International AirlinesPresented By:

Zaki KasmaniDavid Tran

Laurence WongCecilia Fan

Spring 2006Business 417

Industry Outlook

Just Kidding!OR??

Basic Definitions ATK (Available Tonne Kilometres) :

Used to measure available total capacity (combined passenger and cargo) ASK (Available Seat Kilometers):

The number of seats an airline has available multiplied by the number of kilometers they are flown Used to measure airline capacity

RPK (Revenue Passenger Kilometers): The number of passengers multiplied by the number of kilometers they are flown Used to measure actual passenger traffic

PLF (Passenger Load Factor): % of ASK used

FTK (Freight Tonne Kilometers): Used to measure actual freight traffic

UNIT COST: The average operating cost incurred per ATK

YIELD: The average amount of revenue received per RPK, net of taxes Revenue divided by RPK Represents an aggregate of all the airfare and airline charges and measured on a per kilometer

basis LOAD FACTOR:

RPK divided by ASK The percentage of seating or freight capacity that is utilized. Computed as the ratio of RPK to ASK

or in the case of cargo services, RTK to ATK BREAK-EVEN LOAD FACTOR:

The Load Factor when operating revenues is equal to operating costs Unit Cost divided by Yield

Types of Airlines

• Legacy: International & National traditional airlines (ie: British Airways, Delta Airways)

• Discount: Regional (Europe) or National (US) (ie: Easyjet, Southwest)

• Cargo

Airline CharacteristicsCapital intensive industry (highly

leveraged)Largest operating costs: Labour & FuelHistorically low labour productivityVery sensitive to global business

cyclesVery competitiveSensitive to geopolitical events ie: 9-

11, SARS, etc

Types of RoutesPoint to point (linear): direct flight to

destination (low-cost/discount model)Hub and spoke: connection flight

(traditional model) Hub: airport that is used as a transfer point Spoke: routes that airplanes take

Past & Present Injuries Deregulation (October 28, 1978) Terrorist attacks (Sept 11, 2001) The collapse of the dotcom bubble (late 1990) The war in Iraq (2003 - present) The SARS epidemic in Asia (start November

2002) Fiercer competition from new low-cost carriers High taxation Rise in oil price

Future Threats Additional terrorist attacks Future price of oil Further competition from regional airlines Security impact on cost and travel

convenience Decrease in consumer confidence World economy Business cycle Debt (airline industry’s debt load exceeds

the US industry average) Aircraft cost & maintenance

Bankruptcy Protection 2002-2005: Majority of US legacy airlines

entered & emerged from Chapter 11; some still working through restructuring (Delta)

Focus was cost reduction: reduced labour costs, pension restructuring, capital restructuring (fleet overhaul to cheaper, more fuel efficient aircraft – avoid the Jetsgo predicament)

Airlines include: Delta, American Airlines, Northwest, United

Growth Projections

Global Traffic Outlook

Historical Data

-20,000,000

0

20,000,000

40,000,000

60,000,000

80,000,000

100,000,000

120,000,000

140,000,000

160,000,000

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Total Operating Revenues

SOURCE: Bureau of Transport Statistics

Historical Data

-20,000,000

0

20,000,000

40,000,000

60,000,000

80,000,000

100,000,000

120,000,000

140,000,000

160,000,000

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Total Operating Revenues Operating Profit or Loss

Total Operating Expenses

SOURCE: Bureau of Transport Statistics

Fuel Costs

Airline Fuel Cost

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Year

Domistic Total Cost ($) International Total Cost ($) All Cost ($)

$ per gallon

SOURCE: Bureau of Transportation Statistics

Fuel Costs

Airline Fuel Consumption

0

5000000000

10000000000

15000000000

20000000000

25000000000

30000000000

35000000000

40000000000

45000000000

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Year

Domistic Total Gallons International Total Gallons All Gallons

SOURCE: Bureau of Transportation Statistics

Labour CostsAverage Wages and Salary Accruals per Full-Time Equivalent Employee by Transportation Industry (Current $)  

  1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 Cumulative Growth

All industries 27,326 28,672 29,444 30,177 31,034 32,087 33,490 35,201 36,754 38,846 42.16%

Transportation, total 30,018 31,575 31,392 31,946 32,283 33,074 34,407 35,907 37,178 38,484

