Supportable Capacity

2

Objective

• Understand Network Planning and Capacity

Management

• How the game is played

• How fleet impacts the playing field

• Why it is flawed

3

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)

4

Revenue Share

Service Level Share

Largest Carrier Receives A Revenue Efficiency

Illustrative

5

Revenue Share

Service Level Share

Number Two Carrier In A City Will Generate

Revenue Shares Roughly Equal To Its

Capacity Share

Illustrative

6

Revenue Share

Service Level Share

Third And Subsequent Carriers Receive Less Than Their Fair Share Of Revenue

Illustrative

7

Major Carrier Business Model

2001 Strategic Plan

Growth

Revenue

Efficiency

City

Presence

Schedule

Strength Products

and

Services

Frequent Flyer

Loyalty

Profits

Supportable

Capacity

8

Supportable Capacity Model

Supportable

Capacity

Carriers’ absolute

operating cost

Blended profit

objectives of

operating

carriers

Local market size

of hub(s) served

Local Demand At Major Hub Cities

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

Daily Passengers (Based on 2001 traffic and May 2001 OAG Schedule)

1292

516

1218

1085

596

546

659

671

561

472

321

219

600

564

186

320

Numbers indicate

average daily jet

departures

10

Supportable Capacity Model

Supportable

Capacity

Carriers’ absolute

operating cost

Blended profit

objectives of

operating

carriers

Distance to the hub

cities

Local market size

of hub(s) served

11

Colorado Springs To Chicago

COS

ORD

911 miles

Departures: 6

Hours: 14

Seats: 882

12

Colorado Springs To Denver

DEN

COS

67 miles

Departures: 23

Hours: 14

Seats: 3,381

13

Supportable Capacity Model

Supportable

Capacity

Carriers’ absolute

operating cost

Blended profit

objectives of

operating

carriers

Distance to the hub

cities

Local market size

of hub(s) served

Number of

Connections

At Hub

14

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

15

All Major Airlines Rely Heavily on

Connections

Local and O&D Traffic for Industry, TME 06/2000

0%

25%

50%

75%

100%

HP AA CO DL NW UA US Industry

(exc.

WN)

Connect

Local

Source: 2001 Hub Factbook, Salomon Smith Barney

16

United’s Washington - Europe

Traffic Composition

63 60

91

5179

45 49

157

47

71

103

90

11686

29

114

5758 36

32

21

Amsterdam Frankfurt London Munich Paris Milan Brussels

Local

PAX

Online

Connect

(UA-UA Only)

Offline

Connect

Source: PRIMS/PRS, TME 03/2001

249

221 220 213 205

156

Total

193

17

Supportable Capacity Model

Supportable

Capacity

Carriers’ absolute

operating cost

Blended profit

objectives of

operating

carriers

Distance to the hub

cities

Local market size

of hub(s) served

Number of

Connections

At Hub

Express

Connections

SEA

Connections Determine Who Flies the

Market

BA UA

Local 118 118

Connects 133 37

LHR

Illustrative

19

Supportable Capacity Model

Supportable

Capacity

Carriers’ absolute

operating cost

Blended profit

objectives of

operating

carriers

Distance to the hub

cities

Local market size

of hub(s) served

Number of

Connections

At Hub

Code share

feed Express

Connections

FRA

ORD

Alliances Provide New Traffic Sources

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

21

FRA

YYZ

Alliances Provide New Traffic Sources

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

22

Air Canada

Toronto - Frankfurt Passenger Mix

Source:MIDT

* Jan-Mar 99-02

-

50

100

150

200

250

300

1999 2000 2001 2002

local Connections

23

Supportable Capacity Model

Supportable

Capacity

Carriers’ absolute

operating cost

Blended profit

objectives of

operating

carriers

Distance to the hub

cities

Local market size

of hub(s) served

Number of

Connections

At Hub

Code share

feed

City Presence

Express

Connections

24

Working Together Allows More

Effective Competition At Heathrow

British Airways Star Alliance

Daily Departing Seats

Air New Zealand

ANA

Varig

Thai

Austrian Airlines

Singapore Airlines

Air Canada

SAS

United Airlines

Lufthansa

British Midland International

Source: OAG, April 2001

25

Revenue Share

Service Level Share

Largest Carrier Receives A Revenue Efficiency

Illustrative

26

Revenue Share

Service Level Share

Number Two Carrier In A City Will Generate

Revenue Shares Roughly Equal To Its

Capacity Share

Illustrative

27

Revenue Share

Service Level Share

Third And Subsequent Carriers Receive Less Than Their Fair Share Of Revenue

Illustrative

How is the game played?

