Supportable Capacity

Objective Understand Network Planning and Capacity Management How the game is played How fleet impacts the playing field Why it is flawed 2

Route Economic Fundamentals Airlines compete in cities, not segments Hubs serve as the principal means of serving cities The number of markets served and the total number of seats flown in a city are: Directly related to the local demand to the hub(s) Directly related to the number of hub(s) Inversely related to the distance from the hub(s) 3

Largest Carrier Receives A Revenue Efficiency Revenue Share Illustrative Service Level Share 4

Number Two Carrier In A City Will Generate Revenue Shares Roughly Equal To Its Capacity Share Revenue Share Illustrative Service Level Share 5

Third And Subsequent Carriers Receive Less Than Their Fair Share Of Revenue Revenue Share Illustrative Service Level Share 6

Major Carrier Business Model Growth Supportable Capacity Profits Revenue Efficiency City Presence Schedule Strength Frequent Flyer Loyalty Products and Services 2001 Strategic Plan 7

Supportable Capacity Model Carriers absolute operating cost Local market size of hub(s) served Supportable Capacity Blended profit objectives of operating carriers 8

Local Demand At Major Hub Cities Daily Passengers (Based on 2001 traffic and May 2001 OAG Schedule) 0 5000 10000 15000 20000 25000 30000 35000 40000 45000 50000 ORD ATL SFO EWR DFW DEN YYZ DTW PHL IAD YVR YUL PIT CLT YYC MEM 186 320 219 600 564 321 472 671 561 659 546 1085 516 596 1218 1292 Numbers indicate average daily jet departures

Supportable Capacity Model Carriers absolute operating cost Local market size of hub(s) served Supportable Capacity Blended profit objectives of operating carriers Distance to the hub cities 10

Colorado Springs To Chicago 911 miles ORD COS Departures: 6 Hours: 14 Seats: 882 11

Colorado Springs To Denver DEN COS 67 miles Departures: 23 Hours: 14 Seats: 3,381 12

Supportable Capacity Model Carriers absolute operating cost Local market size of hub(s) served Number of Connections At Hub Supportable Capacity Distance to the hub cities Blended profit objectives of operating carriers 13

Marketplace Requires Connections On Every Flight Percent non hub flying down to 11.7% of industry Domestic departures (from 21.0% in 1990) Industry average domestic departure has 60.8% of the load connecting Long haul services require connection feed to fill relatively large cost efficient long haul aircraft Carriers are using connections more and more to fund/support growth 2001 Hub Factbook - Salomon Smith Barney, OAG 14

All Major Airlines Rely Heavily on Connections Local and O&D Traffic for Industry, TME 06/2000 100% 75% 50% Connect Local 25% 0% HP AA CO DL NW UA US Industry (exc. WN) Source: 2001 15 Hub Factbook, Salomon Smith Barney

United s Washington - Europe Traffic Composition Total 249 Offline Connect Online Connect (UA-UA Only) 29 157 221 220 213 205 57 58 36 114 71 90 103 47 193 32 116 156 21 86 Local PAX 63 60 91 51 79 45 49 Amsterdam Frankfurt London Munich Paris Milan Brussels 16 Source: PRIMS/PRS, TME 03/2001

Supportable Capacity Model Express Connections Carriers absolute operating cost Local market size of hub(s) served Number of Connections At Hub Supportable Capacity Distance to the hub cities Blended profit objectives of operating carriers 17

Connections Determine Who Flies the Market LHR SEA BA UA Local 118 118 Connects 133 37 Illustrative

Supportable Capacity Model Express Connections Local market size of hub(s) served Number of Connections At Hub Carriers absolute operating cost Supportable Capacity Distance to the hub cities Code share feed Blended profit objectives of operating carriers 19

Alliances Provide New Traffic Sources ORD FRA Passengers Per Flight UA LH Local 50 34 Behind ORD 81 20 Beyond FRA 39 77 Bridge 76 47 Total 246 178 Source: T100/CRS International, 2000

Alliances Provide New Traffic Sources YYZ FRA Passengers Per Flight AC LH Local 46 72 Behind YYZ 45 20 Beyond FRA 132 236 Bridge 58 53 Total 280 381 Source: MIDT May 2002 21

Air Canada Toronto - Frankfurt Passenger Mix 300 250 200 150 100 50-1999 2000 2001 2002 local Connections Source:MIDT * Jan-Mar 99-02 22

Working Together Allows More Effective Competition At Heathrow Daily Departing Seats Air New Zealand ANA Varig Thai Austrian Airlines Singapore Airlines Air Canada SAS United Airlines Lufthansa British Midland International British Airways Star Alliance 24 Source: OAG, April 2001

Largest Carrier Receives A Revenue Efficiency Revenue Share Illustrative Service Level Share 25

Number Two Carrier In A City Will Generate Revenue Shares Roughly Equal To Its Capacity Share Revenue Share Illustrative Service Level Share 26

Third And Subsequent Carriers Receive Less Than Their Fair Share Of Revenue Revenue Share Illustrative Service Level Share 27

How is the game played?

