Global Airline Industry Update Ed Mc Kenna Director

Global Airline Industry Update Ed Mc. Kenna Director, Ultramar Strategic Solutions November 19 th, 2015

NJBTA Education Day: Agenda Introduction GDP Growth 1 H 15 Global Commercial Aviation Results Regional Updates § Europe / Middle East § Asia § Latin America § North America 2016 Buyer’s Landscape Q&A 2

Introduction 35+ years in strategic roles in the travel industry, both on the travel agency and corporate sides § 20 years travel agency experience in: § Technology § Reporting § Operations § 15 years corporate experience in: § Travel Program Management § Procurement (Regionally & Globally) Joined Ultramar Strategic Solutions in September, 2015 as Director of Strategic Solutions 3

Global Airline Industry Overview: GDP Growth Region 2014 2015 2016 United States 2. 4 2. 7 2. 8 Latin America 0. 9 0. 4 2. 0 Brazil 0. 1 -1. 3 1. 1 United Kingdom 2. 8 2. 6 Germany 1. 4 1. 5 1. 6 Japan 0. 0 1. 1 1. 7 China 7. 4 7. 1 7. 0 Australia 2. 2 2. 4 2. 9 India 7. 3 7. 5 7. 9 Africa (Sub-Sahara) 4. 6 4. 2 4. 6 Worldwide 2. 6 2. 8 3. 3 Gross Domestic Product (GDP) Primary indicator used to gauge the health of a country’s economy Consists of 4 components: § Investment § Net Exports § Government Expenditure § Personal Consumption Expenditures Source: World Bank (November 2015) 4

1 H 15 Global Commercial Aviation Results Financial Results - 1 H 15 Carrier Revenues Why are the Financial Results so good? Profits American Airlines $20, 700 M $3, 100 M Delta Airlines $18, 600 M $2, 200 M United Air Lines $18, 500 M $1, 900 M Air France / KLM $13, 161 M $1, 127 M Lufthansa Group $16, 441 M $1, 021 M Japan Air Lines* $5, 588 M $996 M Emirates ** $13, 150 M $600 M IAG / British Airways $11, 088 M $594 M Singapore Airlines* $5, 137 M $256 M Cathay Pacific $6, 500 M $254 M * Results based on April 1, 2015 – September 30, 2015 time frame ** Based on April 1, 2014 – March 31, 2015 and normalized All Oil and Ancillary Fee related? – Airline Spend $823 B (1% of Global GDP) – Fuel represents 30% of total costs ($1 flux in barrel of oil generates $100 M in incremental cost/savings) – Carriers will spend $70 B less in fuel in 2015 vs 2014 (-33%) – 2014 ancillary fees generate $39 B incremental revenue (+17%) Are Customers Benefitting from the Newly Found Fortunes? – New aircraft (1, 700 to be delivered in 2015 alone) – Lower Air fares – Enhanced premium product offerings – Amenities (On Board & Lounges) – Carriers introducing more non-stop to secondary markets Today’s Airlines are Profit Driven – Minimal government assistance – Cost structure is based on $100 oil (per barrel) – Becoming very lean & efficient thru intense competition 5

Europe / Middle East Outlook Aer Lingus part of IAG (British Airways, Iberia) Ultra Low Cost Carriers (ULCCs) impact: § Norwegian Airlines challenging British Airways in London § Ryan Air & Easy. Jet establishing corporate type programs Capacity Expansion § Aggressive capacity expansion from Middle Eastern carriers § Significant expansion on the North Atlantic from both legacy-network carriers (BA & LH), as well as ULCC such as Norwegian Uneasy political situation, especially in Southern Europe / Middle East Labor issues, most notably at Air France and Lufthansa German Airlines Currency fluctuations impacting earnings § Strong US Dollar and GB Pound Sterling § Weaker Euro 6

Asia Outlook Cathay Pacific aggressively adding new cities in Europe & North America Korean Air facing intense LCC competition and pressure from Chinese carriers Singapore Airlines experiencing sluggish growth, profits and yield § Emphasis on Scoot Airlines expansion (Singapore’s LCC) Japan Airlines predicting strong growth § Strengthening its one. World relationship with new DFW to Tokyo service Qantas restructuring has produced record breaking earnings § Jet. Star expansion into Asia Slower economic growth in China will impact long-term growth § China has experienced blistering economic growth for many years Expansion of non-stop service from secondary cities in China to Europe & North America § United added San Francisco to Chengdu and will add Xi’an in 2016 § Xiamen and China Southern Airlines keen to expand § 787 -8 Dreamliner 7

