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Open Skies – Impacts & Outlooks

Presented by:

Jon F. Ash

President InterVISTAS-ga2 Consulting Inc.

1615 L Street, NW, Suite 910Washington, DC 20036

jon_ash@intervistas.us

Spring MeetingLos Angeles, California

March 20, 2008

1

Outline

BackgroundBilateral “Open Skies”Evolution of NegotiationsMarket RespondsSecond Stage-Outlook

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Background

3

History of Bilateral Agreements

In 1944, Chicago Convention created to provide a framework where international civil air transport could develop. Multilateralism rejected by British.Subsequent bilateral agreements ensured the viability of national carriers; regulated capacity, number of carrier designations, routings, pricing, etc.Consumers were not the ultimate beneficiary.

4

Types of Bilateral Agreements that have evolved over the years

Bermuda I (1946)U.S. and the U.K.

Bermuda II (1977)U.S. and the U.K.

Open Skies (1992)First one between U.S. and Netherlands (many countries added later)

MALIAT multilateral (2001)U.S., Singapore, Brunei, Chile, New Zealand –predecessor to U.S.-EU Open Skies

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Bilateral Open Skies

6

The U.S. currently has 91 Open Skies partners

Africa20 agreements

including Egypt, Ethiopia, Senegal,

Namibia, etc.

Asia/Pacific24 agreements

including Korea, New Zealand, UAE,

Thailand, Pakistan, Singapore, India, etc.

North, Central, South America14 agreementsincluding Canada,

Chile, Peru, Jamaica, Costa Rica, etc.

Europe33 agreements

including EU member states*, Switzerland,

Ukraine, etc.

Prior to Negotiations, The U.S. had 77 agreements*33 agreements includes separate agreements with all member states

7

The U.S. had Open Skies agreements with many European Countries—Pre U.S.-EU

Major countries such as UK, Ireland, Spain and Greece were operating under controlled regimes.Carriers from “Open Skies” partner countries are allowed to participate in anti-trust immunity relationships.

8

Barriers to moving beyond bilateral “Open Skies”

Nationality clauseRestrictions on foreign ownership and control of domestic carriersRight of establishment7th Freedom rightsCabotageFly AmericaWet LeasingCivil Reserve Air Fleet (US)Some of these would require significant U.S. legislative change

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Evolution of Negotiations

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Real world barriers. Why did the U.S. and EU look to begin negotiations?

European Court ruled that individual bilateral “Open Skies”agreements with US violated the Treaty of Rome nationality clause.Markets including UK, Spain, Ireland and Greece were not “Open Skies” partnersCarriers from both sides continued to disagree with restrictions at London Heathrow, Shannon Stop rule, etc.Brussels (the Commission) wanted to control the aviation regulatory environment.

11

First Stage Agreement

In June 2004, the EU Council of Transport Ministers rejected the proposed first stage agreement as “imbalanced”The Council directed the Commission to return to the negotiating table to rectify the “imbalance.”

12

Changes between 2004 and 2007 Agreements

Language on ownershipFranchising capabilitiesWet Leasing Agreement to begin Phase II negotiations

Pressure of ECJ ruling prompted the Commission to deliver an agreement.

13

Practical Impacts of Agreement

Opens London Heathrow to all Carriers

Slots selling for $25 million/pair

CREATE “CARRIER OF THE COMMUNITY”

Carriers may now operate what was formerly 7th

freedom services.Eliminates Treaty of Rome violation (ECJ decision)

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Market Responds

15

Current U.S. nonstop gateways to Europe by Departures

75% of all departures are from 8 airports with more than 20 average daily departures

20LAX22BOS24PHL29IAD30ATL39ORD62EWR86JFK

ADD*Airport

+20 ADD

8-19ADD

1-7 ADD

SFO

LAS

PDX

SEA

LAX

PHX

DEN

MSP

DFW

IAH

MEM

ORD

DTW

CLE

CVG

CLT

RDU

IAD

ATL

SFB

TPA

RSW MIA

BWI

PHLEWR

JFK

BDL

BOS

MCO

SLC

Source: OAG June 2008, Fifth Freedom Operations not includedADD is Average Daily Departures

16

Current European nonstop gateways to the United States by Departures

52% of all departures are from 4 airports with more than 25 average daily departures

37AMS43FRA46CDG92LHR

ADD*Airport

Source: OAG June 2008, Fifth Freedom Operations not includedADD is Average Daily Departures

+20 ADD

8-20ADD

1-7 ADD

SNNDUB

BFS EDIGLA

KEFOSL

ARN

HEL

WAWKRK

PRG

OTP

ATH

BUDVIE

TXLHAM

CPH

AMSDUS

CGNFRA

STRBRU

CDGGVA ZRH

MUC

VCEMXPPSA

FCO

NCEBCNMADLIS

OPO

MANSTN

LHRLGWBRS

BHX

17

U.S. – North Atlantic Passengers

U.S. - United KingdomU.S. - GermanyU.S. - FranceU.S. - NetherlandsU.S. - ItalyU.S. - IrelandU.S. - SpainU.S. - SwitzerlandU.S. - BelgiumU.S. - Other Europe

Total U.S. - Europe

17,2189,3236,2424,6652,8952,0751,9261,568

7754,405

51,092

Source: U.S. DOT T-100, YE Comparisons of September 2007

33.7%18.2%12.2%9.1%5.7%4.1%3.8%3.1%1.5%8.6%

100.0%

0.7%6.6%

(1.8)%2.8%8.4%6.4%

15.2%10.9%6.7%

10.8%

3.9%

Market 2007 Passengers (000)

