Market Overview. John Griffiths Chief Economist Boeing Commercial Airplanes June Presented to: Port of Seattle

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1 Market Overview John Griffiths Chief Economist Boeing Commercial Airplanes June 2008 Presented to: Port of Seattle

Discussion items Business environment Global Economy Airline

3 The Global Outlook: Growth Is Slowing A global economic slowdown is under way Whether or not the U.S. economy is technically in recession, the recovery path will be slow and uneven Europe faces headwinds from rising currencies, tightening credit, and house price corrections Emerging markets are better positioned than in , but vulnerable to a China hard landing and facing inflation problems Key Issue: How much must growth slow to cap global inflation? Copyright 2008 Global Insight, Inc. 05/2008

5 Wide Variations in Regional Economic Growth Real GDP Growth (%) NAFTA Western Europe Japan Emerging Europe Middle East Asia-Pac (Ex. Japan) China India Source: Global Insight, May 2008 Interim Forecast Copyright 2008 Boeing. All rights reserved.

6 Multiple Shocks Have Hit The U.S. Economy The Worst Housing Downturn Since World War II The Worst Financial Crisis In Recent Memory The Worst Credit Crunch Since The Recession And Oil Prices Over $120/Barrel These May or May Not Add Up to a Technical Recession But At Best Add Up To an Extended Period of Subpar Growth Copyright 2008 Global Insight, Inc. 05/2008

7 Oil Prices and Volatility Remain High Updated on: 06/18/ $/Barrel (Brent Crude Oil / Rotterdam Jet Fuel) Avg Ann Prices 2003 $ $ $ $ $ YTD $107 Jet Fuel Futures Market Global Insight Moody s EIA IATA Mid-term oil price scenario range /Gallon Crude Oil average annual oil price forecasts as of June 2008 (IATA, Global Insight, EIA) and May 2008 (Moody s) Copyright 2008 Boeing. All rights reserved. Business Strategy & Marketing 7

13 World Traffic and Capacity Traffic Growth Slowing Updated on: 06/02/08 8% 7% 6% 5% 4% 3% 2% 1% 0% YoY Growth ASK RPK World 4.0% 3.4% J A S O N D J F M A M J J A S O N D J F M 8% 6% 4% 2% 0% -2% -4% -6% YoY Growth ASK RPK US Domestic J A S O N D J F M A M J -3.7% -5.2% J A S O N D J F M A 12% 10% 8% 6% 4% 2% 0% YoY Growth ASK RPK Europe 7.5% 3.6% J A S O N D J F M A M J J A S O N D J F M A 10% 8% 6% 4% 2% 0% YoY Growth ASK RPK Asia Pacific Int l J A S O N D J F M A M J 4.0% 2.6% J A S O N D J F M Source: ROM Associates, ATA, and AEA, airline reports, Boeing market analysis Copyright 2008 Boeing. All rights reserved. Business Strategy & Marketing 13

14 Load Factors at Historically High Levels Updated on: 06/02/08 90% 85% 80% 75% 70% 65% 60% Load Factor World Mar: 79% J F M A M J J A S O N D 90% 85% 80% 75% 70% 65% 60% Load Factor US Domestic Apr: 81% J F M A M J J A S O N D 90% 85% 80% 75% 70% 65% 60% Load Factor Europe Load Factor 90% Asia Pacific Int l 85% Apr: 75.3% 80% Mar: 76.6% % % % 60% J F M A M J J A S O N D J F M A M J J A S O N D Copyright 2008 Boeing. All rights reserved. Business Strategy & Marketing 14

15 Air Cargo Traffic Growth Below Long-Term Trend Updated on: 6/18/ Billions of RTKs J F M A M J J A S O N D Sources: U.S. Department of Commerce, AAPA, AEA, ATA and the Boeing World Cargo Forecast. Copyright 2008 Boeing. All rights reserved. Business Strategy & Marketing 15

16 Commercial Parked Fleet Increasing Total Parked Fleet Current Generation Parked Fleet 2,500 # of Aircraft % of Fleet 15% 700 # of Aircraft % of Fleet 7% 600 6% 2,000 12% 500 5% 1,500 9% 400 4% 1,000 6% 300 3% 200 2% 500 3% 100 1% 0 May-04 May-05 May-06 May-07 May-08 0% 0 May-04 May-05 May-06 May-07 May-08 0% AC Types Included: 717, 737 Classic, 737NG, MD80/90, 757, 767, 777, , A320 Family, A330, A340 Copyright 2008 Boeing. All rights reserved. Business Strategy & Marketing 16