American At Little Rock BNA DFW LIT 29

Delta At Little Rock DFW LIT ATL 30

Delta At Little Rock CVG LIT DFW ATL

American At Little Rock LIT DFW

United At Lincoln DEN LNK ORD 33

Major Carrier Business Model Growth Supportable Capacity Profits Revenue Efficiency City Presence Schedule Strength Frequent Flyer Loyalty Products and Services 2001 Strategic Plan 34

United Is In A Superior Position INDUSTRY DEMAND BY AIRPORT IAD DEN SFO ORD LAX DAL BNA MSY OAK HOU MCI SJC MDW SAN BWI LAS PHX SLC CVG DFW ATL MIA DFW ATL CLE IAH EWR BWI PIT CLT PHL MEM MSP DTW UA WN DL AA CO US NW Source: OAG/T100, United Estimates 35

British Airways Is Not INDUSTRY DEMAND BY AIRPORT IAD DEN SFO ORD LAX DAL BNA MSY OAK HOU MCI SJC MDW SAN BWI LAS PHX SLC CVG DFW ATL MIA DFW ATL CLE IAH EWR BWI PIT CLT PHL MEM MSP DTW LHR UA WN DL AA CO US NW BA Source: OAG/T100, IATA Passenger Forecast, United Estimates 36

Revenue ($B) Potential of Global Alliances $100 City Revenue Of Industry At Hubs Of Each Airline: $75 $50 $25 $0 StarAlliance oneworld Wings* SkyTeam Source: 2000 Revenue forecast * Anticipated Alliance based on November 2000 announcement by NW 37

The Carrier With The Most Connections - WINS!

How Do Networks Compete?

Washington - Amsterdam United Service Passengers Per Flight Locals 68 Behind IAD 175 Beyond AMS 11 Bridge 6 Total 260 Source: T100/CRS, 2000

UA and KL Do Not Compete on AMSIAD Passengers Per Flight NW/KL UA Local 53 82 Behind IAD 2 210 Beyond AMS 164 13 Bridge 5 7 Total 224 312 Source: T100/CRS, 2000

But UA does compete with CO s EWRAMS Passengers Per Flight NW/KL UA CO Local 53 68 75 Behind IAD 2 175 86* Beyond AMS 164 11 5 Bridge 5 6 10 Total 224 260 176 Source: T100/CRS, 2000 *Behind EWR

Fleet Impacts Route Networks

Impact Of New Aircraft Aircraft all have unique efficiencies Large aircraft tend to offer low unit or seat costs These aircraft are used by carriers to play a consolidation game Small aircraft tend to offer low trip or plane mile cost These aircraft are used by carriers to play a fragmentation game The two games don t get along with each other

Fragmentation When efficiency is brought into the market in the form of a small aircraft Frequencies grow Markets served grows Smaller hubs win

Fragmentation Game Higher revenue per Flight Flight added with Low trip cost aircraft Traffic reflows to remaining flights More flights Large aircraft flights cancelled Less revenue per flight Large aircraft flights become less profitable

Fragmentation Examples B767 supports additional long haul frequency B757 replacing DC10s and L1011s on Hawaii Mainland A320 replacing widebodies on transcon RJs replacing B737s and DC9s

Consolidation When new efficiency is brought into the market in the form of a large aircraft Frequencies come down Markets served declines Large hubs win

Consolidation Game Higher revenue per Flight Flight added With Low seat cost aircraft Traffic reflows to remaining flights Fares lowered to help fill large aircraft Low demand flights cancel Less revenue per passenger Breakeven load factor increases

Consolidation Examples B747 Replacing B707 and JFK and LHR rule the Atlantic B777 replacing B767 and large gateways rule once again

Aircraft Economics Impact International Services B747

Aircraft Economics Impact International Services B747 B767

Aircraft Economics Impact International Services B747 B767 B777

Aircraft Economics Impact International Services B747 B767 B777 A380 B787

Summary Carriers seek revenue efficiency aka city presence This is achieved through growth, marketing alliances and fleet planning The one with the most hubs in large cities wins!

