PREMIUM TRAFFIC MONITOR JULY 2014 KEY POINTS

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1 PREMIUM TRAFFIC MONITOR JULY 2014 KEY POINTS Growth in international air passengers was weak for a second consecutive month with a 2.6% increase in July compared to a year ago premium seat numbers rose only slightly more, 3.0%; Although international air travel was 3.6% higher in July year-to-date, passenger numbers have contracted slightly between December and July; Part of the year-to-date growth took place last year, when business activity and trade grew strongly; And while there was some (albeit slower) growth between December and May, there has been a notable weakening during the last two months, flattening the growth trend in international passenger numbers in 2014; This weakness comes despite recent improvement in trade and business confidence, which both weakened in Q1; The slowdown is largely limited to the within Far East market and markets connected to South America; Economic and politic turmoil in Thailand has damaged tourism demand over recent months and Malaysia air travel has been impacted by tragedies related to the flag carrier; The North America South America market has been hit by capacity cuts to Venezuela as well as weakness in key economies like Brazil and Argentina; By contrast, longer-haul markets have been performing strongly, which has supported yields and explains why international RPKs are growing much faster than passenger numbers. The expansion in the number of international air passengers was weak for a second consecutive month with a 2.6% increase in July compared to a year ago. Although international air travel was 3.6% higher in the first seven months of this year compared to the same period in 2013, passenger numbers between December and July have actually contracted slightly. This can be explained by two factors. First, a part of the growth in the past year took place in the second half of 2013, when business confidence and economic activity grew relatively strongly. Second, while there was some (albeit slower) growth taking place between December and May, there has been a notable weakening during the last two months which has essentially flattened the trend in international passenger numbers in 2014.

2 Travel on premium seats rose 3.0% in July compared to a year ago, a stronger gain than economy international travel numbers that increased 2.6%. Looking at a longer time period, the first half of 2014 also shows that premium travel expanded on average at a slightly faster rate than economy travel, at 3.8% compared to 3.6%. The second chart above shows that the share of premium travel still seems to be trending upwards from the low point reached at the bottom of the economic cycle in late The rising share of premium seats has been supported by stronger growth longer-haul markets. This in turn has helped support premium yields, as longer-haul markets drive the greatest share of premium revenues. This has helped the financial performance of the longer-haul network airlines, compared to shorter-haul mainly leisure travel focused airlines in some, though not all, regions. The stronger growth of longer-haul markets has meant that RPKs are growing at a much faster pace than passenger numbers. July s expansion of 2.6% in international passenger numbers compares to a 5.5% growth in international RPKs. Usually the gap in growth is 0.5-1% points, so July s situation is unusual. The profile of air travel growth, with a strong second half in 2013 and relatively slower growth during the earlier months of 2014, has been driven by wider economic developments. World trade and industrial production accelerated during the second half of 2013, but that trend failed to continue in 2014 with growth slowing for both measures in Q1. Business confidence, a good leading indicator, similarly rose sharply in mid-2013 before flattening off and then deteriorating early this year, as a number of potential threats to the global economy emerged. However, in recent months business confidence (as measured by the PMI Index in the second chart below) has started to rise once more, as worries about the impact of geopolitical developments and US Federal Reserve monetary policy appear to have diminished. If this improvement continues, which is the consensus view now, then we would expect international air travel growth to accelerate during the second half of this year. Moreover, there has been some recovery in world trade volumes over recent months, after the declines in Q1. These more positive developments are not consistent with the weakness seen in international passenger numbers in June and July. The slowdown is largely reflecting weakness on some large markets, rather than a fundamental weakness in the global demand backdrop. The route area analysis explains further. 2

3 TRAFFIC GROWTH BY MAJOR ROUTE The major areas of weakness in international air travel are concentrated on markets connected to a number of key emerging economies. The important Within Far East market barely increased in July, rising just 0.3% on total traffic compared to a year ago. The June result was ever weaker, with a 3.2% contraction in international travel on this market. The market has shown weakness for the year-to-date so far, with growth of just 0.3%, but has been particularly weak during the past two months, which has contributed to the recent slowdown in global results. The North America South America total market has also been weak, falling 3.5% in July compared to a year ago. The within Far East market has experienced a 2.4% fall in premium passenger numbers in July year-on-year, and a small 0.5% increase in economy seats. The results we are currently seeing are difficult to explain when looking at the major economies in the region, namely China. The Chinese economy has been managed onto a slower growth path, as the government seeks to move away from the earlier investment-led growth, but recent business confidence data suggests economic activity is starting to strengthen. The slowdown in the within Far East market has been caused by notable declines in international travel in Thailand and Malaysia. The Thai economy is expected to eventually stabilize after the military coup in May, but latest data show significant falls in tourism and exports during recent months when compared to a year ago. In addition, Malaysia has experienced declining tourism activity following the MH370 and MH17 tragedies. The North America South America market has also contributed to the recent weakness in international passenger numbers. There was a 3.8% contraction in premium passenger numbers on this market in July compared to a year ago, and a 3.5% fall in economy passenger numbers. Although the US economy was hit hard in Q1 due to extreme weather conditions, which has resulted in downward revisions to growth expectations for the year as a whole, latest indicators suggest fundamental improvements in business activity (both manufacturing and services sectors) as well as improving employment conditions. The weakness comes primarily from factors concerning South America. Part of the weakness is a result of regional carriers (US and South American) significantly reducing capacity to Venezuela over recent months due to challenges in repatriating funds held by the government. In addition, there are fundamental demand weaknesses the Brazilian economy has been weak and is getting weaker, according to the recent business confidence data, and the crisis in Argentina is adding further downward pressure. African markets are also noticeably weak, despite relatively good economic growth in many Sub-Saharan economies, except for South Africa where growth remains weak. The Ebola outbreak has yet to impact the data on African markets. However, travel has been discouraged by political unrest in parts of North Africa. Markets like Africa Far East and Europe Africa showed declines of 3.6% and slow growth of 1.9%, consecutively. The Africa Middle East market was down 0.2% in July compared to a year ago, but growth so far this year has been solid at 5.1%, sustained by flows of workers and business travel stimulated by new South-South trade lanes. Growth in international air travel has been supported by the performance of longer-haul markets. Total traffic on the North and Mid-Pacific market was up 8.2% in July (and 7.0% so far this year), and the North Atlantic market has seen solid expansion this year (4.0% in July year-to-date). Premium revenues comprise a significant share (up to 47% on the North Atlantic market) on these markets. Improving demand condition in the US and Europe have helped support growth in business travel on these markets, as well as enabling some leisure travelers to pay for premium seats due to the longer flight times. IATA Economics 22 nd September economics@iata.org 3