Latin America Outlook Uneven Regional Economic Performance § Brazil’s economy still in the doldrums § Brazilian carriers are cutting domestic Brazil capacity significantly § Olympic Games in Rio should provide additional relief § Continued turmoil in Venezuela § Currency devaluations in Brazil & Colombia leading to double-digit inflation § Commodity prices has fallen significantly United Airlines 5% stake in Azul SA § United looking to strengthen its footprint, especially in Brazil § Similar strategy to Delta’s relationship with GOL Aeromexico / Delta Joint Venture § Increase flight options with both carriers in the US and Mexico § Strengthens Aeromexico position in the face of LCC competitors (Inter. Jet & Volaris) Increased non-stop service to US and Europe § LATAM building up Sao Paolo service to Europe in response to their move to oneworld § Azul added non-stop flights from Sao Paolo to Orlando and Fort Lauderdale § Evaluating Sao Paolo service to/from New York/JFK in 2016 8

North America Outlook Day of Week Analysis for NYC to Hong Travel Moderate economic growth expected to continue in 2016 & Kong 2017 American / US Airways merger complete Continued Consolidation at Hub airports § United transfer of JFK / West Coast service to Newark Capacity Expansion § Addition of new flights, especially over the North Atlantic and Pacific § Upgauging of equipment Enhanced Product Offerings § NYC/Boston to West Coast § Expansion of Jet. Blue’s Mint service Air Canada: Strong International Growth § Targeting US travelers with connections in Toronto § PRASM and load factors in Western Canada are down significantly due to oil crash Ultra LCC Impact § Frontier, Sprit and Allegiant establishing routes in Chicago and Seattle 9

2016 Buyer’s Landscape Geopolitical Events § The Great Unknown What is Old is New Again! § Revenue-based performance contracts with certain carriers § Carriers want more “premium” business Market Share Performance Remains Important § Ability to move international travel will impact positively domestic discount structure JV/JB Corporate Deals Now the Norm § Single carrier & world-wide alliance programs are a thing of the past Increased Capacity = Opportunity? § After years capacity discipline, carriers are adding more flights/seats § North Atlantic, in particular, becoming hyper-competitive Ultra Low Cost Carriers (LCCs) § Expanding into new markets like Chicago & Seattle § Limited ability to leverage expanded ULCC networks with legacy carriers § Benefit of lower published pricing to be competitive 10

Take the Pulse & Determine Scope Whether utilizing 3 rd party consulting services or doing internally, the first steps of any airline sourcing initiative include determining the company mindset/culture, data collection and scope of work Before taking action, take the “Pulse” § What’s the appetite for change? § What’s the traveler’s satisfaction threshold? Understanding your Top Markets § Where are the opportunities within these top markets? § What international markets can I shift to obtain stronger domestic discounts? Past and Present will dictate the Future Can I “turbo source” or is a formal sourcing initiative more appropriate? Do I need 3 rd party consultants to assist me? Is my sourcing initiative a North American / US only exercise or is my company looking for additional points-of-sale pricing? 11

What to Expect When Negotiating What do airlines look for from buyers? § § § Above and beyond FMS/QSI Premium Spend and Segments Commitments to not “Overcommit” Which agreement(s) do I choose? § § § Hard Savings vs. Cost Avoidance Route Coverage or Spend Coverage Carrier Friction What is FMS/QSI? Fare Market Share (FMS) or Quality Service Index (QSI) is a measurement frequently used by carriers which represents a carrier’s “expected” (given no corporate agreements exist) market share in an individual market or combined set of markets. Many factors are considered in determining these numbers, including, but not limited to: 1. 2. 3. 4. Non-stop versus connections Frequencies offered Total number of seats available Departure / arrival times and the appeal to the traveler 5. Equipment utilized 6. Airline hubs 12

Post-Implementation Management On your Market, Get Set …. and GO Internal Marketing Status Matching Performance Content Customization … Don’t be afraid Always Remember … Nothing is Permanent 13

Q&A 14

Thank You! Ed Mc. Kenna Director, UTM Strategic Solutions ed. mckenna@ultramartravel. com 212 -856 -5635 15