2013 airline disclosures handbook

8/12/2019 2013 Airline Disclosures Handbook

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GLOBAL AVIATION GROUP

2013 AirlineDisclosuresHandbook

Financial reporting and management

trends in the global aviation industry

kpmg.com


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Introduction

Our 4th disclosure handbook takes a detailed look into upcoming changes in accounting

guidance that will materially impact airlines profits and balance sheets; looks to where

airlines are in terms of industry co-operation and consolidation; and seeks to provide a

forward looking view on the never ending task of cost reduction.

Looking to the key developments

in International Financial Reporting

Standards (IFRS) and US GAAP (wherethe projects are joint with IFRS), this

edition examines:

The upcoming positive news on

hedging for airlines (under IFRS)

including the use of options as

economic and accounting hedges,

hedging of aviation fuel purchases

and reduced compliance costs in

terms of hedge accounting testing

requirements. However, as always

with accounting rules on derivatives,

there appears to be a sting in thetail in terms of accounting issues

associated with the swapping of

foreign currency debt. Our

understanding as a result of the

January 2013 IASB Board meeting is

that this should be resolved by the

issuing of the new hedging standard;

Where is the joint IASB and US

Financial Accounting Standards

Board (FASB) project on lease

accounting up to? Our analysis

has highlighted six key issues that

airlines may consider critical for the

IASB and FASB to address prior to

finalising this standard; and Maintenance accounting for leased

aircraft sometimes described as a

dark art, we discuss the accounting

considerations and include example

disclosures.

The handbook then moves into

the complexity involved in airline

co-operation, co-investment and

mergers. The regulatory environment

for airlines is relatively unique in terms

of foreign ownership rules, the system

of route access and other restrictionsthat inhibit consolidation activity

(outside of open sky environments). We

look at what is currently happening in

this space and offer some insights from

other industries which have similarities

in their regulatory environments.

Finally, we continue our benchmarking

of full service/legacy airline cost bases to

their low cost counterparts. This analysis

looks at how the low hanging fruit

has been plucked and where airlines are

now in the cost reduction journey.

In compiling this guide, KPMGs Global

Aviation practice professionals have

reviewed the financial and other reportsof the worlds top 25 airlines by revenue

and a select six of the largest lower

cost airlines. We have also reviewed

other publicly available information

within these airlines websites and

analyst presentations. Details of the

principle sources of information used

are set out in Appendix 1.

KPMGs Global Aviation practice has

taken direct extracts from various

airline financial statements and other

published information. These havebeen extracted from the relevant

publicly available regulatory reports

noted above. No comment is made

by KPMGs Global Aviation practice in

regard to the adequacy or otherwise

of these policies, rather the examples

used are to demonstrate current

disclosure practice and to facilitate

discussion on key airline issues as

identified by airlines.

2013 KPMG International Cooperative (KPMG International), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with

KPMG International. KPMG International provides no client services. All rights reserved.


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Highlights

Accounting standard changes

Derivatives accounting is

starting to look more like

economic reality.

KPMG investigates six of

the accounting impacts of

proposed changes to lease

accounting, three of whichwould have significant

balance sheet impacts for

airlines.

Under the proposals, airlines

will recognize operating lease

commitments on balance

sheet. This will increase

reported debt, lead to balance

sheet volatility due to the

remeasurement proposals,

and accelerate expenserecognition in many cases.

Maintenance accounting for

leased aircraft is driven by

a combination of the lease

contract, return conditions

and systems of aircraft

maintenance (internal and

outsourced). We look to

three common accounting

scenarios under IFRS.

Airlines are starting to move

to more innovative ways of

partnering

Until there is further market

deregulation in regions such

as Asia, traditional airline

partnering through code

shares, alliances and direct

investments is alive andwell and still dominates the

co-operation/merger and

acquisition landscape. The

recent Qantas/Emirates

announcement (subject

to regulatory approval)

demonstrates airlines are

starting to consider more

innovative tie ups.

The heavily used joint

venture structures in

the Energy and Natural

Resources sector appear

to be available to airlines.

We consider whether this is

the new frontier for airline

consolidation.

Cost structure of low cost and

legacy carriers are converging

During the six years of

the KPMG airline unit cost

survey, we have seen the

cost gap between legacy

and low cost carriers narrow

from 3.6 to 2.5 US cents per

Available Seat Kilometer.

This narrowing has plateaued

since 2009 during the

period subsequent to the

emergence from bankruptcy

protection of a number of

carriers during 2009 and

the recent global economic

downturn continues focus

on costs at all airlines.

KPMG outlines why webelieve the remaining portion

of this cost gap is structural

in nature, and is unlikely to

significantly contract into the

future.


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Contents

1 Hot topic accounting policies 1

2 The long haul to consolidation 11

3 Benchmarking airline costs 16

Appendix 1: Surveyed airline financial reports 25

Appendix 2: KPMGs Global Aviation practice contacts 27


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2013 Airline Disclosures Handbook | 2

Operating Expenses

Jet fuel costs (34,703,369) (24,096,078)

Movements in fair value of fuel derivative contracts 85,447 1,954,071

Take-off, landing and depot charges (8,740,822) (7,707,019)

Depreciation (9,560,907) (8,569,370)

Aircraft maintenance, repair and overhaul costs (2,612,678) (2,577,185)

Employee compensation costs 6 (12,270,065) (9,851,935)

Air catering charges (2,662,984) (2,044,359)

Aircraft and engine operating lease expenses (3,931,549) (3,488,014)

Other operating lease expenses (668,916) (712,005)

Other flight operation expenses (9,342,935) (8,227,555)

Selling and marketing expenses (5,480,514) (4,602,745)

General and administrative expenses (2,261,549) (1,637,824)

(92,150,841) (71,560,018)

Finance costs 9 (220)

Finance income 9 85

Retranslation charges on currency borrowings (8)

Fuel derivative losses (12)

Net charge relating to available-for-sale financial assets 18 (19)

Share of post-tax profits in associates accounted for using theequity method

17 7

(Loss)/profit on sale of property, plant and equipment andinvestments

(2)

Net financing credit/(charge) relating to pensions 9 184

Profit before tax 537

Example disclosure

Some airlines reporting under IFRS call out the impact on the incomestatement of volatility related to hedging losses. The changes in IFRS 9should move most of this volatility to the same income statement line item asthe economic exposure. The following are examples of current line items onthe face of the income statement that try to call out this volatility.

Air China 2011 Annual Report (IFRS)

International Airlines Group 2011 Annual Report (IFRS)


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3 | 2013 Airline Disclosures Handbook

Allowing component part hedging

of fuel

At present, IAS 39 prohibits thehedging of a component of risk for anon-financial item.

IFRS 9 approach

Under the proposed guidance, anentity will be able to designatechanges in cash flows or fair valuesof a component of an item as thehedged item provided that, based onan assessment within the context ofthe particular market structure, the riskcomponent is separately identifiableand the changes in cash flows orfair value in relation to that item arereliably measurable. The treatment forfinancial and non-financial items will bethe same.