29

American At Little Rock

LIT DFW

BNA

30

Delta At Little Rock

LIT

DFW

ATL

Delta At Little Rock

DFW

LIT

ATL

CVG

American At Little Rock

LIT

DFW

33

United At Lincoln

LNK ORD

DEN

34

Major Carrier Business Model

2001 Strategic Plan

Growth

Revenue

Efficiency

City

Presence

Schedule

Strength Products

and

Services

Frequent Flyer

Loyalty

Profits

Supportable

Capacity

35

INDUSTRY DEMAND BY AIRPORT

UA WN DL AA CO US NW

United Is In A Superior Position

Source: OAG/T100, United Estimates

IAD

DEN

SFO

ORD

LAX PHX

LAS

BWI MDW

SAN SJC

MCI OAK HOU

BNA MSY DAL

SLC

CVG

DFW

ATL

MIA

DFW

ATL

CLE

IAH

EWR PHL

CLT

PIT BWI MEM

MSP

DTW

36

INDUSTRY DEMAND BY AIRPORT

UA WN DL AA CO US NW BA

British Airways Is Not

Source: OAG/T100, IATA Passenger Forecast, United Estimates

IAD

DEN

SFO

ORD

LAX PHX

LAS

BWI MDW

SAN SJC

MCI OAK HOU

BNA MSY DAL

SLC

CVG

DFW

ATL

MIA

DFW

ATL

CLE

IAH

EWR PHL

CLT

PIT

BWI MEM

MSP

DTW

LHR

37

Potential of Global Alliances

$0

$25

$50

$75

$100

StarAlliance oneworld Wings* SkyTeam

Reven

ue (

$B

)

Source: 2000 Revenue forecast

* Anticipated Alliance based on November 2000 announcement by NW

City Revenue Of Industry At Hubs Of Each Airline:

38

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)

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

Local 53 68

Behind IAD 2 175

Beyond AMS 164 11

Bridge 5 6

Total 224 260 Source: T100/CRS, 2000

*Behind EWR

CO

75

86*

5

10

176

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

Less revenue

per flight

Flight added

with Low

trip cost aircraft

More flights

Large aircraft

flights become

less profitable

Large aircraft

flights cancelled

Traffic reflows

to remaining

flights

Higher revenue

per Flight

Fragmentation Game

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

Less revenue

per passenger

Flight added

With Low

seat cost aircraft

Fares lowered

to help fill large

aircraft

Breakeven

load factor

increases

Low demand

flights cancel

Traffic reflows

to remaining

flights

Higher revenue

per Flight

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

58

Supportable Capacity (psgrs per departure)