17 Single-Aisle Utilization Growth Slowing Updated on: 06/02/ Flight Hours Per Day J F M A M J J A S O N D Source: BCA RM&T Fleet Reliability Statistics for 717, 737, 757 Copyright 2008 Boeing. All rights reserved. Business Strategy & Marketing 17

18 Twin-Aisle Utilization Remains High Updated on: 06/02/ Flight Hours Per Day J F M A M J J A S O N D Source: BCA RM&T Fleet Reliability Statistics for 747, 767, 777 Copyright 2008 Boeing. All rights reserved. Business Strategy & Marketing 18

22 Recent Fuel Price Increases Far Outpacing RASM Growth 25% YoY % Change RASM (Revenue/Available Seat Mile) 20% 15% Domestic Est. Unhedged Fuel Impact to CASM 10% 5% 0% International April 2008 Intl: +5.5% Dom: +2.9% -5% -10% Source: ATA Domestic Revenue Series (includes Alaska, American, Continental, Delta, Northwest, United, and USAirways) Copyright 2008 Boeing. All rights reserved. Business Strategy & Marketing 22

24 High Fuel Prices Driving Recent Airline Bankruptcies Updated on: 30 May 2008 Category Region Airline In-Service Fleet On Order Boeing Airbus Boeing Airbus Ceased Ops US Maxjet (12/07) High fuel prices, business model Ceased Ops US Aloha (3/08) J 9 737N Ceased Ops Asia Adam Air (3/08) 4 737J C Ceased Ops US ATA (4/08) N DC10 Ceased Ops Asia Far East Air Trans (5/08) MD80 Safety issues - 3 months to rectify, cash injection needed to restart ops Ceased Ops US Eos (4/08) High fuel prices/business model Ceased Ops Africa Nationwide Air (4/08) 6 737J 2 737C Comments Mesa go! competition Key driver lost military charter contract Ceased Ops US Skybus (4/08) 11 A A320 High fuel prices/business model Chapter 11 US Frontier (4/08) 62 A320 8 A320 Credit card company increased holdback of customer receipts Ceased Ops Asia Oasis (4/08) High fuel prices, lack of capital Safety/regulatory issues and high fuel prices High fuel prices, competition Ceased Ops Europe Silverjet Unable to secure addt l funding Totals Copyright 2008 Boeing. All rights reserved. Business Strategy & Marketing 24

25 Airlines cutting capacity to reduce costs and improve yields due to high fuel prices Most cuts to older generation single aisle fleet, and RJs (US) Largest cuts in U.S. domestic market, bulk starting in fall. Yearend 2008 capacity anticipated to be down 5-10% vs Little parked fleet impact thus far 2008 YoY Domestic Capacity Growth Airline Q1 Q2 Q3 Q4 Notes Others 27% -6% -15% -23% Bankruptcies United -6% -4% -4% -14% C, American -4% -3% -4% -11% MD80/A300 + RJ Continental -1% -1% 0% -11% 737C retirements Delta -2% -7% -9% -8% mainline, RJ Northwest -1% -2% -2% -4% 10 DC9s /A320 USAirways -4% -2% 1% -2% 737 retirements JetBlue 8% 1% 0% -1% A320 deferrals Alaska 9% 4% 2% 0% MD80 retirements Frontier 12% 5% 0% 2% A320 sales Southwest 6% 5% 3% 3% 737 deferrals AirTran 11% 12% 8% 4% 737 deferrals Total 1% -1% -3% -7% Source: Lehman Brothers, industry reports As of 06/12/08 Some European cuts in 2008, but more anticipated in 2009 due to fuel hedge expirations and slowing traffic growth v. capacity Many Asian carriers considering cuts, but few announced to-date as economy and traffic/capacity balance still holding up Europe Asia Ryanair SAS Easyjet Aer Lingus BA Iberia Qantas Korean China Airlines China Southern Plans to ground about s (10% of fleet), mainly at Stansted and Dublin, during winter schedule. Also selling s. Cutting capacity by 11 airplanes, or 5%, in fall Accelerating the removal of less efficient airplanes from its fleet 15% cut in long-haul capacity this winter key cut: Dublin-Los Angeles Likely to cut winter season capacity, summer 2008 unaffected 15% cut within Spain for balance of 2008 (fierce competition from LCCs + new high-speed train between Madrid and Barcelona) 5% capacity reduction planned (retiring 737, A320, two 767s; canceling A321 delivery; accelerating retirements; reducing utilization) Temporarily suspending passenger services on five international routes and reducing frequency on several from early June to the middle of July. Planning 10% capacity reduction by cutting 100 passenger and 50 cargo frequencies. Reducing international services on up to 21 routes. Copyright 2008 Boeing. All rights reserved. Business Strategy & Marketing 25