Airline industry implications

There is a lack of liquidity in themarket for jet fuel derivatives with amaturity of greater than six months

and therefore many airlines use crudederivatives with maturities of up to 2-3years to meet their risk managementobjectives. Under IAS 39, basis risk isincluded in the effectiveness testing,which creates income statementvolatility. Under IFRS 9, airlines candesignate the component of the jet

fuel price that relates to the crude

input as a separately identifiablerisk and this should reduce incomestatement volatility.

Airlines will however need to carefullyconsider the most appropriate crude oilderivative that best correlates to theirinterplane pricing benchmark to ensurethat the detailed requirements of theproposed standard are met as there isstill a risk of ineffectiveness if this isnot undertaken.

Removal of the 80-125 percent

effectiveness threshold

At present, IAS 39 is rules based andresults in income statement volatilitydespite company risk managementobjectives being met.

IFRS 9 approach

Under the proposed guidance, the80-125 percent threshold is removed.A hedge relationship will be considered

effective provided that: there is an economic relationship

between the hedged item and thehedging instrument;

the effect of credit risk doesnot dominate the value changesthat result from that economicrelationship; and

the hedge ratioof the hedgingrelationship is the same as thatresulting from the quantity of thehedged item that the entity actuallyhedges and the quantity of thehedged instrument that the entityactually uses to hedge that quantityof hedged item.


Since retrospective effectivenesstesting is no longer required tosupport existence of a valid hedging

relationship, for fuel hedging inparticular this should drive efficiencyin back office functions of airlinetreasuries. We do note that changes tocurrent hedge documentation will berequired.

Disclosure changes

Disclosures will be required under IFRS9 in addition to the requirements ofIFRS 7. These disclosures will include:

the entitys risk managementstrategy and how it is applied tomanage risk;

how the entitys hedging activitiesmay affect the amount, timing anduncertainty of its future cash flows;and

the effect that hedge accountinghas had on the entitys primaryfinancial statements.

The adoption of the standard is alsolikely to lead to a reduction in the useof non-statutory financial informationin airline financial statements asmany airlines are already disclosingan underlying or normalised profitmeasure that eliminates some of theincome statement volatility that existsunder IAS 39 in relation to hedgeaccounting.

The amendments that will beintroduced by IFRS 9 more closely alignhedge accounting and management ofrisk and are likely to be welcomed bythe airline industry.


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Leases on the balance sheet

Introduction

The IASB and FASB released a jointexposure draft on lease accountingin August 2010. Since that time theBoards have made significant changesto the proposals. A revised exposuredraft is expected in early 2013.

Under the proposals operating leaseagreements will be brought ontothe balance sheets of lessees, whowill recognize new liabilities withcorresponding right of-use assets thatwill be depreciated over the term ofthe lease.

Operating leases of aircraft are usedextensively within the airline industryand capitalising these leases willsignificantly change the balance sheetsof many airlines. The current proposalsalso significantly change the incomestatement profile of many leases,accelerating expense recognitioncompared to current operating leasetreatment.

The IAWG, in conjunction with KPMGacting as accounting advisor, hasidentified six issues with a significantimpact on airlines, which airlineswill wish to see resolved prior tothe issuance of a final standard. Thefollowing summarises these concerns.

Foreign currency revaluation of the

right-of-use asset and lease liabilities

Proposal

The right-of-use asset will be recognisedon the balance sheet as a non-financialasset, measured initially at the presentvalue of the estimated future leasepayments. As a non-monetary asset thisbalance will be outside of the scope ofIAS 21 for subsequent measurement.

The lease liability will be recognised onthe balance sheet as a financial liability a monetary item and therefore

will be within the scope of IAS 21 forrevaluation.


Many airlines with a functional currencyother than USD are a party to USDdenominated leases.

Under the proposals, adjusting theliability but not the asset for changesin exchange rates has the potential tocreate significant income statementvolatility.

If the standard does not address thisissue, then airlines in this positionthat also hold USD denominated

debt may consider designating theforeign currency risk on the liability in ahedge. This accounting would requirecareful consideration and liaison withaccounting advisors and auditors.

Introduction of a new lease

classification test

Proposal

The current IAS 17 Leasesrequirescapitalisation on the balance sheet as

a finance lease only when significantlyall the risks and rewards of ownershipof an asset are transferred to thelessee. The expense for leases that didnot fall into this category is generallyrecognised straight-line over the termof the lease.

The proposals include a new leaseclassification test and retain thepossibility for a straight-line expenserecognition for some leases, forexample certain real estate leases.


Many existing aircraft operating leasesare expected to require recognitionin the income statement on anaccelerated basis under the proposals.This will lead to a greater incomestatement charge for interest in thefirst half of the lease than in the secondhalf. This will impact airlines differentlydepending on the current portfolio ofoperating leased aircraft.

Component accounting for the right-

of-use asset

Proposal

The proposals are unclear in relationto the ability to recognise significantcomponents of the right-of-use asset,consistent with the required treatmentunder IAS 16 Property, Plant andEquipment.


Under IAS 16 airlines are required

to identify significant componentsof aircraft and separately assess theuseful economic life and residual value.This ensures that the charge to theincome statement is consistent withthe use of the asset.

Airlines would welcome the ability toaccount for the right-of-use asset in thesame way. For example, this wouldallow for the separate measurement ofsignificant maintenance componentsand ensure consistent treatment across

the fleet of owned and leased aircraft.

Identification and separate

treatment of service component

Proposal

If a contract includes a servicecomponent, then the lessee wouldaccount separately for the componentsunless there are no observable pricesthat can be used to allocate thepayments between service and lease

components. Lessors would alwaysaccount for the components separately,using the revenue guidance to allocatepayments.


Within the airline industry it is commonfor contracts to involve items such ascomplicated maintenance arrangementsor the provision of operating crew thatare likely to require significant judgmentin distinguishing between service

and lease components and allocating


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payments. Whilst this requirement isnot new the accounting implicationsof identifying service contracts versusleases are likely to be greater.

Requirement for additional

disclosures

Proposal

The lessee will be required to presentor disclose separately the leaseliabilities.

The right-of-use assets will bepresented or disclosed separately toproperty, plant & equipment that theentity does not lease.

The amortisation of the right-of-useasset and the interest expense on thelease liability will require identificationseparate from other amortisation andinterest expense.

For leases featuring accelerated

expense recognition, payments ofprincipal will be presented as financingactivities, payments of interest willbe presented as either operating orfinancing activities, and payment ofvariable amounts will generally bepresented as operating.


The requirements above are moredetailed and may be more onerous toapply than the current requirements

in relation to finance leases that arerecognised on the balance sheet.

The separate recognition of theright-of-use asset for aircraft inparticular may be confusing to users ofthe financial statements.

Introduction of new terminology and

thresholds specific to leases

Proposal

The exposure draft includes a numberof terms that have not previously beenincluded in International FinancialReporting Standards. These include:

significant economic incentive;

threshold tests; and

right-of-use asset.


The current IAS 17 terminology andclassification criteria relating to financeleases and operating leases are wellunderstood by preparers and users offinancial statements.

There is a risk that introducingnew, additional terms may createunnecessary complexity.


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Maintenance Accounting

Introduction

Airframes, engines, auxiliary powerunits, landing gear and other aircraftparts require major maintenance eventson a routine basis. The cost of theseevents may be difficult to predict untilthe part is inspected.

