ECONOMIC OUTLOOK Sponsored by:

Chairman s Opening Remarks William Pershke, Head, IDFS Development and Performance, IATA

Welcome Address Dr. Emre Serpen, Executive Vice President, InterVISTAS Consulting Group

IATA Cargo Conference Presented by Dr. Emre Serpen Executive Vice President March 8, 2011

in 2008 world air cargo market looked bleak YoY Percent Change Air Freight Traffic January 2008 January 2009 Source: International Air Transport Association However compared with 2009 world air cargo market expected to grow approx 5.9 % per annum over the next 20 years 5

Air Freight Traffic Shows Normalisation of cargo traffic in recent months, as high yoy growth rates was due to recovery from recession YoY Percent Change Air Freight Traffic January 2010 January 2011 Source: International Air Transport Association 6

IMF sees strong growth in emerging markets such as India and China World Economic Outlook Projections (GDP) 2011 Estimates Euro Area Japan 1.5 1.6 United Kingdom 2 Canada Advanced Economies 2.3 2.5 United States 3 Central & Eastern Europe Other Advanced Economies 3.6 3.8 Mexico World Brazil Russia Africa Middle East 4.2 4.4 4.5 4.5 4.5 4.6 CIS Excluding Russia 5.1 ASEAN-5 5.5 India 8.4 China 9.6 0 2 4 6 8 10 12 Percent Growth Source: International Monetary Fund, World Economic Outlook Update, January 2010 7

Asian and Middle Eastern Markets are among fastest growth markets World Air Cargo Forecast (RTKs) CY 1999 2009 (Historical) and CY 2010 CY 2029 (Long-Term Forecast) Source: Boeing World Air Cargo Forecast Economic Trends 8

Since 2004, the historical relationship between GDP and air freight volume growth has deteriorated YoY Percent Growth YoY Percent Growth in Freight Tonne Kilometers vs. World GDP CY 2000 CY 2009 Freight Tonne Kilometers GDP Source: ICAO Air Transport Reporting Form A plus ICAO estimates for non-reporting States 9

Air freight yields continued to rise thru 2008 with increasing fuel prices than fell 22% 2009 with falling fuel prices Air Freight Yield (USD ) Air Freight Operating Revenues per RTK CY 1995 CY 2007 Fuel/Security Surcharge Effects Avg. Annual Growth Rate Air Friend Yields Deregulation, liberalisation and increased belly capacity contributed to continuously declining air freight yields 1995-2001 -1.1% 2002-2006 +2.9% Source: ICAO Air Transport Reporting Form A plus ICAO estimates for non-reporting States 10

Few years ago compared to passenger airlines cargo airlines were slow in executing capacity adjustments YoY Percent Chance in Air Freight Traffic CY 2007 2008 Capacity Growth Market Growth Source: International Air Transport Association 11

Cargo Airlines are now doing much better job matching cargo capacity with demand YoY Percent Change in Traffic and Capacity Passenger vs. Cargo January 2011 vs. January 2010 Passenger Traffic & Capacity Cargo Traffic & Capacity 0.9% 1.8% Passenger Growth Cargo Growth Commercial decision making, Balancing Yield, Price and Service Source: International Air Transport Association 12

Operating freighter efficiency critical for profitable operation Net Payload (lbs) Net Payload vs. Fuel Burn per Block Hour for Select Freighter Types B747-400F B777-200F A340-300F MD11-F B767-300F A300-600F Fuel Burn per Block Hour Source: DAC; Note: Fuel burn and net payload at 2,500 km (net payload at 8.5 lb/cu ft); Boeing Fleet Trends

Opportunities for improving margins with better commercial decisions, route/yield management, fleet mix, and working with other carriers/alliances Operating Margin for Select Cargo Operators FY 2009 Average 4.1% Source: ATW World Airline Report Financial 2010 14