Infrastructure Costs Impact Canada

Supportable Capacity (psgrs per departure) UA - SFO LCL 69 CNX 36 TTL 105 AS - SEA LCL 62 CNX 26 TTL 88 HP - PHX LCL 40 CNX 45 TTL 85 NW - MSP LCL 34 CNX 55 TTL 89 AA - DFW LCL 31 CNX 62 TTL 93 UA - ORD LCL 46 CNX 51 TTL 97 DL - ATL LCL 36 CNX 83 TTL 119 CO - EWR LCL 68 CNX 22 TTL 90 US - CLT LCL 16 CNX 64 TTL 80 58

Why Cost Is A Constant Focus of Air Carriers We know that the more flights we can schedule will drive more connections More connections drive more traffic onto the base capacity at very low incremental cost Increased Profit Driving more profits, supporting more growth Higher Loads Flights Added Products and Services More Connecting Traffic Connections Created 59

Ye Olde Supportable Capacity Model Regional Connections Local market size Number of Connections Carriers absolute operating cost Supportable Capacity Distance to the hub cities Blended profit objectives of operating carriers 60

Cost Per Operat Competitive Standing Of Airports A320 Airport Related Costs 2500 2000 1500 1000 500 0 YYZ JFK DTW SFO YHZ YEG ORD YWG YOW LAX YUL YVR YYC MIA ATL Landing Fees Passenger Charges 61

Cost For One Hour Significant Cost Difference Will Drive A Capacity Change Variable Operating Cost 7000 37% 48% 6000 5000 4000 3000 2000 1000 0 YYZ JFK DTW SFO YHZ YEG ORD YWG YOW LAX YUL YVR YYC MIA ATL Varible Operating Cost 62

Industry Annual Seats Per Capita, Connection % SEA 6.3 26% MSP 8.4 55% YYZ 3.6 44% NYC 3.4 22% SFO 6.9 36% CITY SEATS/POP. CNX % PHX 10.4 45% DAL 11.2 62% ORD 7.5 51% ATL 16.4 83% CLT 14.4 64% 63

Canada s Higher Cost Structure Stunts Growth City ORD DFW CLT ATL Seats/Pop 7.5 11.2 14.4 16.4 City YUL YYZ YVR YYC Seats/Pop 2.1 3.6 5.0 6.0 64

Costs Do Impact Service Levels Departure seat per capital (based on 2005 population & Jun OAG, seat annulized) 14.0 12.0 10.0 11.9 9.8 8.0 7.7 7.7 7.1 6.7 6.7 6.7 6.7 6.0 4.0 2.0 5.6 5.5 5.2 4.5 4.3 3.8 3.8 3.6 3.4 2.4 2.1 0.0 ATL SFO PHX DFW YYC CHI HOU YHZ SEA YVR IAD DTW LAX BOS NY YYZ YEG YWG YOW YUL 65

Extra Slides

Traffic composition for YYZ international routes Toronto International Traffic Composition 300 250 200 150 100 50 0 CDG FCO FRA GLA LHR MAD MAN MUC ZRH Local Dom Cnx Trb Cnx Other Cnx Source: AC data May 2002 67

Traffic composition for YVR international routes 300 Vancouver International Traffic Composition 250 200 150 100 50 0 HKG ICN KIX NGO NRT PEK PVG TPE Local Dom Cnx Trb Cnx Other Cnx Source: AC data May 2002 68

The Breakdown Of YYZ Traffic Top 10 YYZ Domestic Routes Traffic Composition 140 120 100 80 60 40 20 - YUL YYZ YVR YYZ YYC YYZ YOW YYZ YHZ YYZ YWG YYZ YEG YYZ YQB YYZ YQT YYZ YYT YYZ YQR YYZ Local Dom Cnx Trb Conx Int Cnx mutiple Cnx 69

Daily Passengers ('000s) Daily Departures United Airlines Chicago - Frankfurt Passenger Mix 1000 900 800 700 600 500 400 300 200 100 0 '93 '94 '95 '96 '97 '98 '99 '00 '01 * Locals Connections Departures 10 9 8 7 6 5 4 3 2 1 0 Source: PRS * Jan-Apr 2001

New Search Engines Add to Commoditization of The Product

RJs Efficiency - A Fragmentation Game 37% lower trip cost versus A319 Greater range the turboprops Net effect is dramatic growth in frequencies and markets served The FAA contends that in 1999, regional jets carried almost one in 10 U.S. passengers. In 2002, they accounted for one in six passengers.

Largest Carrier Receives A Revenue Efficiency Revenue Share Illustrative Service Level Share 74

Number Two Carrier In A City Will Generate Revenue Shares Roughly Equal To Its Capacity Share Revenue Share Illustrative Service Level Share 75

Third And Subsequent Carriers Receive Less Than Their Fair Share Of Revenue Revenue Share Illustrative Service Level Share 76

Air Canada Faces Tough Competition IAD DEN SFO ORD LAX BWI BNA DA HOU L MDW OA K ST L PHX LAS SC CVG MCO ATL DFW SJU MIA DFW ORD PIT CLT BWI PHL DCA CLE IAH EWR MEM MSP DTW YUL YY C UA WN DL AA US CO NW AC YVR YYZ LHR