Introduction. Airline Economics. Copyright 2017 Boeing. All rights reserved.

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1 Introduction Airline Economics The statements contained herein are based on good faith assumptions and provided for general information purposes only. These statements do not constitute an offer, promise, warranty or guarantee of performance. Actual results may vary depending on certain events or conditions. This document should not be used or relied upon for any purpose other than that intended by Boeing.

2 Objectives Define the operating cost components that impact airline profitability Introduce maintenance costs and its drivers Understand introductory and transition costs Select the right airplane by analyzing options from an airplane cost perspective

3 Total aircraft efficiency Aerodynamics Engine Weight

4 Define the operating cost components that impact airline profitability BOEING 4

5 Airplane Economics Operating Costs Revenue Profits

6 Operating cost categories Total Operating Costs (TOC) Airplane Related Operating Costs (AROC) Systems Related Operating Costs (SROC) Payload Related Operating Costs (PROC) Cash Airplane Related Operating Costs (CAROC) Ownership Costs General and administrative Airplane Passenger Cargo Passenger Related Costs Cargo Related Costs Fuel Flight Crew Cabin Crew Maintenance Landing Navigation Airplane Station Ground Power Financing Depreciation Introductory Investment Operating Lease Hull Insurance Food In flight services Handling Commissions Advertising Reservation and sales Baggage handling Handling Commissions Advertising Reservation and sales

7 Contributions to Total Operating Costs Cash Airplane Airplane Total Related Operating Related Operating Costs Costs Costs System Related Operating Costs Cargo Related Operating Flight Costs Crew Passenger Related Operating Costs Other Cabin Crew Ownership Navigation Fees Landing Fees Fuel Airplane Related Cash Airplane Operating Costs Related Operating Costs Maintenance

8 Exercise 1 Cost drivers and implications Each table will have one cost driver to review Take 5 minutes to list as many items that can drive that cost higher or lower in two groups Manufacturer driven Airline driven Each table will present to the group

9 Cost Driver and Implications Cost Driver Manufacturer Airline Fuel Flight Crew Cabin Crew Maintenance Cost Landing Fees Navigation Fees Ground Station

10 Fuel cost drivers Airplane type Airplane size Payload Trip distance Airline rules

11 Oil and jet fuel price outlook Oil price volatility returns, mid-term price outlooks $60 - $80 per barrel Brent-Oil Jet Fuel - USD/gallon $200 $180 $160 $140 $120 $100 $80 $60 $40 $20 $0 Forecast $4.50 $4.00 $3.50 $3.00 $2.50 $2.00 $1.50 $1.00 $0.50 $0.00 Oil price forecasts are nominal annual average prices for Historical data source: EIA, futures: ICE

12 Using your fleet as a hedge against fuel prices Relative Fuel Consumption 0% 737 Classic 737NG Base Blended Winglets Carbon Brakes Enhanced Engines 737 MAX -10% -20% -7.5% -4.0% -0.4% -2.0% 30% -30% -14.0% -40% -50% Baseline is the 737 Classic, 1,000 NM mission

13 Flight crew cost drivers Salary/block hour rates Benefits Hotel & per diem Recurrent training

14 Cabin crew cost drivers Number of attendants Salary/block hour rates Benefits Hotel & per diem Recurrent training

15 Maintenance costs account for 10-14% of cash airplane related operating costs Cash airplane related operating cost Ground Support Flight Crew Cabin Crew Navigation Fees Landing Fees Maintenance Fuel

16 Navigation fees are driven by Airplane weight Distance flown Countries flown over

17 An example of how navigation fees vary Operating Aircraft: ER JFK-FRA LHR-CDG LHR-SVO Distance 3,351 nm 188 nm 1,359 nm Cost $4,079 $689 $4,348

18 Drivers of landing fees Airplane weight Noise Emissions

19 An example of how landing fees vary W W ERW New York (JFK) $981 $1,106 $1,192 Shanghai (PVG) $473 $530 $568

20 Costs vary by airplane and operation W 162 Seats 1,000nm ER 396 Seats 6,000nm Flight Crew Cabin Crew Cabin Ground Flight Crew Support Crew Ground Support Navigation Fees Navigation Fees Fuel Landing Fees Landing Fees Maintenance Fuel Maintenance ~ $11,600 per trip ~ $165,000 per trip