Thank You www.intervistas.com

Keynote: Economic Trends Brian Pearce, Chief Economist, IATA

Economic outlook: cyclical, capacity and structural issues March 2011 Brian Pearce www.iata.org/economics To represent, lead and serve the airline industry

Billion FTKs index of world trade, 2000=100 Renewed trade expansion but how fast? 14 World trade in goods and air FTKs Source: Netherlands CPB and IATA 170 13 160 12 International FTKs (left scale) 150 140 11 130 10 120 9 World goods trade volumes (right scale) 110 100 8 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 90 Source: IATA, Netherlands CPB

YoY Growth A much slower growth environment for air 60% 50% 40% 30% International Freight growth by major routes Source: IATA ODS Within Far East North and Mid Pacific 20% 10% 0% -10% -20% -30% -40% Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Europe - Far East Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 North Atlantic May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Source: IATA

% Growth, Year-on-Year Ocean freight regaining lost share 20 Container Shipping Volume Growth by Region Source: Drewry Dec-09 Nov-10 Dec-10 15 10 5 0-5 North America North Europe Far East Middle East Latin America Source: Drewry

Inventories to sales ratio FTKs (billion) Now that business restocking is over 1.6 Total Business inventories to sales ratio and FTKs Source: US Census Bureau and IATA 18 17 1.4 Inventories to sales ratio 16 15 14 1.2 13 12 1 FTKs 11 10 9 0.8 8 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Source: IATA, Haver

Europe s economic situation remains risky 14 10-year government bond yields, % 12 10 8 6 4 2 0 97 98 99 00 01 02 03 04 05 06 07 08 09 10 Greece Ireland Portugal Spain Italy UK US Germany Source: Haver

% change over year Economic forecasts still relatively rosy 9 Forecasts for GDP growth Source: EIU 8 2010 2011 7 6 5 4 3 2 1 0 US Japan Europe ASPAC excl Japan Middle East North Africa Latin America World Source: EIU

Balance expecting improvement, index Balance expecteting improvement, net % Mixed picture for the consumer demand 120 Consumer confidence Source: Haver Analytics China 0 100-5 80 60 40 US -10-15 -20-25 20 Europe (right scale) -30 0 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11-35 Source: Haver

50 = no change Is a problem developing in China? 65 Purchasing managers confidence indices 60 Major country average 55 50 China 45 40 35 30 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Source: Markit

The big challenge will be fuel prices 200 Jet Fuel and Crude Oil Price ($/barrel) 180 160 140 120 100 80 Jet fuel price Futures curve 60 40 Crude oil price (Brent) 20 Jan03 Jan04 Jan05 Jan06 Jan07 Jan08 Jan09 Jan10 Jan11 Source: Platts, Bloomberg

US$ per kilo US$ per kilo Not clear if cargo costs can be recouped 2.0 Air Freight Yields (US$ per kilo) Seasonally Adjusted Source: IATA CASS 4.0 3.6 1.6 1.2 3.2 2.8 2.4 2.0 0.8 0.4 SE Asia-Europe SE Asia-Europe (incl other charges) Global - LHS 1.6 1.2 0.8 Global (incl other charges) - LHS 0.4 0.0 0.0 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Source: IATA

% AFTKs % ASKs Load factors slipping as capacity expands Loads factors on international passenger and freight markets 58% 56% 54% Passenger (right scale) 80% 79% 78% 52% 50% 48% Freight (left scale) 77% 76% 75% 74% 46% 73% 44% 72% 42% 71% 40% 70% Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Source: IATA

Downsized freighter fleet little changed 3300 In-service aircraft fleet 3200 3100 Twin aisle passenger fleet 3000 2900 2800 2700 Freighter fleet 2600 2500 Dec 06 Dec 07 Dec 08 Dec 09 Dec 10 Source: Ascend

Hours per day But sharp rise in its utilization 12 Aircraft daily hours utilized 11.5 Twin-aisle passenger 11 10.5 10 9.5 9 Freighters 8.5 8 7.5 7 2005 2006 2007 2008 2009 2010 Source: IATA