Many airlines transfer parts of this riskto maintenance providers using risktransfer type arrangements. Theseagreements are generally billed andexpensed on a by the hour basisand are not covered further in thisdocument.

For owned or finance leased aircraft,industry practice is to capitalise anddepreciate maintenance expenses formajor or heavy events. This involvescapturing the embedded cost ofmaintenance on new aircraft.

For operating leased aircraft, the

treatment differs based on thecircumstances. Generally, the lesseeis required to return an aircraftwith a contractually agreed levelof maintenance. Deviations fromthis agreed level may be settledfinancially or may require an additionalmaintenance event to be performed bythe airline.

This section highlights observationsmade from airline disclosures aboutaccounting for maintenance costs.

Owned aircraft and aircraft under a

finance lease

IAS 37 Provisions, Contingent Liabilities

and Contingent Assetsprohibitsrecognition of a provision for futureoperating losses and future expenditurethat can be avoided. Therefore, thecost of future maintenance of own

assets is not provided for in advanceof a maintenance event as it can beavoided by either not flying the aircraft,or by selling the aircraft.

Under IAS 16, major inspections andoverhauls are identified and accountedfor as a separate component if thatcomponent is used over more thanone period. When a major inspectionor overhaul cost is embedded in thecost of an aircraft, it is necessary toestimate the carrying amount of thecomponent. Disclosures by airlinesthat account under IFRS demonstratethat this is common practice andembedded aircraft and enginemaintenance costs are identified as aseparate component and depreciatedover the period until the next event.

These initial embedded maintenanceassets are fully written off by the timewhen the next maintenance event isperformed and the cost of the newevent is capitalised and depreciated

over the period until the next event.Although this is common practice, thelevel of disclosure by airlines varies andat times it can be difficult to determinewhich maintenance events qualify forcapitalisation. Airlines refer to major orsignificant events or checks withoutdisclosing specific details.

It was observed that unlike IFRS, thepractice under US GAAP is to expensemaintenance costs as incurred.


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Aircraft under an operating lease

In contrast to the treatment ofmaintenance of owned aircraft, alessee may, through use of an aircraft,create an obligation to a lessor tomake good the aircraft to a level ofmaintenance determined in the leaseagreement. It is also possible that thelessor may be required to reimbursethe lessee for returning an aircraft witha level of maintenance greater than thereturn condition.

At the termination of an agreementthe settlement should be relativelystraight-forward to determine.During the life of the lease, whichmay typically be up to ten years, theaccounting can be complicated due tothe usage of the aircraft and intra-leasemaintenance events.

IFRSs do not contain industry specificguidance in relation to the accountingfor maintenance return conditions onoperating leased aircraft. It remains

to be seen how the proposals for thenew leases standard may impact theaccounting in this area.

Currently airlines turn to IAS 37 andIAS 16 for guidance. The generalposition observed within the industryis that when flight hours are flown, orcycles operated, to a level that requiresremedial maintenance or a settlementwith the lessor, then a presentobligation exists and must be providedfor. It has been observed that some

airlines also capitalise modificationsthat enhance the operatingperformance or extend the usefullives of aircraft. Such modificationsare depreciated over the shorter ofthe period to the next check and theremaining lease term.

It was observed that both Ryanair andQantas Airways recognised provisionsfor maintenance of aircraft, whichwas leased under an operating leaseand had to be returned in a specifiedcondition, during the lease term.

Various observed approaches toaccounting for maintenance of aircraft,

which is leased under an operatinglease and has to be returned in aspecified condition, are illustrated bythe following example. The approach isgenerally dependent upon the particularcircumstances of a given airline and theterms of lease contracts.

Example disclosure: Ryanair 2012 Annual Report (IFRS)For aircraft held under operating lease agreements, Ryanair is contractuallycommitted to either return the aircraft in a certain condition or to compensatethe lessor based on the actual condition of the airframe, engines and life-limitedparts upon return. In order to fulfill such conditions of the lease, maintenance,in the form of major airframe overhaul, engine maintenance checks, andrestitution of major life-limited parts, is required to be performed during theperiod of the lease and upon return of the aircraft to the lessor. The estimatedairframe and engine maintenance costs and the costs associated with therestitution of major life-limited parts, are accrued and charged to profit or lossover the lease term for this contractual obligation, based on the present value ofthe estimated future cost of the major airframe overhaul, engine maintenance

checks, and restitution of major life-limited parts, calculated by reference to thenumber of hours flown or cycles operated during the year.

Ryanairs aircraft operating lease agreements typically have a term of sevenyears, which closely correlates with the timing of heavy maintenance checks.The contractual obligation to maintain and replenish aircraft held underoperating lease exists independently of any future actions within the controlof Ryanair. While Ryanair may, in very limited circumstances, sub-lease itsaircraft, it remains fully liable to perform all of its contractual obligations underthe head lease notwithstanding any such sub-leasing.

Example disclosure: Qantas Airways Limited 2012 Annual Report (IFRS)

With respect to operating lease agreements, where the Qantas Groupis required to return the aircraft with adherence to certain maintenanceconditions, provision is made during the lease term. This provision is basedon the present value of the expected future cost of meeting the maintenancereturn condition, having regard to the current fleet plan and long-termmaintenance schedules.

The costs of subsequent major cyclical maintenance checks for owned andleased aircraft (including operating leases) are capitalised and depreciatedover the shorter of the scheduled usage period to the next major inspectionevent or the remaining life of the aircraft or lease term (as appropriate).


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Observed approaches to accounting

for maintenance of aircraft leasedunder an operating lease

Fact pattern:

Operating lease of a new aircraft;

Lease term of 9 years;

Major maintenance events(checks) required on the airframeevery 5 years at a cost of 100 unitsbased on consistent use of theaircraft over time;

Maintenance events are carried outat the end of the life of the previousmaintenance event and restore anadditional 5 years of maintenance life;

The lease requires that the aircraftis returned with at least 50%maintenance life (half life) withthe option to settle the differencebetween the maintenance liferemaining and 50 units where theaircraft is below 50% maintenancethreshold;

At the end of the lease, the lesseechooses to pay the lessor 30 unitsto make good the maintenancedeficit below half life conditions.

The current accounting approachesresult in a number of different incomestatement profiles as highlightedbelow. The examples ignorediscounting.

Profile of value of check remaining compared to value of the check to be

returned, and P&L charge/credit for each option

0

10

20

30

40

50

60

70

80

90

100

0 1 2 3 4 5 6 7 8 9

Valueofcheckremaining

andch

arge/credittoP&L

Year

Check value remaining Observed practice 1 P&L chargeCheck value to be returned to lessor (half life)

Observed practice 2 P&L charge Observed practice 3 P&L charge

1 2 3 4 5 6 7 8 9 Net P&L charge

Observed Practice 1 20.0 20.0 20.0 20.0 20.0 7.5 7.5 7.5 7.5 130.0Observed Practice 2 0.0 0.0 10.0 20.0 70.0 0.0 0.0 10.0 20.0 130.0

Observed Practice 3 0.0 0.0 0.0 0.0 0.0 25.0 25.0 35.0 45.0 130.0


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Observed Practice 1

Accrue with usage, maintenance costsbooked against provision when incurred.