Air 34,487 36,058 35,852 36,257 36,419 36,989 38,691 40,441 42,523 43,820 27.06%

Trucking and warehousing 26,921 28,336 28,293 29,112 29,605 30,342 31,754 32,949 34,007 35,024   

Local and interurban passenger transit 18,064 18,950 18,955 19,504 19,980 20,648 21,219 22,008 22,792 23,745   

Railroad 45,893 50,267 50,440 51,719 50,465 55,299 57,235 60,632 60,623 62,673   

Water 34,703 36,311 36,833 37,357 37,769 38,857 40,329 42,317 43,436 44,980   

Pipelines, except natural gas 47,000 51,526 50,421 54,647 58,186 54,782 58,881 64,991 65,379 66,540   

Transportation servicesc 27,169 28,534 28,792 29,588 30,801 31,511 32,794 34,603 36,204 38,602   

Aggregate Economy 24,565 25,646 26,374 26,936 26,998 27,789 28,808 29,744 30,618 31,949 30.06%

SOURCE : U.S. Department of Commerce, Bureau of Economic Analysis, National Income and Products Accounts, tables 6.6b and 6.6c, Internet site http://www.bea.doc.gov/bea/dn1.htm available as of Feb. 17, 2004

AGGREGATE ECONOMY DATA SOURCE: US Bureau of Labour Statistics

Labour CostsCareer/Industry Group Minimum Salary   Average Salary   Maximum Salary  

Airport $25,000.00 $43,722.70 $79,200.00

AP Mechanic $14,137.20 $44,504.22 $75,000.00

Avionics $18,000.00 $48,191.44 $150,000.00

Computer $35,322.00 $52,957.83 $70,543.00

Dispatch $25,000.00 $32,000.00 $55,000.00

Engineering and Aerospace $20,000.00 $67,484.60 $115,000.00

Executive $60,000.00 $72,500.00 $80,000.00

Flight Attendant $16,800.00 $17,099.00 $24,000.00

Ground-Ramp $50,000.00 $57,500.00 $65,000.00

Management $16,476.00 $62,024.21 $120,000.00

Office and Administrative $14,137.20 $33,479.23 $64,728.00

Other $20,000.00 $36,950.00 $56,800.00

Pilot $14,137.10 $52,061.39 $110,000.00

Sales-Marketing $30,000.00 $52,750.00 $80,000.00

Source: Aviation Career & Salary Ranges - Aviation Jobs (www.avjobs.com)

Labour Cost Implications

More median salaries above average than below = higher overall salary cost than for economy in general

Wide range in salaries, unionized labour; senior international route pilots can earn up to $190,000 USD per year

Majority of pensions are defined benefit: higher salaries = significantly higher pension obligations

Barriers to Operations

Airports: generally locally owned authorities, lease out gates to airlines for long terms

Exclusive use, preferential use, or common use

Signatory airlines receive preferential rates vs. non signatory (most new entrants). ie: Pittsburgh Int’l Airport non signatory rates min. 20% higher

FAA mandates that gate access be granted in a fair and non-discriminatory manner. Regulations should only maintain safety, not encourage dominance

Gate access at airports can be a significant barrier

Barriers to Operations

In practice, established airlines can exercise significant dominance: gates are usually assigned via non market practices (bidding). Ability to bid depends on access. Large airlines can make contributions to/lobby municipal governments to restrict competing airlines’ access to airport

Majority in Interest (MII) clauses grant airlines rights to approve airport capital improvement plans (can restrict expansion to maintain monopoly access to a “hot” airport)

Barriers to Operations

FAA is currently reviewing gate lease practices in an attempt to make access more equitable. However, oversight still lies with the airport owner (local authority)

Therefore, a carrier’s ability to grow may not be determined by its cost efficiency but rather by its ability to land at high traffic destinations

Bottom Line

Airlines MUST reduce costs to achieve a return to sustained

profitability.

Cost Minimization Strategies Oil price forecasted to drop to $45-55 per barrel

range in 2007 (March 22 WTI spot:$60.82)

Cost Minimization Strategies1a) Acquire more fuel efficient aircraft:

Current Long Range Aircraft Fuel Consumption Boeing 747-400 3.5 L/100 passenger KM

(Average)

New Long Range Aircraft Fuel Consumption Boeing 787: 2.4 L/100 passenger KM Airbus A380: 3.0 L/100 passenger KM Airbus A350: 3.0 L/100 passenger KM

Cost Minimization Strategies1b) Acquire more regional jets:

Regional Jets Bombardier CRJ 200 (50 seat): ~3.12L/100

passenger KM Bombardier CRJ 700 (78 seat): ~2.60L/100

passenger KM

All Russian aviation companies now under one banner – United Airplane Company. Focus will now be on Regional Jets, which will be of great demand in Russia.