Number of Aircraft Plenty of wide-body capacity arriving 350 300 250 200 Other Middle East Twin Aisle Aircraft Deliveries by Airline Region Source: Ascend North America Europe Asia Pacific 150 100 50 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source: Ascend

Passenger cooperation and cargo JVs but does it lead to consolidation? $9bn $10bn $14bn $10bn $10bn $11bn $19bn $14bn market cap Source: Bloomberg

% revenues Poor profitability is a long-term problem 8% 6% Profitability of the worldwide commercial airline industry Source: ICAO, IATA EBIT margin 4% 2% 0% -2% -4% Net posttax profit margin 40-year average (0.1%) -6% 1970 1975 1980 1985 1990 1995 2000 2005 2010F V2050_1 Source: IATA

$ million A handful of airlines created value 2,500 Economic profit, (ROIC-WACC)*IC Cumulated over 2002-2009 2,000 1,500 1,000 500 0 Emirates Ryanair Aeroflot LAN COPA Air Arabia Easyjet Allegiant Aegean Source: McKinsey & Company for IATA

% invested capital Most of the value chain is profitable 45 Return on invested capital, 2002-2009 40 35 30 25 20 15 10 5 0 Weighted average 75% quartile 25% quartile 25.9 20.0 14.8 10.8 9.3 8.1 7.2 4.6 CRS Travel Agents Freight Forwarders All services Lessors ANSPs Manufacturers Airports Airlines 2.8 Source: McKinsey & Company for IATA

% invested capital Ratio of best to worst economic profit margin Reward seems not to be related to risk ROIC compared to a measure of risk, 2002-2009 30 25 20 ROIC Best/worst economic profit margin 8 7 6 5 15 4 10 5 3 2 1 0 0 CRS Freight forwarding All services Lessors ANSPs Manufacturers Airports Airlines Source: McKinsey & Company for IATA

But most profitable sectors are small Invested capital and revenue by sector, 2009 Airlines 506 Airports 293 Lessors 48 Manufacturers ANSPs 27 18 Revenue Invested capital Freight forwarders 12 Maintenance 11 Travel Agents 10 Ground services 9 CRS 6 Catering 3 0 100 200 300 400 500 600 US$ billion Source: McKinsey & Company for IATA

The main problem lies in the airline sector 0-2 -0.6-0.2 0.2 0.2 0.2-1.2 0.4-4 -6-8 US$ billion per year -10-12 -20.3-14 -16-18 -20-22 Manufac-Lessorturers MRO Ground CateringAirports ANSP Airlines 0.6 CRS 0-2 Travel Agents 1.0-18.7 Freight Total Forwarders Source: McKinsey & Company for IATA

Panel: Commercial Decision Making Moderator: William Pershke, Head, IDFS Development and Performance, IATA Panel: James Fernandez, CHAMP Cargo Systems Jay Shelat, Vice President, Cargo, Jet Airways David Yokeum, President, WCA Family of Logistic Networks Limited

Networking Coffee Break Sponsored by: 40

Keynote: Profitable Techniques to Balance Yield, Price and Service Range David Hoppin, Managing Director, D. F. Hoppin & Associates

Profitable Techniques to Balance Yield, Price, and Service Range Presentation by: David F. Hoppin IATA World Cargo Symposium Istanbul March 2011

Effective cargo airline strategy development is necessarily iterative and continuous The Circle of Airline Strategy Development Which customers? Customer selection is the logical starting point because it influences the answers to all other questions What products? Which product(s) do the target customer want, and can we make the desired products at a profit? Products defined as scheduled / charter / ACMI, types of A2A products, etc. What network and fleet? Which geographic markets (lanes), how much capacity per departure and per week, and how many frequencies per week? Depending on the above answers, what are the best fleet types? Are you achieving success? And, how do you measure success? Achieving Success? Which customers? What network & fleet? 43 What products? Critical questions to ask about each customer / product / market choice: Do you have a cost advantage? Can you earn at least your fair share of revenue? 4 3