During the first five years, theprovision of 100 units for the majormaintenance check at the end of yearfive is recognised as the leased aircraftis flown usually on a cycles basis.When the major maintenance check isperformed at the end of year five, thecosts are booked against the provision.From year six to the end of the lease

term in year nine, a provision for cashsettlement of 30 units is recognised ona straight-line basis.

Observed Practice 2

Provision for contractual obligation forcash settlement is recognised duringthe lease term, and maintenanceexpensed as incurred.

When the maintenance condition fallsbelow 50% during year 3, a provisionfor cash settlement is recognised.

At the end of year 3 this is 10 units,representing the contractual abilityto settle the difference between theremaining maintenance life (2 yearsat a cost of 20 units per year) and the50% threshold. When a maintenanceevent is performed at the end of year5, a provision of 50 units will havebeen recognised as the provisionfor cash settlement. The cost of themaintenance event is 100 units and50 units of cost are recognised against

the provision and the remaining 50 unitsare expensed. This results in a chargethrough the income statement overthe period during which the remainingmaintenance life is below 50%.

Observed Practice 3

Provision raised for contractualobligation during the last maintenancecycle only, and major maintenanceevents within the lease are capitalisedas leasehold improvements.

When a maintenance event isperformed, its cost is capitalisedas a leasehold improvement underIAS 16 and depreciated over theremaining maintenance life. Thisresults in an expense holiday in

the income statement until the firstmaintenance event is performed.This practice is consistent with theobserved approach taken by many IFRSreporting airlines to the capitalisationof significant maintenance events forowned aircraft, where the recognitionof a component per IAS 16 is deferreduntil the first check. The provisionfor the contractual obligation for cashsettlement for the second maintenanceevent is recognised during the leaseterm, and maintenance expensed asincurred consistent with ObservedPractice 2 above.

Airline Disclosures Handbook | 10


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2. The long haul to consolidation

Over recent years, government regulations, economicuncertainty, natural disasters, technological change, changes inconsumer base and preferences have all collided and resultedin diminishing operating margins. In the last decade we havewitnessed tie ups of legacy carriers, overhauled airline alliancesand joint services agreements, ownership changes and newcode share agreements. We look at some of the most recent

initiatives to secure consolidation.


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"The growth LATAM Airlines Groupis expected to generate will allow usto offer flights to new destinationsfor our customers, create moreopportunities for our more than51,000 employees and greater valuefor shareholders. In addition, wecan support the economic, social

and cultural development of ourregion, improving the connectivityof passengers and cargo in SouthAmerica and the rest of the world."

Mauricio Rolim Amaro,

Vice Chairman of TAM S.A.

Mergers/Consolidations

The most integrated two airlinescan become is when they enterinto a merger and act in all ways asone airline.

The most recent tie up was finalisedin June 2012 between LAN AirlinesS.A. and TAM S.A. to create the

LATAM Airlines Group S.A. LATAMcomes after a number other mergers,with significant mergers between AirFrance-KLM, Delta and Northwest,Continental and United.

LATAM Airlines have continued inthe tradition of previous mergers withLAN and TAM continuing to operateand market their respective brands inparallel with one another. One of thepreeminent advantages of this mergeris that LAN and TAM state they partake

in complementary markets to eachother, increasing their network withoutfurther significant capital outlay.Synergies in the first twelve monthsare estimated to range betweenUS$170 million to US$200 million,increasing to between US$600 millionto US$700 million in the following fouryears. Despite the abundant benefits,such a transaction does not comewithout costs; LATAM Airlines estimatethe costs of the transaction to betweenUS$170 million and US$200 million.

The merger was not achieved withoutsignificant negotiation and rigorous

evaluation by regulators and otherstakeholders. This is illustrated by thetime taken to finalise the transaction.The merger was first announced inAugust 2010, following which is wasreferred to the relevant regulatorybodies for review.

Alliances

The three main alliances continueto grow with the introduction ofnew members. Since 2008, 22 newmembers, associates or affiliatemembers have been announced intotal: 5 oneworld, 9 Sky Team and6 Star Alliance. The Alliances areexpanding their membership base withairlines operating in complementarymarkets to those of existing members.

Star Alliance recently welcomedAviancaTaca and Copa Airlines in 2012,with only one other existing memberhailing from the South American region.Invitations to join the alliance have beenextended to Eva Air and ShenzhenAirlines, which would increase theirpresence in Asia.

Sky Teams access to the MiddleEast was further developed with theintroduction of Saudia and MiddleEast Airlines.

The oneworld alliance will welcome

two new members Malaysian Airlinesand SriLankan Airlines, cementing theirassociation with Asian carriers.


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The partnership [with EtihadAirways] simultaneously providesinternational presence, strategicpenetration and a bright future forour national carrier.

The aviation industry is underenormous pressure right now, withsmall airlines especially vulnerableto global economic instabilityand ongoing oil price volatility. Inthis context, consolidation offers

the best possible solution for AirSeychelles. This agreement willallow Air Seychelles to share thebenefits of the visionary strategy ofone of the worlds leading airlinesand leverage its economies of scaleand synergies.

Joel Morgan, Seychelles Minister

of Home Affairs, Environment,

Transport and Energy

January 25, 2012

Direct investmentDirect investment is no longer solelya transitional strategy to acquire acontrolling stake in another airline;it has also become a means tocommence a strategic partnership.

Etihad Airways has acquired a directinvestment in airlines over recent yearsincluding Air Berlin, Air Seychelles,Aer Lingus and Virgin Australia. Theownership interest acquired in eachhas varied but Etihad has articulatedbenefits from each investment.

The benefits communicated haveincluded:

Expansion of operations into growthmarkets, without considerablecapital requirements throughintegration of networks (includingthrough the establishment of codeshare arrangements).

Access to training andadministration facilities andexecution of joint marketinginitiatives, reducing the need forduplication.

Integrated reward programsto include mileage earning andredemption on each carriers flights.

Despite the benefits there may beobstacles to such an investment. It isnecessary to consider the relevant lawsand regulations of each country, asinvestment approval is usually required.

Interline and code sharearrangements

Interline and code share arrangementshave been in existence for manyyears. The aim of these agreementsis to effectively allow an airline toincrease the number of services thatthey can sell onto and allocates theselling carrier to market flights across abroader network.

Airlines have continued to use interlineand code share arrangements inrecent years, with the traditionalmodels expanded to include domesticnetworks and the integration ofadditional partners.

The next milestone will be the

expansion of the existing domesticcodeshare on each airline'sdomestic network, further improvingconnectivity of our services andgiving Virgin Australia guests accessto 250 destinations across theUnited States, Canada and Mexico.

Merren McArthur, Virgin Australia,

Delta begin codesharing to USA in

November, published 19 September

2011 by John Walton


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We have agreed to join forcesto give our customers the mostcomprehensive premium travelexperience on the planet.

