatively impact current positive trend in growth
 Significant halt in oil production could ultimately
increase fuel cost to $80/bl
5
Robust economic expansion
continues
Real GDP Growth and Forecasts
2002
2003
2004F
2005F
World
1.9%
4.5%
5.0%
4.3%
United States
1.9%
3.0%
4.3%
3.5%
Japan
-0.3%
2.5%
4.4%
2.3%
Euro Area
0.8%
0.5%
2.2%
2.2%
Latin America
-0.1%
1.8%
4.6%
3.6%
Emerging Asia
6.4%
7.2%
7.3%
6.5%
Source: IMF (September 2004)
6
Industry Trends and Performance
7
World airlines see traffic and
capacity recovery coupled with
financial pressure
 Global traffic recovers from impact of Iraq War and SARS
 Traffic for 2004 increased 8.8% over 2000 levels - and up 15.3% over
2003
 5% growth attributed to recovery from impact of SARS
 Overall 2004 traffic higher than expected increase of 14%
 Capacity for 2004 was 7.3% higher than 2000 levels and 12.1% over 2003
 Airlines carried a record 1.8 billion passengers – 11% more than 2003
 Passenger growth forecast is 6% per year for 2005 to 2008
 World carriers loss estimates for 2004 are $4.8B-$5B
 Between 2001 and 2004 the industry has lost $35B
 Initial forecasts for 2004 were $3B profit, prior to increase in fuel costs
8
World airlines see traffic and
capacity recovery coupled with
financial pressure
 Yields have dropped 30% in the last 10 years
 Business traveler has changed travel patterns
 Transparency of fares with increased use of internet distribution

Industry has no pricing power
 Low cost carriers continue robust growth
 Overcapacity
 Increasing liberalization
 Some airlines continue to face significant financial pressure




On-going losses
Increased debt loads
Difficulty in accessing capital markets
Dwindling liquidity
9
2004 World Traffic and Capacity
All Regions Post Double-Digit Traffic Growth
Full Year 2004 Year-Over-Year Percentage Change
Traffic
Capacity
World*
15.3%
12.1%
Europe
10.1%
8.4%
North America
South America
14.8%
12.7%
11.0%
9.8%
Asia Pacific
20.5%
15.5%
Middle East
Africa
24.8%
10.3%
21.6%
8.9%
*Sample IATA Overall
Source: IATA International Traffic Statistics, 1/31/05
10
Jan 2005 World Traffic and Capacity
continued to See Improvements
January 2005 YOY Percentage Change
Traffic
Capacity
World*
7.9%
7.8%
Europe
9.9%
6.8%
North America
11.8%
10.0% Lower than expected
Latin America
Asia Pacific
Middle East
15.0%
2.5%
10.7%
12.8%
6.1%
13.0%
Africa
9.4%
7.9%
due to Tsunami
*Sample IATA Overall
11
Preliminary Feb 2005 Traffic highlights
Asian recovery from tsunami
 World traffic growth was 6.6%
 Load factors remained high at 72%
 Passenger traffic grew across all sectors
 Led by the Middle East and Latin America
 Asia Pacific posted an 8% increase over Feb last
year

Growth rates returned to normal levels
 Cargo traffic slumped 1%
 Weaker economic activity
 Slight slump in Chinese imports
12
Summary of Regional Trends
Fuel Costs
North America
Airline Restructuring
Yield pressure
Overcapacity
LCC expansion
Europe
LCC expansion
Airline Mergers
High-speed Trains
Middle East
Political instability
Huge traffic growth
Latin America
Poor economy in key areas
International ownership
Corruption
Asia-Pacific
LCC growth
Industry expansion
Increasing fuel demand
Bi-lateral agreements
Strong economy
Africa
Political instability
Largest carriers expanding
Role of Government
13
Industry Impacted
by the Rising Cost of Fuel
14
Rising Fuel Prices Impacting
Industry
 Global Production Crisis
 Political unrest in oil producing nations