Which Customers? 4 4

4 5 Customer selection is the foundation of commercial strategy in the air cargo business Pick Your Customers Carefully Accurately forecasting revenue is typically the most difficult part of airline planning Best way is bottom-up forecasting expected volume and rates by customer by flight Robust market research function is of course important need to analyze available statistics on demand, competition and pricing A2A cargo is an industrial market, with a limited number of powerful, well-informed buyers (freight forwarders) so statistical revenue-forecasting approaches have limited applicability (in contrast to passenger airline business) Therefore critical to identify target customers, and to truly know them in terms of requirements and behavior

4 6 A number of factors can turn a high-yield customer into a profit problem Requirements Geographic market coverage Capacity per departure Schedule frequency Special handling Services beyond A2A Behavior Demand variability (dayof-week, seasonal) Demand predictability (tender performance each day) Use of ad hoc pricing Demand for ad hoc pricing Collections & credit risk Above factors can make a big difference in the profitability of different customers!

What Products? 4 7

It is a real challenge not to succumb to the siren song of high gross yields Horizontal versus Vertical Expansion Vectors The core business of an airline is basic A2A transportation of general freight Standard Special Handling Time- Defined It is possible to increase yields by adding complexity: Horizontal expansion into premium products, such as live animals, temperature-controlled, time-definite, etc. Vertical expansion into the door-todoor journey mostly in the form of RFS Shipper Dep. Airport Arr. Airport Consignee The real challenge is to truly understand the cost of complexity: What is the cost of maintaining facilities, IT and trained staff even if zero demand for the complex service? How does cost increase with volume? 4 8

What Network and Fleet? 4 9

USD Per Block Hour A network s scope and scale affects not only its costs, but also its revenue Revenue Benefits to Scale Minimum Competitive Scale (MCS) is the fleet size below which unit revenue will not exceed unit cost over the long term. Both unit revenue and unit cost curves are unique to each airline. Unit Cost versus Unit Revenue USD per Block Hour Minimum Competitive Scale (MCS) ILLUSTRATION An airline manager s objective should be to maximize the profit envelope, not unit cost or unit revenue Average Unit Cost Profit Additionally, many large, powerful customers will not deal extensively with customers who cannot offer a minimum scope Average Unit Revenue Accordingly, tuning the network to achieve the goal of maximizing profit is an ongoing operation 1 Fleet Size (Freighters Or Equivalents) 5 0

Units 5 1 The seasonality of many air freight markets can make it difficult to sustain expensive new freighters The Slope Is Too Steep ILLUSTRATION Air freight demand tends to be highly seasonal. It is not unusual for freighter operators make 60% of annual revenue in four months There is a trade-off between minimizing cash operating costs via new, fuel- and maintenance-efficient aircraft, and minimizing ownership costs via older, less expensive and less efficient freighters Loss Profit Naturally, in the current environment of rising fuel prices, many executives are focused on fuel efficiency but do not underestimate the value of flexible utilization that older aircraft offer Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Naturally, the largest aircraft offer the lowest unit cost but also impose the greatest capacity risk Freighter Trip Cost versus Unit Cost: PVG-[GYD]-LUX-AUH-PVG Rotation Index, B744F Cost = 100; Fuel Cost = $2.84 per USG ILLUSTRATION Unit Cost Index 115 110 MD11F 105 100 B777-200LRF B747-400BCF B747-400F B747 Classic 95 90 B747-8F 85 85 90 95 100 105 110 115 Trip Cost Index Source: DFH Associates. 5 2