Source: The Worlds Leading Airline

Partnership, Alan Joyce, Qantas Group

CEO, Sydney 06 September 2012

Qantas and JAL have a long-standing relationship, as codesharepartners and fellow oneworldalliance members. We are also

delighted to be joining withMitsubishi Corporation- one ofJapans great global brands - tolaunch Jetstar Japan, building on thesuccessful expansion of the Jetstarbrand across Asia.

The Qantas Group has a wealth ofexperience in establishing low costcarriers and were looking forwardto working with our two partnerson this new venture which will offerlow fares to the Japanese travelling

public.

Alan Joyce, Qantas Chief Executive

Officer, Qantas Airways Limited

Joint service and profit/revenueshare agreements

We continue to see the expansionof profit, revenue and servicearrangements.

One of the latest formal arrangementswas the Qantas and Emiratesannouncement on 6 September 2012of an airline partnership (subject toregulatory approval). The aspiration ofthe partnership is to extend beyond theoperation of joint routes and to provide

customers with access to improvednetworks, frequencies, lounges, loyaltyprograms and the overall customerexperience.

Such an agreement does not excludethe need for regulatory approval. Qantasstates that the arrangement is subjectto regulatory approval and wouldinclude if permitted, integrated networkcollaboration including coordinatedpricing, sales and scheduling.

This is just one in a long line ofarrangements which on the back ofAnti Trust Immunity (ATI) allowsmember airlines to share information,pricing, capacity and frequency, aswell as route strategies. Such alliancesare designed to offer benefits tothe customer (in terms of increasedchoice), and to the airline: moreefficient use of capacity, scheduling,and a metal-neutral approachto joint sales, while staying withinregulatory constraints including foreign

ownership limits.

An interesting development is theextent to which overlapping alliancesthemselves compete. For example, a

customer wishing to travel from New

York JFK to Tokyo Narita has the choice(amongst others) of flying:

East, via London Heathrow, withthe first leg (JFK-LHR) on analliance between British Airways(AA), American Airlines (AA) andIberia (IB), and the second sector(LHR-NRT) on another metal neutralalliance between BA and JapanAirlines (JAL); or

West, via any connecting point in

the US (or direct) on a metal neutralalliance between AA and JAL, withcertain connections allowed on acodeshare with Cathay Pacific.

Franchise

A concept used in many industriescurrently being modelled withinthe aviation industry is franchising.Although not strictly applying thetraditional concept, this new modelinvolves bringing together partners

who each contribute capital as well asoperational strengths.

Jetstar Japan was launched in August2011 and is a partnership betweenQantas Airways, Japan Airlines andMitsubishi Corporation. The airlineadopts the low cost model assumedby Jetstar Airways Australia and usesthis as a prototype to establish a lowcost airline servicing the domesticJapanese market.

The parties collectively have a firmunderstanding of the businessmodel, regulatory and legislativeenvironment, consumer demands andcapital avenues.


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Consolidation outlook

Until we see liberalisation of aviationmarkets in geographics such as Asiawe will continue to see more ofthe traditional methods of airlineco-operation and tie-ups. Why is thisthe case? There are three key inhibiters

to aviation consolidation.

Ownership and control restricitions;

Competition regulation; and

Route right access issues.

Whilst competition regulation affectsall industries, it is when you add inforeign ownership caps and route rightaccess based on nationality youget a complex web that mergers andacquisitions have to navigate through.

The closest industry we can see toairlines in terms of the above issuesis that of the Energy and NaturalResources sector. It is common inthis sector to utilise unincorporatedcommercial joint ventures usually todevelop a specific mine or group of

mines. We have noted previously thatairlines could contribute assets(eg aircraft), rights and other resources(eg people) that service a route networkinto a unincorporated commercialjoint venture. Whilst the competitionregulatory issues remain, a merger of asubset of the airlines could be achieved.Potential benefits could include:

No legal change in ownership;

No change in labour agreements forexisting workforce;

No change in Air OperatingCertificates as key post holdersand systems of safety aremaintained; and

A re-set of the accounting values which could include fair valueingnew intangibles (some being non

depreciable) and property, plant andequipment (very likely downwards).

We recognise these structureswould require significant legal andother diligence, the benefits couldbe significant. It will be interesting tosee if any airlines utilises one of thesestructures prior to the next version ofour handbook.


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3. Benchmarking airline coststhe endof low cost flying?

Introduction

KPMGs study of airline unit costs shows that over the pastsix years, the difference between the cost base of low costcarriers (LCCs) and legacy airlines has narrowed dramatically. Inmany geographies, from a passenger viewpoint, the distinctionbetween the two business models (particularly in short-haul) is

also becoming increasingly blurred. So where does the industrygo next? We review the trends between 2006 and today as wellas consider the ongoing cost implications.

We will show why we consider that:

The remaining cost gap betweenlong haul and short haul may narrowfurther but will not be eliminated, asit is inherently structural in nature;

Legacy airlines are likely to explore

new business models in their short-haul feeder networks;

LCCs are likely to take one oftwo routes: certain airlines willremain ruthlessly low price (and bynecessity, low cost which is thestrategy of the likes of Ryanair),while others will compete againstlegacy carriers for their highervalue customers (as shown by theevolution of Virgin Australia).

The disclosure of successes and theacknowledgement of challenges facedby airlines on the journey to sustainedprofitability continues to develop, asthe industry continues to developmethods for conveying the value ofcost saving initiatives.

KPMG investigates the outliers in thisspace which outline success stories forunit cost containment.

Cost glide-path has converged

As demonstrated by Chart 1, in 2006 theaverage unit cost (excluding impairmentcharges) of legacy carriers was 3.6 UScents/ASK higher than low cost carriers(LCCs). By 2011, as a result ofaggressive streamlining and restructuringthe difference was just 2.5 US cents/ASK, a reduction of over 30%.

The majority of this convergencehappened in 2008 and 2009 (see Chart2), which we attribute to aggressivestreamlining by legacy carriers inresponse to the financial crisis. Thelack of further convergence after 2009indicates that the impact of significantrestructurings in 2008 (see below) hasbecome business as usual, and also

that the easy-wins have been taken.We believe that the remaining cost gapis more structural in nature.

In Chart 3, we demonstrate where thecost saving convergence has beenachieved. This chart shows that thesingle-most important componentof the cost savings have been madeoutside of the biggest cost bucketsfor an airline (fuel and staff costs), witha convergence of 0.4 US cents/ASKin other expenses: again consistent

with the airlines attacking the lowhanging fruit first.

Sample method

In our analysis, we have taken acost per ASK approach to comparethe cost bases of both legacyairlines and low cost carriers. Wehave selected the top 25 legacy

carriers by revenue and six lowcost carriers, distributed globally.

Six years of financial data (fromFY2006 to FY2011 inclusive) werecompiled and converted to USDat the average exchange rateacross the survey period for therelevant airline.

These were then converted to costper ASK measures and the weightedaverage cost per ASK for each of the

cost measures discussed for eachof the legacy and low cost carrierswere compared.

The reporting periods in which theairlines are grouped, are basedon yearend dates between 1 Apriland 31 March of the following yeare.g. 2011 cost performance yearrelates to airlines with balancedates between 1 April 2011 and31 March 2012.


