4 topics 1. Current situation 2. Changing industry structure 3. Macro-economic risks to the outlook 4. Policy risks

1

• One unusual feature of aviation markets is the strong divergence between a robust expansion in air travel and the shrinkage of air freight since peaking in early 2010, after rebounding sharply from the recession

• In past cycles weakness in air freight has been a leading indicator of weakness in air travel. That has not been the case this time.

2

• The reason is in large part due to the pattern of recent economic growth. The bulk of economic growth has come from emerging markets, rather than the US or Europe. This has meant more demand for bulk commodities rather than the high value low volumes consumer goods that usually travel by air. This has favored sea over air transport for freight, but air travel continued to be supported by continued economic growth.

3

• This can be seen as world trade continued to expand while air freight declined over the past 2 years. There has been a significant switch in transport modes for freight.

4

• Business confidence is lower than 2010 when the airline business saw good profits and strong air travel growth. Nevertheless, business confidence remain much stronger than 2009 and sufficient to support business travel growth and global RPKs in the 3-4% range.

5

• There is a lot of variation within the aggregate air travel number. • On domestic markets China continues to expand very strongly, after a slowdown

earlier this year. • By contrast Indian markets have gone into sharp reverse in 2012, following the

problems of Kingfisher and the slowdown of the Indian economy • The US market has barely moved, indicating its maturity and the sluggishness of

the economy • In Japan the domestic market has never recovered to pre-earthquake levels and is

currently slowly in decline

6

• On international markets the Middle East airlines continues to expand at a rapid pace, taking share of long haul markets and developing new E-W markets between Africa and Asia

• Followed by the Latin American airlines, boosted by strong trade and relatively strong economies

• North American airlines have reversed the expansion on international markets seen after the recession

• Asia-Pacific airlines, despite the economic strength of their region, have seen the second weakest expansion over the past 5 years.

7

More importantly world economic growth is weak - Close to the 2% stall speed at which, in the past, airline industry profits have turned to loss

8

High fuel prices/weak growth Yet large airlines are doing relatively well with EBITDA 10-15% revenues Even European airlines – with the Eurozone crisis in home markets – are generating as much cash as the US industry Sign that consolidation/restructuring is working

9

However, those exposed to cargo are having a hard time Markets and asset utilization continues to decline

10

The opposite is true in the passenger business with growing markets and sustained high asset utilization – the most obvious sign of consolidation

11

One of the positive outcomes of the 2008 financial crisis is that start-ups have not been able to get funding. The usual high level of new entrant airlines has fallen sharply in the past 2-3 years

12

Consolidation is also evident on domestic markets Not just the US – where merger has brought about consolidation - but also India and Japan

13

• Airline profits were squeezed in 2011 and 2012 by the slowdown in world trade and the rise in oil prices. Both are expected to ease in 2013, allowing some improvement in travel, cargo and airlines profits.

14

• After 2 years of decline a small rise of air freight volumes are expected in 2013 • Passenger numbers are forecast to continue to expand in 2013 moving above the

3 billion mark to 3.1bn.

15

• Our central forecast is for airline net profits to improve from (a revised) $6.7bn this year to $8.4bn in 2013.

• Asia-Pacific airlines retain the strongest margins in 2013, N American airlines are the most improving region. Europe, hampered by the Eurozone crisis, can manage no better than breakeven.

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Tried to quantify these economic risks - Impact on traffic on horizontal axis - Impact on margins on vertical axis Biggest risk remains Europe - Many could take 2% point off traffic and margins Some upside risk - More downside risk than upside

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