There are a number of large freighter options, each offering distinct trade-offs between capacity risk/unit cost and capital cost/operating efficiency Primary Large Freighter Fleet Options Net Payload versus Range; Existing & Potential Fleet Size (Excluding Integrators) Maximum Volumetric Payload (Metric Tons Net) 135 130 125 120 B747-8F 74 +52 B747-400ERF 115 110 114 40 105 100 68 B747 Classic 63 B747-400P2F B747-400F 95 90 B777F 54 +5 +216 /b 85 80 MD-11F /c 70 75 70 6,200 6,400 6,600 6,800 7,000 7,200 7,400 7,600 7,800 8,000 8,200 8,400 8,600 8,800 9,000 9,200 9,400 Existing + Known Orders Still-Air Range At Max Volumetric Payload (Kilometers) Potential (Announced Options + Conversion Feedstock) Source: DFH Associates analysis of Ascend CASE fleet database, aircraft performance data from manufacturers 5 3

A breakeven calculation showing breakeven tons and profit potential can help illustrate each aircraft s fit within a network Illustrative Asia-Europe-Asia /a Breakeven Calculation Net Yields (USD/kg) Backhaul Fronthaul MD-11F $1.24 $4.20 B747-400BCF $1.24 $4.20 B777-200LRF $1.24 $4.20 B747-400F $1.24 $4.20 B747-200F $1.24 $4.20 B747-8F $1.24 $4.20 ACMI Rate (USD/BH) Block Hours/Roundtrip $5,600 27.5 $5,550 25.3 $7,400 25.6 $6,300 25.4 $4,200 27.1 $8,400 25.1 ACMI Fuel @ USD 2.84/USG Landing, Handling, Nav. Cost Per Roundtrip $153,832 $186,470 $73,730 $414,032 $140,249 $231,840 $81,154 $453,243 $189,514 $167,356 $76,577 $433,447 $159,768 $224,777 $82,491 $467,036 $113,862 $285,545 $88,020 $487,427 $211,092 $218,790 $89,553 $519,435 Unit Cost (USD/ATK) $0.245 $0.232 $0.234 $0.231 $0.235 $0.212 Breakeven Load Factor 68.8% 60.6% 64.0% 60.8% 63.9% 55.5% Tons Of Capacity Per Roundtrip: 153 183 175 191 188 231 Profit Potential 48 72 63 75 68 103 Breakeven Tons 105 111 112 116 120 128 Source: DFH Associates analysis based on flight plans and assumptions about long-term traffic flows and yields. All assumptions (except ACMI rate per block hour) are applied uniformly to the three aircraft types analyzed. 5 4

Are you achieving success? 5 5

5 6 What does success even mean? What is Success? It is critical that each airline come to internal consensus on what success means Disparate goals maximize passenger route profitability, maximize market share, maximize growth, maximize overall profitability, etc. require disparate targets and strategies Whatever the goal is, airlines should ensure that managers have an incentive to make progress towards it, rather than work to benefit only their specific P&L Therefore, impose a common analytical framework and require commercial, operations, and finance areas to use it!

5 7 What does success even mean? Some Key Issues in Defining and Measuring Success Is there and how do you account for a freighter halo effect the presence of freighters allowing you to capture more and more profitable customers for your belly network? How do you set the transfer price of belly capacity for your cargo operation? What behavior does setting it high or low engender? What time frame are you analyzing? Are you willing to undergo short-term financial pain in order achieve some long-term strategic gain (e.g., capture market share)? Is there a social or government mandate to maintain air service, despite unsatisfactory financial results?

Conclusions 5 8

5 9 Conclusions Keep revisiting the core question: which customers do I want to serve? Invest appropriate time and effort in truly understanding your cost-to-serve each customer How would total costs change if we add or totally delete a particular product or service? Be a benevolent dictator! Impose a common definition of success Ensure that the organization responds timely to new opportunities and threats

Keynote: Cargo Fleet Trends Jonathan Lesieur, Freight Aircraft Marketing Manager, Airbus

IATA World Cargo Symposium / Istanbul / March 8 th, 2011 Cargo Fleet Trends Measuring the cargo fleet s efficiency Presented by Jonathan Lesieur / Marketing manager, Freighters

Turkey is the second largest domicile for Airbus freighters 6 A300B4 P2Fs 4 A310-300P2Fs + 1 A330-200F (+ 4 A330-200F in the backlog) 5 A300B4 P2Fs + 2 A300-600P2Fs (+ 4 A330-200Fs on order) 3 A300B4 P2Fs + 3 A310-300P2Fs Page 62 AIRBUS S.A.S. All rights reserved. Confidential and proprietary document.