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Impact of restructuringcommencing during 2008 onthe cost differential

During 2008, legacy carriersexperienced significant impairmentcharges. These were particularly ofnote for Delta Airlines, United Airlinesand American Airlines.

The restructuring associated with thesecharges has had significant positiveimpacts on cost performance in thefollowing years.

These impacts have included:

Removal of relatively fuel inefficientaircraft from the passenger fleet

Re-arrangement of employeeentitlements

Re-negotiation of other major

contracts with suppliers includingMRO operations.

Examples of the impacts of theserestructures on the carriers which weresubject to significant impairments inthe 2008 performance year is providedas follows:

Delta Airlines

4,200 employees participating involuntary redundancies in March 2008

United Airlines

Announced removal of 100 aircraftfrom its fleet including 94 B737 andsix B747 aircraft

Estimated FTE reduction of9,000 positions

American Airlines

Removed 79 MD-80 aircraft from,and added 90 B737-800 aircraft toits operational fleet since 2008

Significant reduction in workforceannounced

These restructuring activities acrossthe legacy carriers have significantlycut into the cost advantage of low costcarriers.

We note that the impact of the Chapter11 process for American Airlines andthe bankruptcy proceedings for JALare not reflected in the numbers as theairlines re-set the balance sheets onexit from restructuring.


25/36


$7,296 million Delta

primarily for goodwill

($6,939 million) triggeredby significant declinein market capitalisation

and high fuel prices atthe time.

$2,625 million Unitedprimarily for goodwill($2,277 million),triggered by high

fuel prices, analystdowngrade of stock,

credit rating downgradeand announcementto remove 100 aircraft

from fleet.

$190 million Alaskan AirretireMD80 fleet

$183 million British Airwaysfleet asset impaired

and discontinuedoperations

$148 million China Easternimpairment of fleetassets to market

value

$725 million AMR Corpimpairfleet assets (MD-

80s B757s andB767s)

$371 million AirChinaimpair fleetassets

$319 million ScandinavianAirlinesimpairfleet assets and

holding in Spainair

$327 million Air Chinaimpair fleet

assets

$182 million Deltaimpairfleet assets(50 seateraircraft)

$121 million Lufthansaimpair aircraft

assets

$291 million Unitedimpairintangibles and

fleet assets

$205 million ScandinavianAirlinesimpairfleet

NB: JALbankruptcy financialaccounts not

reported

$158 million RyanAirimpairholdings ofAer Lingus

$147 million

AllNipponimpair fleet

assets

$135 million JALimpair fleet

2011/2012 EuroZone crisis (otherannouncements)

740 millionEuro AirFrance KLMannounce majorrestructuring andderivative losses.

Large number of

European carriers

still to report their

FY2012 results.

0

3000

6000

9000

12000

15000

USD millions

723

2006 2007 2008 2009 2010 2011

748

13,511

1,217 950

1,831

Global FinancialCrisis $ million

Delta 7,296

United 2,625

AMR Corp (AmericanAirlines)

1,128

US Airways 640

China Eastern 426

Ryan Air 385

China Southern Airlines 269

Scandinavia Airlines 244Qantas 152

Thai Airways 145

Source: KPMG analysis for KPMG International, 2013 Airline Disclosures Handbook


26/36


Chart 1: Legacy versus low cost carrier cost per ASK2006 to 2011 (excluding impairment charges)

2006 2007 2008 2009 2010 20110

2

4

6

8

10

US

centscostperASK

Reporting Period

Legacy Low cost


Chart 2: Reduction in cost per ASK advantage of low cost carriers over legacycarriers from 2006 to 2011 (excluding impairment charges) by year

4.0

Cost advantage

to low costcarriers in 2006

Cost advantage

to low costcarriers in 2011

2007 2008 2009 2010 20110.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

US

centscostadvantageper

ASK

3.6

2.5

0.00.00.7

0.5

0.1



27/36


Chart 3: Cost per ASK bridge between legacy and low cost carriers bycategory in 2011 (excluding impairment charges)

0

2

4

6

8

10

9.8

0.50.5

0.3 0.00.4

0.3 0.0 0.2 0.1 0.1

7.3

UScentscostperASK

Legacy

c/ASK2011

Fuel

Manpower

Other

expenses

Engineering

Sellingand

Marketing

Depn,

Amort

andOpLease IT

Landingand

Parkingfees

Airmeals

OtherAOV

Lowcost

c/ASK2011


Chart 4: Reduction in the composition of cost disadvantage to legacy

carriers over low cost carriers between 2006 and 2012 by cost category

0.2 0.1

0.4 0.1 0.10.1 0.1 0.1 0.0 0.0

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

IT

Costdisadvantageto

legacycarrie

rsin2006

Costdisadvantageto

legacycarrie

rsin2011

Fuel

M

anpower

Other

expenses

Engineering

Sellingand

M

arketing

Depn,

Amort

and

OpLease

Landingand

Parkingfees

Airmeals

O

therAOV

3.6

2.5



28/36


Fuel

The cost differential with respect tofuel costs has decreased over theperiod of the survey. This is primarilybecause of the actions taken bylegacy carriers to reduce fuel bills , asLCCs already have relatively new andfuel-efficient fleet.

Over the period the weighted averagefuel cost per ASK fuel has increased8.5% for the legacy carriers comparedto 11.8% for LCCs. A significant

contributor to this is the significant

efforts by legacy carriers to eliminate

their older fleet. As an example, Chart5 below shows that although the fuelcosts of LCCs and legacy carriers haveboth moved in response to underlyingfuel price, certain legacy carriers (ofwhich SAS is an example in our dataset) have significantly out-performedthe average.

In the future, we expect fuel efficienciesto continue as a result of fleetinvestment. For example, in July 2011AMR (parent company of AmericanAirlines) announced the largest fleet

replacement order in history, with

460 narrow-body single-aisle orders(B737 and A320 next generationfamilies) with the stated aim ofachieving the youngest and mostfuel-efficient fleet among its U.S. airlinepeers with deliveries starting in 2013.

Although this will act to reduce fuelcosts, we believe that LCCs will alsobenefit from new technology, andthe structural differences inherent inlegacy carriers (including longer averagestage lengths) will mean that fuel costdifferences will not converge to nil.

Chart 5: Basis movements in fuel cost per ASK

Legacy vs low cost airlines, including performance outlier SAS

2007 2008 2009 2010 2011-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

Legacy fuel basis movement Low cost fuel basis movementSAS fuel basis movement

-3.1%2.9%

44.3%

-21.1%

7.4%

25.7%

3.8%

31.9%

-33.4%

16.7%23.5%

16.2%

-19.1%-8.0%

9.9%


Manpower

The cost differential with respect tomanpower has decreased over theperiod of the survey, mainly due toan average decrease in manpowerunit costs experienced by thelegacy carriers, of 0.7% (on average)compared to an increase experiencedby low cost carriers of 0.9%.

Singapore Airlines and Air Canada bothhave sustained decreases in manpowercosts per ASK of 3.9% and 2.1%respectively per year on average overthe period of the survey.

Manpower costs unlike fuel costs are

subject to a significant lag time fromthe initiation of capacity reductions.This is noted below in the SingaporeAirlines case study.