21 The Sonic Cruiser

22 Maintenance Cost Drivers From a manufacturer s point of view

23 Manufacturer Airline Maintenance costs drivers two views Inherent Aircraft Reliability Operations Aircraft Maintainability Product Support Maintenance Practices Accounting Practices Support Practices

24 Maintenance Cost / Flight Hour Airplane size is a driver of maintenance costs Older Technology Newer Technology Advanced technologies reduce the impact of size on airplane maintenance costs Airplane Size

25 Technology - getting more from fewer parts X/ parts 13 parts

26 Electrical Power Distribution Optimization Traditional Power Architecture 787 No-bleed Systems Architecture Engine Bleed Air Electric Power

27 Technology Simplified Trailing Edge Bar Linkage Bar Linkage 787 Single Hinge

28 787 Flap/Slat Sequencing F L A P S

29 Systems driven maintenance interval at EIS Longer intervals, less maintenance, less often Major systems check interval (C-check) Typical % Setting new industry standards at EIS % *EIS entry into service Months

30 Technology composite fuselage Composites drive lower weight, fewer parts and fasteners, and less maintenance

31 First internal structures inspection interval at EIS Longer intervals, less maintenance, less often Heavy maintenance visit (HMV or D-check) Typical 737NG/777/ MAX +33% +50% Setting new industry standards at EIS % *EIS entry into service Years

32 Airplane age impacts costs Airframe maintenance cost/flight hour Newness Maturity Aging Higher Utilization Actual Lower Utilization Amortized Two dimensional aging curve Defined by age (years) and annual utilization (flight hours) Years in service

33 What about engines? The longer an engine is on wing, the lower the maintenance costs.

34 Major factors that influence engine maintenance costs Engine thrust rating Engine derate Operating environment Engine Maintenance Costs Average flight leg

35 Engine maintenance overview Plan Period (Typically Years) 1 st Interval 1 st Shop Visit $ spent 2 nd Interval 2 nd Shop Visit $ spent 3 rd Interval 3 rd Shop Visit $ spent $/Engine SV $/Engine Flight Hour Time On-Wing Cost Breakdown

36 Environmental effects on engine maintenance Environmental effects can impact both time-on-wing and shop visit costs Sand Dust Pollution Compressor Blades Compressor Vanes Combustion Chamber Turbine Blades Turbine Vanes Sand Dust Pollution North America Seasonal South America Europe Seasonal Seasonal Source Van Donkelaar, A., et al., Global estimates of ambient fine particulate matter concentrations from satellite-based aerosol optical depth: Development and application, Environmental Health Perspective, 2010, Volume 118, Issue 6 North Africa/ Middle East China India Source 737NG/CMF567B WTT Meeting, May 22-24, 2012

37 Takeaways for engine maintenance costs Keep the engine on-wing by using preventive measures Minimize full power takeoffs (i.e. maximize the use of derates where possible) Purchase only the thrust rating required. Sub-fleet of higher thrust required for certain markets is a way to minimize costs Water wash engines as needed to reduce environmental impacts

38 How can airlines reduce maintenance costs? Understand the costs Improve operations Find opportunities o o o Capture Monitor Compare o o o Escalate intervals Outsource Delete unnecessary tasks o o o Training Optimize facility Renegotiate contracts

39 Understanding Introductory and Transition Costs

40 Introductory and transition costs Capital expenditures to support a new or incremental fleet introduction SPARES TRAINING FACILITIES DOCUMENTS Airframe Flight Crew Tooling MPD Engine Cabin Crew Upgrades Weights Mechanics Rentals MMEL Technical Software

41 Commonality matters

42 Commonality can reduce provisioning costs Initial provisioning, $ Airplane with no commonality Airplane with partial commonality Savings Airplane with total commonality Existing airplane fleet Fleet size

43 Recurring benefits of commonality Single Aisle Family Twin Aisle Family 100% Engine commonality 100% Flight Deck commonality Common ground support equipment 98%-100% common airframe spares Common ground handling Operational commonality Flight deck commonality Speed Range Parts commonality where it makes sense

44 Commonality eliminates labor duplication New Deliveries New Subfleet ER 737 MAX 737NG Fleet 737NG Fleet Fleet Supported by Fleets Supported by 737 Chief Pilot and staff 737 Technical Pilots 737 Pilot Trainers (TRE/TRI/LTC) 737 Line Crews & Reserves 737 Chief Pilot and staff 737 Technical Pilots 737 Pilot Trainers 737 Line Crews & Reserves 767 Chief Pilot and staff 767 Technical Pilots 767 Pilot Trainers 767 Line Crews & Reserves Duplicate set of pilots