The A330-200F is operating into Beijing, Shanghai and Hong Kong HHN MXP TIP ISTANBUL DXB ABU DHABI Planned PEK PVG Planned HONG KONG HND 2 aircraft EIS: Sept 1 st, 2010 1 aircraft EIS: Oct 14 th, 2010 NDJ NBO SIN 2 aircraft EIS: Oct 24 th, 2010 Next new operator, EIS 2011 The A330-200F is operating into China with less sensitivity to imbalanced flows compared to larger freighters Page 63 AIRBUS S.A.S. All rights reserved. Confidential and proprietary document.

Evaluating an aircraft s efficiency: What s important? Fuel at $25 per barrel Fuel at $100+ per barrel Fuel Fuel Fuel represents 20% of overall operating costs Fuel represents 50% of overall operating costs Page 64 AIRBUS S.A.S. All rights reserved. Confidential and proprietary document.

$ per Available Tonne Kilometer Average age of fleet Freighter aircraft are globally getting more efficient... Average Cash operating costs per ATK for the freighter fleet (>15 t payload) 0.300 0.250 Costs per ATK (left axis) Age of fleet (right axis) 25 20 0.200 15 0.150 0.100 Today's freighters 10 0.050 5 0.000 0 1980 1985 1990 1995 2000 2005 2010 2015 Constant fuel price (today s fuel price)...but this has translated into fleetwide efficiency gains only since the mid 90s... Page 65 AIRBUS S.A.S. All rights reserved. Confidential and proprietary document.

Reference = January 2001 To face increasing demand, expensive capacity is maintained in the market 1.40 12 month moving average (international FTK, ATK) ATK (capacity) 1.30 1.20 1.10 FTK (traffic) 1.00 0.90 0.80 Jan-01Jan-02Jan-03Jan-04Jan-05Jan-06Jan-07Jan-08Jan-09Jan-10 12mma FTK 12mma ATK Page 66 AIRBUS S.A.S. All rights reserved. Confidential and proprietary document.

The current fuel environment is resulting in the freighter fleet being less efficient today than it was 30 years ago! Average Cash operating costs per ATK for the freighter fleet (>15 t payload) Costs per ATK (left axis) Today's freighters Fuel price (right axis) The efficiency of (most of) the available capacity is not adequate for today s conditions Page 67 AIRBUS S.A.S. All rights reserved. Confidential and proprietary document.

Higher fuel prices are changing the rationale between modern and ageing aircraft Fuel price per USg ~2,000 hrs ~4,000 hrs The utilization threshold required to compensate higher acquisition costs gets significantly lower as fuel prices increase Page 68 AIRBUS S.A.S. All rights reserved. Confidential and proprietary document.

Is a one-size-fits-all approach to cargo the best approach? To achieve maximum revenue on the trunk routes To achieve maximum profitability when the large freighter cannot be filled to its full capacity Today s and tomorrow s fuel prices call for increased flexibility in the marketplace Page 70 AIRBUS S.A.S. All rights reserved. Confidential and proprietary document.

Panel: Consolidation and Alliances Moderator: William Pershke, Head, IDFS Development and Performance, IATA Panel: Marco Bloemen, Vice President, Seabury Aviation & Aerospace LLC Oliver Evans, Chief Cargo Officer, Swiss International Air Lines Ltd Neel Shah, Senior Vice President and Chief Cargo Officer Delta AirLines

Chairman s Closing Remarks William Pershke, Head, IDFS Development and Performance, IATA