Nigeria’s two oil unions threaten strike
Iraq oil production continuously disrupted by oil well attacks
Russian oil giant, Yukos, plagued with problems
 Ever increasing demand for fuel
 Largest demand increase in 24 years
 China’s oil imports rose 35% in 2004 and forecast for 2005 is a
22% increase over 2004
 “Fear factor” now a component of the market
 Difficult to quantify but adds to the volatility
 Estimates are US$/bbl attributed to “fear factor”
 Airlines spent 32% more on fuel in 2004 over 2003
 Resulted in $62B fuel cost for 2004
Source: www.wtrg.com, Merrill Lynch report March 18, 2005, IATA speeches
15
Rising Fuel Prices Impacting
Industry
 Supply concerns resulted in an oil price rally to highest level ever with
prices reaching record levels of over $56/barrel
 Most airlines had forecasted fuel prices at $28-30 a barrel for 2004 and $42$47 a barrel for 2005
 2005 analyst fuel forecasts are $51/bl with 2006 at $40-$45/bl
 U.S. carriers need $36/bl fuel cost to break even
 Inability to hedge given airlines’ financial condition and dwindling liquidity
 Difficult for airlines to manage a large cost that is so volatile
 Goldman Sachs recently said we could be entering a “super-spike” period
with prices as high as $105bbl
 Economy cannot support fuel costs exceeding $70/barrel

Governments will have to intervene
 Meanwhile, airlines continue to seek alternatives to adjust for fuel cost spike
Source: www.wtrg.com, Merrill Lynch report March 18, 2005, IATA speeches
16
Fuel prices have risen
dramatically this year
U.S Fuel Price is Closely Matched by Other Countries
Price per barrel
$65
Fuel closed at high
of $56.72 in Mar 05
$55
$45
$35
$25
$15
Reflects end of month NYMEX spot Price $/bbl
Source: www.eia.doe.gov and www.wtrg.com
Dec
2005
Nov
Oct
2004
Sep
Aug
2003
Jul
Jun
May
Apr
Mar
Feb
Jan
2002
$55.40/bl as of
Mar. 31, 2005
17
Hedging fuel costs
has helped some carriers
 Best hedged airlines* maintain a cost advantage over those with no
hedging position
 In Europe, Lufthansa, Iberia, Air France and British Airways are
about 50% hedged
 Qantas is hedged for 70% at $31 until June, Thai Airways for 50%,
and SIA 45% at $41
 Southwest has 85%of fuel requirements hedged at $26, and
Alaska has 50% at $29.87
 Airlines not hedged are exposed to the higher cost of fuel
 In North America: Delta, United, US Airways, Continental,
American
 In Europe: Ryanair and Swiss hedges expired
 Many of Asia’s LCC’s don’t hedge at all
 Plan to weather the storm
* Indicates percentage of fuel hedged for Full Year 2005 unless stated otherwise
18
Hedging fuel costs
has helped some carriers
 Many global airlines are just beginning to feel impact of fuel
costs as a result of their strong currency vis-à-vis the US dollar
 Airlines are implementing or increasing fuel surcharges to off-set
fuel costs
 European carriers have been able to off-set 1/3 of fuel costs
through fuel surcharges
 Cathay Pacific increased fuel surcharge in May by 40% for
international and 35% for regional, while Japan Airlines and
ANA saw 5% increases
 U.S. airlines are added several small fare increases
19
Airline Performance by
Geographic Region
20
European Airlines Face Fewer
Challenges
 AEA airlines estimate a break-even year up to an operating loss
of between $500M in 2004
 Much improved performance over 2003 loss of $1.5B and
$800M in 2002