% of Total

2006-2007Growth Rate

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U.S. – Europe Nonstop Structure

4.2%100%730,447Total

-1.0%20.4%149,330Other0.0%4.7%34,370US Airways

28.6%5.7%41,776Northwest-0.1%6.1%44,767Virgin Atlantic0.6%6.6%48,098Air France6.2%7.0%50,792United0.3%8.3%60,398American3.4%8.8%64,249Continental8.0%10.0%73,148Lufthansa2.4%10.7%78,139British Airways

11.5%11.7%85,380Delta

% Change from 2006% ShareSeats/Week

Each WayCarrier

Source: OAG June 2007/2008, Does not include transatlantic service to Russia, Middle East, Israel, North Africa

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U.S. – Europe Frequency Comparisons

Frequencies by Alliance Grouping

38%

22%27%

13%

41%

21%26%

12%

0%

10%

20%

30%

40%

50%

Perc

enta

ge

2007 Frequencies2008 Frequencies

Other

Source: OAG June 2007/2008, Does not include transatlantic service to Russia, Middle East, Israel, North Africa

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Most changes have taken place in the U.S. – London market.

Heathrow

Luton

Gatwick

Stansted

City

Many carriers that could only serve Gatwick have announced new Heathrow serviceSome carriers have retained limited service at GatwickSlots at Heathrow costly (most were traded among code-share partners)Stansted growing its role as a favorable gateway to the banking district in LondonBritish Airways has announced new services between City Airport and New York.

21

Notable changes after deal comes into force.

Entering Denver – London Heathrow market

Announced that it will cease all Gatwick Operations in 2008 and shift all flights to

Heathrow

Announced plans to serve New York from Brussels and Paris –”Open Skies”

New York – Paris Orly with Air France as a partner

London Heathrow – Los Angeles nonstop market (partnership with Delta)

Detroit and Minneapolis service to Heathrow, and entry to Seattle – London Heathrow market.

RouteAir Carrier

Note: Some Routes may have been available prior to agreement but are in fact a competitive response to overall rights becoming available

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As expected, service at London Gatwick has decreased …

Carriers Seats Flights

ATL CLE CLT CVG TPA Same Same Same

DTW PHL Same Less Same

IAH Less Less Less

EWR Same Less Less

JFK More Less Less

MCO More More MoreSource: OAG June 2007/2008

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…while London Heathrow has increased.

ATL

BOS

BWI

DEN

DFWDTW

EWR

IADIAH

JFK

LAX

LHR

MIA

MSP

ORD

PHL

PHX

RDU

SEA

SFO

Carriers Seats Flights

ATL DFW IAH MSP RDU

New New New

DEN EWR JFK LAX PHL SEA More More More

BOS BWI MIA PHX SFO

Same Same Same

IAD Same More More

DTW Same More Same

ORD Same Less Less

Source: OAG June 2007/2008

24

Heathrow will be more competitive.

2008 Year-Over-Year Comparisons

9%

19%

25%

-35%

22%

-38%

46%

8%

-60% -40% -20% 0% 20% 40% 60%

Total London

Other

Heathrow

Gatwick

SeatsFrequencies

Source: OAG June 2007/2008, Other includes Stansted, City and Luton Airports

25

Most Heathrow growth has been from U.S. New Entrants.

New Heathrow-U.S. Nonstop Frequencies by Type of Carrier

1.02.93.4

11.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

US New Entrants UK Incumbents US Incumbents Other

Avg

. Dai

ly D

epar

ture

s

Source: OAG June 2007/2008

No new flights from any UK new entrants have been

announced as of today.

SkyTeam Alliance previously had 0% LHR Market Share

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For the most part, drastic changes in the market have not materialized…

As expected, carrier added three new U.S. gateways after “Shannon Stop Rule” phase-out.

No application yet for Antitrust Immunity

Recently announced plans to delay 7th freedom operations from Europe

Only certain unique markets have provided an opportunity for 7th freedom service

No major Transatlantic low-fare announcement has been made yet

Delaying start of UK – US scheduled nonstop services from Heathrow

ActionAir Carriers

27

Partnerships on the transatlantic continue to evolve.

Smaller alliance members could be acquired by larger carriers:

BA IberiaLufthansa Swiss, AustrianAir France Alitalia

New types of marketing and investment alliances could develop further

Aer Lingus & JetBlueLufthansa & JetBlue

28

European majors may seek a role in potential U.S. airline mergers.

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Second Stage-Outlook

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Second Stage Negotiations begin in May 2008 in Slovenia.

Priority Items for discussionsFurther liberalization of traffic rightsAdditional foreign investment opportunities Effect of environmental measures and infrastructure constraints on traffic rights Further access to Government-financed air transportation (FLY-America)Provision of aircraft with crew (Wet-leasing)

31

What other issues are tied to the Second Stage and beyond?

“What-if scenarios”Current agreement reads: “if no second stage agreement has been reached by the Parties within twelve months of the start of the review, each Party reserves the right thereafter to suspend rights specified in this Agreement .”Additional parties to the multilateral regime

Switzerland, Canada, New Zealand, Singapore, Morocco

Joint Committee established to oversee rights in current agreement

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