45 Select the right airplane by analyzing options from the cost perspective

46 Which aircraft has better economics? W 162 seats Cost per trip Cost per seat-mile 737 MAX seats 1,000 NM sector North American short-medium rules

47 Relative seat-mile cost, % The fan chart of operating costs 20% 10% used ER MD11 used 0% ER ER LR used -10% ER -20% ER 2 Engines Engines -30% -20% 0% 20% 40% 60% 80% 100% Relative trip cost, %

48 Exercise 2 The fan chart challenge Each table will be assigned one question to answer Take 2 minutes to discuss the answer One person from the table will answer the question by pointing it out on the chart

49 Exercise 2 The fan chart challenge Questions: 1. Which axis represents risk and which represents reward? 2. Which area of the chart is most desired and why? 3. Identify an airplane that is less attractive cost-wise and why? 4. If the MD11 was new where would it be found? 5. If a global carbon tax is put in place, which airplanes will benefit most? 6. If you add more seats on to the ER where would you find it? 7. Where would the as a simple stretch of the be found? What about if you increased its range capability? 8. What cost, if included on this chart, may make the more attractive to operate, relative to new airplanes? 9. Where would a 250-seat, Mach 0.98 Sonic Cruiser be found?

50 REWARD Relative seat-mile cost, % Q1) Which axis represents risk and which represents reward? 20% 10% used ER MD11 used 0% ER ER LR used -10% ER -20% ER 2 Engines Engines -30% -20% 0% 20% 40% 60% 80% 100% Relative trip cost, % RISK

51 Relative seat-mile cost, % Q2) Which area of the chart is most desired and why? 20% 10% used ER MD11 used 0% ER ER LR used -10% ER -20% J ER 2 Engines Engines -30% -20% 0% 20% 40% 60% 80% 100% Relative trip cost, %

52 Relative seat-mile cost, % Q3) Identify an airplane that is less attractive cost-wise and why? 20% K 10% used ER MD11 used 0% ER ER LR used -10% ER -20% ER 2 Engines Engines -30% -20% 0% 20% 40% 60% 80% 100% Relative trip cost, %

53 Relative seat-mile cost, % Q4) If the MD11 was new where would it be found? 20% 10% used ER MD11 used 0% ER ER LR used -10% ER -20% ER 2 Engines Engines -30% -20% 0% 20% 40% 60% 80% 100% Relative trip cost, %

54 Relative seat-mile cost, % Q5) If a global carbon tax is put in place, which airplanes will benefit most? 20% 10% used ER MD11 used 0% ER ER LR used -10% ER -20% ER 2 Engines Engines -30% -20% 0% 20% 40% 60% 80% 100% Relative trip cost, %

55 Relative seat-mile cost, % Q6) If you add more seats on to the ER where would you find it? 20% 10% used ER MD11 used 0% ER ER LR used -10% ER -20% ER 2 Engines Engines -30% -20% 0% 20% 40% 60% 80% 100% Relative trip cost, %

56 Relative seat-mile cost, % Q7) Where would the as a simple stretch of the be found? What about if you increased its range capability? 20% 10% used ER MD11 used 0% ER ER LR used -10% ER -20% ER 2 Engines Engines -30% -20% 0% 20% 40% 60% 80% 100% Relative trip cost, %

57 Relative seat-mile cost, % Q8) What cost, if included on this chart, may make the more attractive to operate, relative to new airplanes? 20% 10% used ER MD11 used 0% ER ER LR used -10% ER -20% ER 2 Engines Engines -30% -20% 0% 20% 40% 60% 80% 100% Relative trip cost, %

58 Relative seat-mile cost, % Q9) Where would a 250-seat, Mach 0.98 Sonic Cruiser be found? 20% 10% used ER MD11 used 0% ER ER LR used -10% ER -20% ER 2 Engines Engines -30% -20% 0% 20% 40% 60% 80% 100% Relative trip cost, %

59 Conclusion

60 Key takeaways Profitability always includes cost control The right airplane fleet will minimize costs Fuel, maintenance, and fees are key costs Environmental costs are increasing, but addressable Fleet commonality provides benefits Fan Chart will tell you where you are and where you can be Environmental impact offset by new airplanes, fuel alternatives, and operating practices.

61 Thank you!