In fact, the top European flag carriers earned a $319M profit in 2003
 Traffic increased 9.0% in 2004
 Capacity increased 7.3% for the year
 Trunk carriers add capacity to maintain market share
 Yields continued to face pressure from low cost carrier growth
and price discounting from full service airlines
 Pressure from North America capacity plans and aggressive fares
 LCCs compete against each other for market share
 Are there too many low cost carriers in Europe?
 Eastern European states’ admission to EU fuels growth
 Despite some failures, new ones are continuously emerging
Source: Traffic & Capacity data is for AEA
Note: Top flag carriers include Air France Group, British Airways, Alitalia, Iberia, Lufthansa, SAS
21
European Operating Margins
Saw Improvement Over 2003
2004
Ryanair
Air France/KLM *
British Airways
easyjet**
Lufthansa
Austrian
Finnair
SAS Group
Alitalia
2003
29.7% 31.2%
11.2% 9.1%
6.5% 4.0%
4.6% 6.1%
2.3% 0.2%
2.1% 2.8%
1.0% -1.2%
-3.1% -3.8%
-9.9% -8.9%
Pts Chg.
(1.5)
2.1
2.5
(1.5)
2.1
(0.7)
2.2
0.7
(1.0)
*2003 Pro forma
**Full year operating margin
AF/KLM, Ryanair & BA 4Q04 estimates to determine FY2004 results
Source: Company Reports, includes all unusual items
22
Asia-Pacific Industry
Experiences Robust Growth
 Region estimates a $3B net profit in 2004
 China’s airlines posted combined profits of $753M
• Air China, China Eastern & China Southern responsible for $651M
 Traffic increased 20.5% for the year on 15.5% capacity increase and is expected
to continue growing
 Favorable economic conditions, increasing liberalization and high consumer
confidence to continue driving growth
 Low Cost Carriers expected to play a major role in growth
 LCC’s account for 16% of current announced orders
• Excludes unconfirmed orders & LCC operators finalizing launch plans
 China to be a major market over the next two years
 Aviation regulation will be ease as demand for air travel explodes
 China begins approving applications for privately owned airlines
 China leads world in aircraft orders
 1,790 planes in the next 20 years
23
Asia-Pacific Operating Margins
Benefit from Economic Growth
EVA Airways*
Thai Airways
Virgin Blue*
Cathay Pacific
Singapore Airlines
Qantas
ANA
JAL Group
Malaysia Airlines
2004
2003
Pts Chg.
15.3%
14.6%
14.5%
13.4%
11.3%
9.7%
6.6%
2.8%
2.7%
13.1%
13.8%
15.2%
7.5%
4.7%
5.6%
1.3%
-2.0%
0.4%
2.2
0.8
(0.7)
5.9
6.6
4.1
5.3
4.8
2.4
*Full Year data is Oct 2003 through September 2004
Source: Company Reports
24
Latin American industry
continues to strive for recovery
 Latin American airlines have lost over $3B between 2001 and 2004
 Represent 5% of worldwide traffic but 10% of industry losses


Privatized airports charge fees realizing 30-40% returns
Taxes represent 25.6% of airline ticket
 Region attempts to turn losing trend around
 Smaller airlines plagued by weak local economies, currency devaluations,
and limited access to capital

Do not have cross border alliances common to Latin America’s larger airlines
 As economy picks up, Venezuela see signs of rapid recovery

Previous 40% drop in market attributed to political unrest, poor economy
 Brazil’s new bankruptcy law is a relief for troubled carriers


Financially troubled airlines can renegotiate debts and stay out of bankruptcy
Varig will negotiate $2.6B debt and take on new equity investors
 Avianca and Aerolineas Argentinas exit bankruptcy

Chile approves new offshoot of Aerolineas Argentinas
 Multi-national alliances, TACA and LAN, have been very successful
25
North American Aviation
Continues to Face Challenges
 U.S. Major airlines post a net loss of $5.5B in 2004
 Losses of $30B from 2001 through 2004
 Progress in cost reduction initiatives wiped out by increasing fuel costs
 Labor has provided approximately 75% of savings in bankruptcies and
restructurings
 Despite an increase in revenues, yields are still down
 Analysts forecasting losses of $5B in 2005 and $1.1B in 2006
 U.S. traffic increased 14.2% in 2004
 Low fares stimulate demand but weighs on yields
 Capacity was up 8.1% for the year
 US trunk carriers plan to switch capacity from domestic to international
routes as these yields are improving
 LCC’s expand domestic network as they venture into major airports
 Aloha joins US Airways, United, ATA and Hawaiian in bankruptcy
 Delta expects significant losses in 2005 and hints at bankruptcy
Source: ATA Monthly Passenger Traffic Report
26
Losses Continue in North America
Full Calendar Year 2004 Operating Margins
2004
Southwest
8.5%
America West -0.8%
American
-0.8%
Continental
-2.4%
Alaska
-2.9%
Northwest
-4.5%
United
-4.7%
US Airways
-5.3%
Air Canada
-8.5%
Delta
-22.1%
2003
Pts Chg.
8.1%
1.4%
-4.8%
2.3%
-0.7%
-2.6%
-9.1%
-3.6%
-8.2%
-5.6%
0.3
-2.2
4.1
-4.6
-2.2
-1.8
4.4
-1.7
-0.3
-16.5
Source: Company Press Releases includes all unusual items including restructuring costs
27
LCC Growth and Industry Impact
28
LCCs continue to grow at a
phenomenal rate
 Concept remains popular and continues to grow
 While some emerging carriers do not survive, a large number of
new carriers continue to appear