26 Unit Revenues and Costs Fuel Prices Outpacing Rising Fares and Productivity Updated on: 6/16/ $ (billions) $/ATK Fuel Exp Non-Fuel Exp Revenues $0.60 $0.55 $0.50 Unit Revenue Unit Cost Unit Cost ex Fuel 250 $ $ $ $ F F 2008F Source: IATA, June 2008 Financial Forecast & BCA Market Analysis Copyright 2008 Boeing. All rights reserved. Business Strategy & Marketing 26

27 IATA Profitability Outlook Sharply Higher Fuel Prices Push 2008 Forecast to Loss Updated on: 06/02/08 $10 Net Profit (Loss) Billions Percent of Revenue 10% $6 6% $2 2% ($2) % ($6) -6% ($10) ($14) Source: Source: IATA, June : ICAO data for world scheduled traffic (domestic + international) : IATA estimate for world scheduled traffic (domestic + international) -10% -14% Copyright 2008 Boeing. All rights reserved. Business Strategy & Marketing 27

28 Airline Net Profitability by Region Updated on: 6/13/ F 2 Net Profit (billions $) N. America Europe Asia ME Africa/LA Source: IATA, June 2008 Copyright 2008 Boeing. All rights reserved. Business Strategy & Marketing 28

31 Order Cycle Resembles 1980s More Than 1990s Jet Orders and Cancellations Units 3,500 3,000 2,500 2,000 1,500 1, Orders % Fleet 25% 20% 15% 10% 5% 0 0% Net Orders Cancellations Orders as % of Fleet Single Aisle Twin Aisle COPYRIGHT 2005 THE BOEING COMPANY

32 Single Aisle Order Cycle Resembles 1980s More Than 1990s Single Aisle Orders and Cancellations Units Orders % Fleet 2,000 1,800 1,600 1,400 1,200 1, % 20% 15% 10% 5% 0% N e t O rd e rs C a n c e lla tio n s Orders as % of Fleet Return COPYRIGHT 2005 THE BOEING COMPANY

33 Twin Aisle Order Cycle Driven by New Airplanes Like 1980s But Not as Extreme Twin Aisle Orders and Cancellations Units 1,200 1, Orders % Fleet 35% 30% 25% 20% 15% 10% 5% 0% N e t O rd e rs Cancellations Gross Orders as % of Fleet Return COPYRIGHT 2005 THE BOEING COMPANY

35 Single-Aisle Backlog Almost Twice Previous Peaks But Similar to 1980s as % of Fleet Single Aisle Deliveries and Backlog Units Backlog % Fleet 5,000 50% 4,500 45% 4,000 40% 3,500 35% 3,000 30% 2,500 25% 2,000 20% 1,500 15% 1,000 10% 500 5% 0 0% Deliveries Backlog Backlog as % of Fleet COPYRIGHT 2005 THE BOEING COMPANY

36 Twin Aisle Backlog More Than Double Previous Peak Though Similar to 1980s as % of Fleet Twin Aisle Deliveries and Backlog Units 2,500 2,000 1,500 1, Backlog % Fleet 70% 60% 50% 40% 30% 20% 10% 0 0% Deliveries Backlog Backlog as % of Fleet COPYRIGHT 2005 THE BOEING COMPANY

37 Large, Balanced, Well-diversified Backlog from Established and New Customers Model Backlog Large 8% 737 Single-Aisle 31% Intermediate Twin-Aisle 61% 767 Region Leasing & Gov't Americas $-Billions $124 $174 $ Middle East & Africa Europe, Russia & Central Asia South/ Southeast Asia Americas Asia Pacific China Asia & East Pacific Asia $64 $ COPYRIGHT 2005 THE BOEING COMPANY

38 Summary Economic growth slowing in developed economies, emerging market growth at increased risk Recent era of high oil prices likely to be sustained for the foreseeable future High fuel prices are outpacing airline revenue and efficiency growth, sharply reducing airline profitability Leading to capacity reductions/slower growth, higher fares Increasing need for fuel efficient products and solutions Additional bankruptcies likely if fuel price does not moderate The airline industry is uniquely exposed the weak will get weaker, the strong will get stronger Consolidation leads to near-term reduced capacity demand, but more robust industry in longer-term COPYRIGHT 2005 THE BOEING COMPANY

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