Case Study Singapore Airlines

The average year on year decreasesin manpower costs experienced bySingapore Airlines over the surveyedperiod where notable in both the 2008and 2009 performance year, wherethey averaged a 14.1% manpower cost

per unit reduction year on year.

This cost containment outcome has

been achieved by actively improvingemployee productivity, and movingheadcount in line with capacitychanges.

Singapore Airlines discloses theexecution of this strategy in theTen-Year Statistical Record portion ofthe annual report.

In 2010 it was noted that capacityhad decreased 10%, however thiscapacity decrease was not matched

by a equivalent decrease in operationalheadcount until 2011.


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Singapore Airlines - The Year

in Review

The Airline implementedcompany-wide measures to

reduce operational and staff costsincluding the introduction of ashorter work month scheme foremployees, and deferment of non-essential projects.

Singapore Airlines,

Annual Report for the year ended

and as at 31 March 2010

Staff 2011-12 2010-11 2009-10 2008-09 2007-08 2006-07

Average

strength

(numbers) 13,893 13,588 13,934 14,343 14,071 13,847

Seatcapacity per

employee

(seat-km) 8,163,082 7,952,620 7,583,874 8,212,278 8,096,020 8,127,667

Passengerload carriedper employee

(tonne-km) 594,663 588,714 563,318 598,047 618,295 613,211

Revenue per

employee

($) 868,790 863,931 728,075 909,817 906,801 819,232

Valueadded peremployee

($) 237,472 310,480 219,678 294,666 368,382 368,831

Source: Singapore Airlines, Annual Report, for the year ended and as at 31 March 2012

Case study Air Canada

Air Canada on average, experiencedyear on year decreases of 2.1% inmanpower costs over the surveyedperiod.

Air Canada discloses their costperformance across a number ofcategories in the management

discussion and analysis section of itsannual report.

In the 2009 performance year, therewas a 4.8% reduction in FTEs, resultingin a significant improvement in theefficiency of manpower costs ascapacity had contracted 4.4% in thisparticular year.

In response to historically highfuel prices, on June 17, 2008 AirCanada announced capacity andstaff reductions for the fall andwinter schedule.

Air Canada,

Annual Report for the year ended

and as at 31 December 2008


30/36


Full Year Change(cents per ASM) 2011 2010 cents %

Wages and salaries 2.31 2.39 (0.08) (3.3)

Benefits 0.69 0.62 0.07 11.3

Aircraft fuel 5.08 4.18 0.90 21.5

Airport and navigation fees 1.52 1.51 0.01 0.7

Capacity purchase agreements 1.51 1.53 (0.02) (1.3)

Ownership (DAR)(1) 1.60 1.82 (0.22) (12.1)

Aircraft maintenance 1.03 1.03 - -

Sales and distribution costs 0.92 0.92 - -

Food, beverages and supplies 0.42 0.44 (0.02) (4.5)

Communications and information technology 0.29 0.31 (0.02) (6.5)

Other 1.83 1.87 (0.04) (2.1)

Total operating expense 17.20 16.62 0.58 3.5

Remove:

Cost of fuel expense and cost of ground packages at Air Canada

Vacations

(5.54) (4.61) (0.93) 20.2

Operating expense, excluding fuel expense and excluding thecost of ground packages at Air Canada Vacations (2)

11.66 12.01 (0.35) (2.9)

(1) DAR refers to the combination of depreciation, amortization and impairment, and aircraft rent expenses.

(2) Refer to section 20 Non-GAAP Financial Measures of this MD&A for additional information.

Source: Air Canada, Annual Report, for the year ended and as at 31 December 2011

The decrease in manpower costs perunit noted in the 2011 performanceyear, was predominately driven byproductivity improvements offsettinghigher average salaries and increases inaverage FTEs.

Although the legacy airlines have madesignificant inroads into staff costs, we

believe that the residual difference toLLCs will be more difficult to eliminatedue to structural differences, includinghistorical union arrangements, andlonger routes involving longer (andcostly) layovers.

However, in short-haul, it is increasinglylikely that legacy airlines will seek tocontinue to manage their cost baseclosely in order to be competitiveagainst the LCCs. This may involvethe continuing development of new

businesss models; including lower

cost subsidiaries (e.g. Virgin Australiasacquisition of Tiger Airways); outsourcingof some or part of short-haul operations(as with Finnair and Flybe); or potentially,closer alliances between LCCs andlegacy carriers (as has previously beenexplored with JetBlue and Lufthansawith feeder traffic beyond LufthansasUS gateways).

Cost outlook

We expect legacy airlines to continueto focus on costs. SAS is an exampleof an airline that makes extensivedisclosures about its efforts in this area.

Many of the easier cost targets havenow been eliminated, and while bothLCCs and legacy carriers will continuetheir focus, we believe that the costgap will never be eliminated in full

because of inherent structural issues:

Legacy carriers will not be able tofully move away from historical staffcost and practices;

Only LCC will viably be able tomaintain the staff, engineering, andmaintenance efficiencies created bysingle fleet types;

Because of the lack of network

limitations, LCCs have an inherentability to seek lower cost airportsand routes.

However, LCCs themselves arelikely to diverge in their own businessmodels. Some will seek to continueto be lowest price, which inherentlymeans: lowest cost. Others will seekto try and take market share away fromthe legacy airlines by targeting theirhigher value customers. This will entailadding new products and services

(free baggage, priority boarding,


31/36


pre-assigned seating). The challengein doing this will be to maintain costcontrol to remain competitive againstincreasingly streamlined competitors.

Legacy carriers will continue to needto evolve their business models

through partnership, joint venturesand mergers and acquisitions to meetthe cost challenges in competing withthe newer and large gulf hub carriersand the growth of the large Chineseinternational carriers.

Case Study SAS

SAS makes significant disclosuresof its unit cost performance, whichsuccessfully conveys the messagethat management have taken decisiveaction in reducing their cost base.

Lower units costs (CASK)

Through Core SAS, Scandinavian Airlines has reduced its unit costs (CASK) by 23% and its

operational costs by 24% since 2008. As a result, SAS is now better equipped for the

prevailing situation with increased competition, an uncertain macroeconomic trend and

accelerating fuel prices.

Cost reduction (excluding fuel costs) 2008-2011

0

5

10

15

20

25

30

35

SEKbillion

Currency-a

djusted

costbase

Adjustmentf

or

extraordinarycos

ts

14%

lowerAS

K

2011vs.

20

08

Inflation

Estimatedcostbase20

11

withoutCoreSA

S

Earningsefle

ct

2008-20

11

Costbase20

11

30.123.2

32.0

0.62.1 0.8

6.9

-23%

Source: SAS Annual Report 2011

Core SAS has generated costsavings of 23% since 2008 anda new platform for profitablegrowth has been created. The new

strategic focus 4Excellence waslaunched in autumn 2011, entailingthat SAS continues to maintainits strong focus on the unit cost.The objective is to reduce unitcost by 3-5% per year. This willbe implemented with the supportof cost reductions and increasedproductivity. The part of the unit-cost reduction that is intended to bebased on cost efficiency comprisesreduced administration, lower ITcosts, more efficient purchasingand centralization of internationalsales activities.