Strong LCC growth expected for Eastern Europe
Gol is a rising star in Latin America and Cintra’s Aerocaribe is
expected to be re-launched in May
Concept is beginning to take off in China and India
 LCC’s continue to gain market share in U.S

Top 4 carriers* control 65% of LCC market share
 Firm aircraft orders to expand capacity 52%
 LCC segment expected to account for 45% of both domestic US
and intra-European passengers by 2009
 Asia is prime for LCC entry
 26 newcomers expected in 2005
Source: Airline Business Magazine, March 2005; Airwise news; theaustraliannews.com
*AirTran, Southwest, Frontier, JetBlue
29
Laws of Darwinism applied to
airline industry
 “Survival of the Fittest” plays out as LCC’s battle for market share
 Rivals Ryanair and easyjet control 75% of European LCC market
 Easyjet plans to increase fleet 62% over the next 3 years
 Ryanair plans to double in size in the next 10 years
 LCC’s evolve as next phase includes plans for long-haul carriers
 Aer Lingus considers trans-Atlantic carrier
 Canadian carrier Zoom is running profitably after June 2002 launch
 SkyLink is next planning to operate from North America
 Hong Kong plans for Oasis Hong Kong Airlines and WOW Airlines
 Some LCC airlines are down but not out…
 Volareweb* to resume operations in April after ceasing operations
in Nov.
 Wizz Air secures €25M assistance
 …While we must wait to see if other airlines will be revived
 Jetsgo, Lagun Air, Air Polonia, V-Bird
 Air Polonia and V-Bird are working on rescue plans to secure
new funding and restart services
*Volare Group is resuming operations which also contains 2 leisure carriers
30
Airlines Develop Strategies to
Compete with LCCs
31
Established/Trunk Airlines
Are Responding
 US major airlines deal with the threat by:
 Restructuring mostly through cost reductions, majority of
savings comes from labor
 Setting up own low cost operation
 Shifting capacity to more profitable international routes

Better yields due to the lack of LCC competition
 Fuel costs have eroded much of the progress
 Legacy carriers in Asia-Pacific arena take LCC threat
seriously as they branch out with their own budget airlines
 Budget airlines in the Southeast Asian region could easily grab
30% of the market in just a few years, as Virgin Blue did in
Australia
 ANA creates LCC entrant, Air Next launching June 1
 APAA suggests that members prepare for LCC competition
32
Established/Trunk Airlines
Are Responding
 European traditional carriers have few choices in response to
LCC’s
 Approximately 65 LCC’s are operating in Europe
 As profitable operation becomes more challenging, Chapter 11
protection from creditors is not an option
 Airlines forced to solve problems, merge or go under
 EU’s “One time, last time” rule allow countries to bail out their
carriers only once
 Latin America has emerging LCC’s with Gol gaining strength
 Airline restructuring in the region has been the result of
growing economies and increasing demand
 Need for defensive strategies against LCC’s not yet
addressed
33
Industry pressure impacting LCCs
 Some restructuring may succeed as LCCs appear not to be
indestructible
 Ryanair reports its first quarter loss in 13 years of operation
 JetBlue sees profit margin dipping
 Southwest offers all employees a severance package option

Would have posted past losses if not for aggressive hedging policy
 Easyjet files formal complaint against Air France/KLM merger
 European trunk carriers protest LCC’s receiving government
incentives to attract low-cost business to their regions

Estimated aid worth €10 - €17 per ticket
 A few European LCC’s have failed, could more be on the way?

Competition for market share anticipates “blood shed”
34
How is LCC Growth Affecting Industry?
 LCC growth undermines attempts to maintain capacity discipline
 Rapid growth results in overcapacity - too many choices
 Keeping fares depressed
 Results in challenges for higher cost, established trunk carriers
 Given differences in structure established trunk carriers can not
become LCCs
 Network and fleet differences
 Seniority of work force
 Full service vs. no frills
 Who will survive?
 Will depend on competition, capitalization and ability to sustain a
positive business plan
 “Survival of the fittest”
 Consolidation
 Elimination of capacity
35
What Else Can Airlines Do?
36
Airlines Work on Programs that Strive
for Profitability
 Consolidation
 Mergers
 Alliances
 Low Cost Divisions or Subsidiaries
 Comprehensive Restructuring Programs
 Court Assisted Restructuring
 Fleet Revitalization Programs
37
Airlines Recognize Efficiencies
through Consolidation
 Europe
 AF and KLM