CO - EWR

LCL 68

CNX 22

TTL 90

NW - MSP

LCL 34

CNX 55

TTL 89

AA - DFW

LCL 31

CNX 62

TTL 93

UA - ORD

LCL 46

CNX 51

TTL 97

HP - PHX

LCL 40

CNX 45

TTL 85

AS - SEA

LCL 62

CNX 26

TTL 88

DL - ATL

LCL 36

CNX 83

TTL 119

US - CLT

LCL 16

CNX 64

TTL 80

UA - SFO

LCL 69

CNX 36

TTL 105

59

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

• Driving more profits,

supporting more growth

Increased

Profit

Higher

Loads

More Connecting

Traffic

Flights

Added Products

and

Services

Connections

Created

60

Ye Olde Supportable Capacity Model

Supportable

Capacity

Carriers absolute

operating cost

Blended profit

objectives of

operating

carriers

Distance to the

hub cities

Local market size

Number of

Connections

Regional

Connections

61

Competitive Standing Of Airports

A320 Airport Related Costs

0

500

1000

1500

2000

2500

YYZ JFK DTW SFO YHZ YEG ORD YWG YOW LAX YUL YVR YYC MIA ATL

Co

st

Pe

r O

pe

rati

on

Landing Fees Passenger Charges

62

Significant Cost Difference Will Drive A

Capacity Change

Variable Operating Cost

0

1000

2000

3000

4000

5000

6000

7000

YYZ JFK DTW SFO YHZ YEG ORD YWG YOW LAX YUL YVR YYC MIA ATL

Co

st

Fo

r O

ne

Ho

ur

Tri

p

Varible Operating Cost

37% 48%

63

Industry Annual Seats Per Capita,

Connection %

NYC

3.4

22%

CLT

14.4

64% DAL

11.2

62%

SEA

6.3

26%

PHX

10.4

45%

SFO

6.9

36%

ORD

7.5

51%

ATL

16.4

83%

MSP

8.4

55%

CITY

SEATS/POP.

CNX %

YYZ

3.6

44%

64

Canada’s Higher Cost Structure Stunts

Growth

ORD

7.5

ATL

16.4

CLT

14.4

DFW

11.2

City

Seats/Pop

YUL

2.1

YYC

6.0

YVR

5.0

YYZ

3.6

City

Seats/Pop

65

Costs Do Impact Service Levels

Departure seat per capital (based on 2005 population & Jun OAG, seat

annulized)

11.9

9.8

7.7 7.77.1

6.7 6.7 6.7 6.7

5.6 5.5 5.24.5 4.3 3.8 3.8 3.6 3.4

2.4 2.1

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

ATL SFO PHX DFW YYC CHI HOU YHZ SEA YVR IAD DTW LAX BOS NY YYZ YEG YWG YOW YUL

Extra Slides

67

Traffic composition for YYZ

international routes

Source: AC data May 2002

Toronto International Traffic Composition

0

50

100

150

200

250

300

CDG FCO FRA GLA LHR MAD MAN MUC ZRH

Local Dom Cnx Trb Cnx Other Cnx

68

Traffic composition for YVR international routes

Source: AC data May 2002

Vancouver International Traffic Composition

0

50

100

150

200

250

300

HKG ICN KIX NGO NRT PEK PVG TPE

Local Dom Cnx Trb Cnx Other Cnx

69

The Breakdown Of YYZ Traffic

Top 10 YYZ Domestic Routes Traffic Composition

-

20

40

60

80

100

120

140

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

United Airlines

Chicago - Frankfurt Passenger Mix

Source: PRS

* Jan-Apr 2001

0

100

200

300

400

500

600

700

800

900

1000

'93 '94 '95 '96 '97 '98 '99 '00 '01 *

Dail

y

Passen

gers

('0

00s)

0

1

2

3

4

5

6

7

8

9

10

Dail

y D

ep

art

ure

s

Locals Connections Departures

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.

73

Supportable Capacity Model

Supportable

Capacity

Carriers’ absolute

operating cost

Blended profit

objectives of

operating

carriers

Distance to the hub

cities

Local market size

of hub(s) served

Number of

Connections

At Hub

Code share

feed

City Presence

Express

Connections

74

Revenue Share

Service Level Share

Largest Carrier Receives A Revenue Efficiency

Illustrative

75

Revenue Share

Service Level Share

Number Two Carrier In A City Will Generate

Revenue Shares Roughly Equal To Its

Capacity Share

Illustrative

76

Revenue Share

Service Level Share

Third And Subsequent Carriers Receive Less Than Their Fair Share Of Revenue

Illustrative

Air Canada Faces Tough Competition

EWRDCA

ATL

ORDLAX

DTW

LHR

IAH

PHL

DFW

DFW

ORD

MSP

CLE

BWI

MCOMIA

SFO

MEM

CLT

CVG

DEN BWI

UA WN DL AA US CO NW AC

SJUSC

IAD

PITST

L

BNADA

LHOU

MDW

OA

K

PHX

LASYYZ

YVR

YUL YY

C

78

Supportable Capacity Model

Supportable

Capacity

Carriers’ absolute

operating cost

Blended profit

objectives of

operating

carriers

Distance to the hub

cities

Local market size

of hub(s) served

Number of

Connections

At Hub

Code share

feed

City Presence

Express

Connections