Customers will see a harmonizedproduct offering, which will alsoentail savings for SAS. In addition tocost efficiency, higher productivitywill help reduce the unit cost.Aircraft utilization will increase,partly due to increased productionto private travel destinations. Theaverage aircraft size will gradually

increase due to changes in theaircraft fleet. Extensive Leanefforts are also taking place in manyareas throughout the company,which will help SAS handle plannedcapacity growth in a cost-efficientmanner.

SAS Annual Report 2011

SAS introduces Lean

SAS is introducing Lean to continueimproving the unit cost. Thepurpose of Lean is to harmonizeSASs standard of delivery andquality to customers and achievecost efficiencies. The aim is thatall managers and employees willbase their work on these principles.High precision and reliability inSASs punctuality and regularity isa strong indicator of efficient andreliable processes. Accordingly,

SAS uses punctuality as a key

measure in the Lean program.Motivated and committed employeesand managers are a prerequisitefor creating permanent results.Everyone will apply the best-knownworking practice. To achieve theoverall targets, SAS has establisheda roadmap for the next fewyears with a focus on creating anunderstanding of, and compliancewith, the Lean principles.

Source: SAS Annual Report 2011


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Appendix 1: Surveyed airline financial reports

Company name Reporting GAAP Regulatory filings reviewed

AirAsia Malaysian IFRS Annual Report

Air Berlin EU IFRS Annual Financial Report

Air Canada Canadian GAAP Annual Report

Air China IFRS Annual Report

Air France-KLM Group EU IFRS Annual Financial Report

Alaskan Air Group US GAAP Form 10-K

All Nippon Airways Japanese GAAP Annual Report

AMR Corp (American Airlines) US GAAP Form 10-K

Cathay Pacific Airways Hong Kong IFRS Annual Report

China Eastern Airlines IFRS Annual Report

China Southern Airlines IFRS Annual Report

Delta Airlines US GAAP Form 10-K

Deutsche Lufthansa Group EU IFRS Annual Financial Report

easyJet EU IFRS Annual Report and Accounts

Emirates Airlines IFRS Annual Report

International Airlines Group (BritishAirways and Iberia)

EU IFRS Annual Report and Accounts

Japan Airlines (JAL) Japanese GAAP Annual Financial Report

JetBlue Airways US GAAP Form 10-K

Korean Air Lines Korean GAAP Annual Financial Report

Qantas Airways Australian IFRS Annual Report

Ryanair IFRS Annual Report and Form 20-F

Scandinavian Airlines System IFRS Annual Report & Sustainability ReportSingaporean Airlines Singaporean IFRS Annual Report

Southwest Airlines US GAAP Form 10-K

TAM Linhas Areas IFRS Form 20-F

Thai Airways International Thai GAAP Annual Report

Turkish Airlines CMB IFRS Annual Report

United Continental Holdings US GAAP Form 10-K

US Airways US GAAP Form 10-K

Reporting for relevant period included in survey


33/36



34/36


Appendix 2: KPMG Contacts

For more information, please contact a professional from the

following KPMG member firms.

Global Leadership

Dr Ashley Steel

Global Chair Transport

15 Canada Square

London, E14 5GLU.K.T: +44 20 7311 6633E: [email protected]

Malcolm Ramsay

Global Head of Aviation

10 Shelley Street

Sydney 2000AustraliaT: +61 2 9335 8228E: [email protected]

Contact Us

Argentina

Eduardo H Crespo

+54 11 4316 5894

[email protected]

Australia

Malcolm Ramsay

+ 61 2 9335 8228

[email protected]

Belgium

Serge Cosijns

+32 3 821 18 07

[email protected]

BrazilMauricio Endo

+55 11 3245 8322

[email protected]

Canada

Laurent Gigure

+1 514 840 2393

[email protected]

Chile

Alejandro Cerda

+56 2 798 [email protected]

China

Jeffrey Wong

+86 21 2212 2721

[email protected]

Cyprus

Sylvia Loizides

+357 25869104

[email protected]

Czech Republic

Eva Rackova

+420 222 123 121

[email protected]

DenmarkJesper Ridder Olsen

+45 7323 3593

[email protected]

Finland

Pauli Salminen

+358 20 760 3683

[email protected]

France

Philippe Arnaud

+33 1 5568 [email protected]

Germany

Steffen Wagner

+49 69 9587 1507

[email protected]

Greece

Dimitra Caravelis

+30 2106062188

[email protected]

Hong Kong

Shirley Wong

+852 2826 7258

[email protected]

HungaryZoltan Szekely

+36 1 887 7394

[email protected]

India

Manish Saigal

+91 22 3090 2410

[email protected]

Indonesia

David East

+62 [email protected]


35/36


Ireland

Michele Connolly

+353 1 410 1546

[email protected]

Israel

Guy Aharoni

+972 4 861 4801

[email protected]

Italy

Alessandro Guiducci

+39 010 553 1913

[email protected]

Japan

Atsuki Kanezuka

+81 3 3266 7002

[email protected]

Korea

Ha Kyoon Kim

+82 2 2112 0271

[email protected]

Luxembourg

Philippe Neefs

+35222 5151 5531

[email protected]

Malta

Pierre Portelli

+356 2563 1132

[email protected]

Malaysia

Hasmanyusri Yusoff

+60377213388

[email protected]

Mexico

Alejandro Bravo

+525552468360

[email protected]

Netherlands

Herman van Meel

+31 20 656 7222

[email protected]

New Zealand

Paul Herrod

+64 9 367 5323

[email protected]

Norway

John Thomas Srhaug

+47 4063 9293

[email protected]

Peru

Victor Ovalle

+5116113000

[email protected]

Poland

Andrzej Bernatek

+48225281196

[email protected]

Portugal

Joo Augusto

+351 210 110 000

[email protected]

Russia

Alexei Romanenko

+7 495 663 8490 ext.12694

[email protected]

Saudi Arabia

Ebrahim Baeshen

+96626581616

[email protected]

Singapore

Wah Yeow Tan

+65 6411 8338

[email protected]

South Africa

Dean Wallace

+27 83 251 9585

[email protected]

Spain

David Hohn

+34 91 456 3886

[email protected]

Sweden

Anders Rostin

+46 8 723 9223

[email protected]

Switzerland

Marc Ziegler

+41 44 249 20 77

[email protected]

Taiwan

Fion Chen

+886 2 8101 6666

[email protected]

Turkey

Yavuz Oner

+90 216 681 90 00

[email protected]

U.K.

Ashley Steel

+44 20 7311 6633

[email protected]

U.A.E.

Andrew Robinson

+9 71 4356 9500

[email protected]

U.S.A.

Chris Xystros

+1 757 616 7009

[email protected]

Uruguay

Rodrigo Ribeiro

+59829024546

[email protected]

Vietnam

John Ditty

+84 8 3821 9266

[email protected]


36/36

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely

information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without

appropriate professional advice after a thorough examination of the particular situation.

2013 KPMG International Cooperative (KPMG International), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG Internationalprovides no client services No member firm has any authority to obligate or bind KPMG International or any other member firm vis vis third parties nor does KPMG International have any such

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