Partnership is recognizing cost savings ahead of schedule
 Lufthansa’s acquisition of Swiss approved by shareholders

Mirror the AF/KLM merger where each maintains existing brand
identity
 BA and Iberia evaluating a similar deal

British Airways currently owns 9%
 SN Brussels and Virgin Express


Transaction planned to be complete in 1Q05
 Will consist of a joint holding company based in Brussels
 SN receives majority stake 70.1% and Virgin takes remaining
29.9%
Continue to operate separate brands for up to 2 years
 SAS plans to eventually acquire 100% of airBaltic and Estonian Air


Take advantage of low operational costs are competitive with
established low cost carriers
Currently holds 49% of Estonian and 47.2% of airBaltic
38
Airlines Recognize Efficiencies
through Consolidation
 Latin America
 LAN to acquire state owned LAFSA as well as the brand and
route of a carrier in Argentina




LAN will form a new holding company, Lan Argentina
LAN has been in talks to acquire or form an extensive alliance
with Argentina’s Southern Winds which is in bankruptcy
Talks broke off in June with small Argentina airline American
Falcon
Already successful with LanPeru
 AeroRepublica and COPA to develop an equity alliance


Jointly develop common strategies and policies in all phases of
operations, finance and marketing
Operate independently under their own managements and
brands
39
Airlines Recognize Efficiencies
through Consolidation
 Asia-Pacific
 Cathay Pacific/ Air China/ Dragonair cooperation

Exploring opportunities to develop closer cooperation in various
business and operational areas
 Japan Air Lines and Japan Air System

Started the mergers in Asia
 Nothing in the U.S. yet
 ATA
 Will carriers consolidation follow trend of international peers?
40
Global Alliances Continue to be a source of additional
Cost Savings and new Revenue Opportunities
World Share of Scheduled Traffic
Unaligned share
was 28.5% last year
SkyTeam
19.1%
Oneworld
15.4%
21.9%
Star Alliance
43.6%
Unaligned
Increased since last
year due to tremendous
traffic growth in AsiaPacific & Middle East
markets
Alliances battle to gain members in Asia-Pacific and Middle East as
traffic in those regions are growing faster than anyplace else and
almost all carriers are not formally attached to a specific alliance
Source: Airline Business, July 2004
41
Trunk Carriers look to Low Cost
subsidiaries for profitability
 Just to name a few:




United Airlines
Delta Air Lines
Volare Group
Air Canada






Singapore Airlines
LOT Polish
Bmi british midland
Lufthansa
Japan Air Lines
Qantas
Ted
Song
Volareweb
Tango
Zip
Tiger
Centralwings
bmibaby
Eurowings
Germanwings
JALways
Australian Airlines
`
JetConnect
JetStar Asia
42
Several European Airlines Have
Multi-year Restructuring Programs
 Iberia has established strategies/goals for market growth and profitability
 Maintain leadership position in the Europe-Latin American market
 Develop competitive service and prices in Domestic and European point-topoint routes
 Improve competitive cost base
 Manage the portfolio of airline related businesses efficiently
 Lufthansa’s “D-Check” program was launched in Spring 2001 and focuses on 4
main areas
 External providers
 Internal providers
 Production framework & processes
 Staff cost reduction through increased productivity
 British Airways plan emphasizes the need to “Simplify the Business”
 Develop a high performing organization
 Deliver a competitive cost base
 Maintain the best UK based network and schedule
43
Several European Airlines Have
Multi-year Restructuring Programs
 Austrian Airlines began its “Break Even Turnaround Program 2001
 Network expansion - “Focus East”
 Successful cost and capital management
 Implementation of various strategic initiatives
 Alitalia develops new 2005-2008 Business Plan Recover market share
 Close CASK gap
 Realign load factor performance
 Financial turnaround
 SAS “Turnaround” Program
 Structural cost savings
 Revenue stabilization
 Capacity cost adjustments
 AF/KLM virtual merger allows for efficiencies in revenue and cost
management
44
North American Airlines forced to use
bankruptcy court to reorganize costs
 Several airlines have filed for Chapter 11 bankruptcy: United, US
Airways (twice in as many years), Air Canada, ATA, Hawaiian, Aloha
 Goal is to eliminate or reduce debt