4 TRAFFIC GROWTH BY ROUTE JUNE 2014 Premium Traffic Growth Economy Traffic Growth Total Traffic Growth Africa - Far East 5.4% -1.8% -4.3% -3.2% -3.6% -3.1% Africa - Middle East 12.2% 7.4% -1.2% 4.9% -0.2% 5.1% Europe - Africa 1.2% 0.4% 1.9% 0.6% 1.9% 0.6% 4.0% 4.7% 4.7% 5.2% 4.6% 5.1% Europe - Middle East 2.1% 7.4% 2.8% 7.9% 2.7% 7.9% Far East - Southwest Pacific 6.2% 7.9% -2.4% 0.7% -1.6% 1.3% Mid Atlantic 15.1% 11.2% 7.1% 4.0% 7.8% 4.6% Middle East - Far East 3.6% 8.1% 2.8% 8.5% 2.8% 8.4% North America - Central America 5.7% 8.0% 9.0% 8.9% 8.7% 8.8% North America - South America -3.8% 3.2% -3.5% 0.8% -3.5% 1.1% North and Mid Pacific 5.5% 5.3% 8.7% 7.3% 8.2% 7.0% North Atlantic 3.4% 4.1% 1.7% 4.0% 2.0% 4.0% Other routes -4.6% 3.2% 0.6% 5.0% 0.2% 4.8% South Atlantic 0.0% -0.9% 1.2% 0.3% 1.1% 0.2% South Pacific -7.6% 2.9% -4.2% 2.3% -4.6% 2.4% Within Africa 4.0% -3.1% -0.6% -1.8% -0.2% -2.0% Within Europe 7.0% 3.1% 3.3% 3.7% 3.5% 3.7% Within Far East -2.4% 0.8% 0.5% 0.5% 0.3% 0.5% Within North America 5.5% 3.7% 10.1% 8.6% 9.6% 8.0% Within South America -15.3% -7.6% -6.3% -4.1% -6.9% -4.3% Total 3.0% 3.8% 2.6% 3.6% 2.6% 3.6% PREMIUM TRAFFIC BY ROUTE PREVIOUS MONTH Share of Premium Share of Total Traffic Revenues Traffic Revenue Africa - Far East 0.6% 0.8% 8.2% 26.9% Africa - Middle East 2.0% 1.1% 6.9% 21.3% Europe - Africa 4.0% 7.4% 6.8% 35.3% 9.5% 13.3% 11.1% 40.1% Europe - Middle East 4.7% 4.7% 10.0% 41.4% Far East - Southwest Pacific 2.6% 2.6% 8.5% 29.3% Mid Atlantic 1.1% 1.3% 7.3% 28.5% Middle East - Far East 2.8% 1.7% 4.3% 15.7% North America - Central America 3.0% 1.2% 4.0% 8.9% North America - South America 2.6% 3.2% 11.4% 31.9% North and Mid Pacific 6.1% 11.3% 12.2% 36.4% North Atlantic 17.6% 27.3% 12.8% 46.7% Other routes 6.2% 4.8% 7.8% 27.7% South Atlantic 2.2% 3.4% 11.1% 34.2% South Pacific 0.9% 2.0% 12.3% 41.0% Within Africa 1.8% 0.7% 7.7% 21.0% Within Europe 16.1% 5.7% 2.3% 9.4% Within Far East 14.4% 6.6% 5.2% 15.5% Within North America 0.9% 0.5% 2.6% 8.6% Within South America 1.0% 0.4% 5.6% 11.1% Total 100.0% 100.0% 5.6% 27.6% 4

5 International Premium Traffic Growth by Route - % Growth 20% 10% 0% -10% -20% Mid Atlantic Africa - Middle East Within Europe Far East - Southwest Pacific North America - Central America North and Mid Pacific Within North America Africa - Far East Within Africa Middle East - Far East North Atlantic Total Europe - Middle East Europe - Africa South Atlantic Within Far East North America - South America Other routes South Pacific Within South America International Passenger Growth by Route - % Growth 20% 10% 0% -10% Within North America North America - Central America North and Mid Pacific Mid Atlantic Within Europe Middle East - Far East Europe - Middle East Total North Atlantic Europe - Africa South Atlantic Within Far East Other routes Africa - Middle East Within Africa Far East - Southwest Pacific North America - South America Africa - Far East South Pacific Within South America 5