Vendors and lenders negotiate new agreements with airlines
 Process allows airlines to disregard contractual labor
agreements

Labor groups agree to deep cuts for fear of the wages and work rules
airlines would enforce through the court
 Airlines walking away from Employees’ Defined Retirement Plans
 PBGC takes over payments offering a fraction of anticipated
payments
 Major restructuring continuing
 More focus on cost reductions than anywhere else
45
Industry Outlook
46
Industry hopes for a profitable 2005
dwindling due to high fuel prices
 World airline industry was hoping for a profit in 2005
 Previous profit forecast of $1-2B now doubtful due to fuel costs
 Expecting revenues of $350B up from $316B in 2003
 International traffic forecasted to grow 7.2% in 2005 and
6% in 2006

Recovery in Europe and the US will not be as robust as the rest of the
world
 Near-breakeven results elevated by the strongly profitable low-cost
carrier segment

Asia Pacific region continues to be bright spot
 LCCs are moving into Asia-Pacific but increased demand can
withstand the near term capacity growth
Source: IATA, www.wtrg.com
47
International Traffic Expected to
Continue to Rebound
Scheduled International Passenger Traffic Growth and Forecasts
World
Africa
Asia/Pacific
Europe
Lat. America/Caribbean
Middle East
North America
2004
2005E
2006E
2007E
2008E
11.0%
8.3%
16.7%
8.6%
9.0%
16.4%
8.8%
5.8%
5.9%
6.8%
5.2%
5.7%
6.4%
5.9%
5.0%
5.2%
5.7%
4.6%
5.2%
5.6%
5.2%
4.5%
4.7%
5.1%
4.2%
4.6%
5.0%
4.4%
4.0%
4.2%
4.5%
3.8%
4.1%
4.4%
3.9%
Measured in PKP’s (Passenger Kilometers Performed)
Source: IATA Passenger Forecast 2004-2008, November 2004
48
Demand returns but challenge remains
in yields and financial condition
 Capacity and traffic balance is key
 Carriers are adding capacity for fear of losing market share
 LCC expansion to continue
 Overcapacity will keep yields down
 Deteriorating balance sheets will take a long time to
improve
 Fuel prices continue to have a significant negative
impact on bottom line
 Significant overall recovery not expected before 2006
 2005 and 2006 will see continued major structural changes
around the world
 U.S. not expected to see any recovery until 2007
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What will airlines do to survive?
 Revenue enhancement strategies




 Few alternatives in this low fare, low yield environment
 Too much competition
 Increased use of internet is a deterrent
 Increased code-sharing and reliance on alliances
Cost Reductions
Labor will continue to be a target
Fuel price volatility will affect timing of strategies
Consolidation
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Impact of Industry
Restructuring on Collective
Bargaining
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Restructuring will continue to
focus on labor costs
 Cost factor over which airlines have most control
 Business plans around the world all focus on “cost
reductions or efficiencies”
 Managements continue to be very aggressive in their
strategy to reduce labor costs
 Wage reductions are higher
 Productivity is a key goal – especially in competing
with emerging low cost carriers

Nothing is sacred anymore
 Pension costs are key target in North America and
Europe
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Management attitude toward
labor is negative
 Goal is to reduce wages, working conditions and
benefits to lowest common denominator
 Even for those airlines that are profitable
 Use of expectation of deterioration in market share and
performance to target reductions
 If it doesn’t work the first time, they’ll come back with
full expectation that labor will give more
 Threat level increases
 Collaborative process less common
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What can we do to protect our
interests?
 Stay informed
 Be prepared
 Three step approach: analysis, direction, negotiation
 Financially
 Challenge management to do their job:
 Business plans will not succeed if their sole focus is
cost reductions
 Pilot costs average 8-12% of total operating expenses
 Comprehensive restructuring is necessary
 Challenge government
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The Missing Link - Labor
 A balanced approach to collective bargaining
 Pension reform
 Consolidation and labor protective provisions
 Consistent government policies
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Thank You
56
INTERNATIONAL FEDERATION OF
AIRLINE PILOTS’ ASSOCIATIONS
ANNUAL CONFERENCE
Arabella Sheraton Hotel
Cape Town, South Africa
“Airline Development
Current and Future Challenges”
Chief Executive
John T. Morrison
Airlines Association of Southern Africa
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