Cost Minimization Strategies1b) Acquire more regional jets:

• cost savings: Flights at capacity, lower cost (less people required to maintain and fly aircraft)

SOURCE: Bombardier

SOURCE: Bombardier

Cost Minimization Strategies2) Reduce Labour Costs

a) Increase labour productivity through additional training, performance monitoring

b) Decrease salary/pension costs by: • hiring non-union workers where possible (new

divisions) • renegotiating existing salary contracts• phasing out defined benefit pension plans in favour of

defined contribution pension plans

Cost Minimization Strategies3) Refine Business Model

• Legacy airlines can employ 2 models: point to point low cost model on domestic routes traditional hub model on international routes.

Thus far, traditional airlines (especially US based ones) have been entering bankruptcy protection to enable a restructuring that encompasses all 3 strategies.

However, this is not exactly conducive to increasing consumer and investor confidence

Growth Projections

China Traffic Growth

Growth Strategies

• China & India: burgeoning middle class now has resources to

travel. Increased trade and foreign investment means

increased number of foreign business people visiting, and increased frequency of visits

Focus on regions that are expected to yield the highest rate of RPK growth:

Investment Criteria

1) Cost efficiency: • fuel efficient fleet, appropriate business model,

reasonable labour costs (non union, or balanced union power)

• well funded pension obligations (defined contribution superior)

2) Exposure, or plans to operate in future high growth areas (China, India, Latin America)

3) Healthy financial structure; should not be overly leveraged, reasonable CAPX

4) Enough market power to secure additional airport access; ability to “withstand” competition from other carriers at high traffic airports (dominate?)

Given the investors’ current distaste for airlines, bargains could (?) be found

Southwest Airlines

Company Snapshot Listed on: NYSE Symbol: LUV Industry: Regional Airlines Market Cap: $14.14B Stock Price: $17.65 (Closing 03/24/06) Dividend Yield: .02 (0.10%) P/E: 26.23 Shares Outstanding: 804,661,597

Background 1967: Incorporated in Texas (Rollin King and Herb Kelleher) 1971: Commenced service with 3 Boeing 737s serving

Dallas, Houston, and San Antonio Short to medium-haul point-to-point regional carrier Today: 448 Boeing 737s, 61 cities, 31 states 31,729 employees as of January 1, 2006 Posted 33rd consecutive year of profits in 2005 Largest US carrier based on originating US passengers

boarded and scheduled US departures

Mission “Dedication to the highest quality of

customer service delivered with a sense of warmth, friendliness, individual pride, and company spirit.”

“… to provide our employees a stable work environment with equal opportunity for learning and personal growth.”

Key Officers Herbert Kelleher

Position: Founder / Executive Chairman Age: 74 Years of Service: 28

Gary Kelly Position: CEO Age: 50 Years of Service: 20

Colleen Barrett Position: President Age: 61 Years of Service: 28

Quick FactsAverage passenger airfare is $93.68Average passenger trip is 775 milesRanked first in customer satisfactionAdopted the first profit sharing plan in

US airline industry in 1973Employees own at least 10% of stock

Member of fortune 500Received 260,109 resumes and hired

2,766 new Employees in 2005

Destinations

Strengths & Weaknesses Strengths

Known for superior customer service

Low-cost, no-frills Direct one-way

travel Point-to-point

efficiency Largest carrier for

domestic service One fleet type Hedge against

exposure to fuel prices

Only airline rated investment grade

Weaknesses Point-to-point creates

excessive expenditure Too many locations,

administrative costs Risk to shocks in US

economy, since it is a domestic carrier

Operating Expenses2005 Operating Expenses

40%

20%

6%

2%

7%

7%

18%

Wages & Benefits

Fuel

Maintenance

Aircraft rentals

Landing fees

Depreciation &amortization

Other

Fuel CostsFuel Costs

771 762 830

1000

1342

0

200

400

600

800

1000

1200

1400

1600

2001 2002 2003 2004 2005

Year

Co

st

(Mil

lio

ns)

Average Cost Per Gallon

0.71 0.68 0.720.83

1.03

0

0.2

0.4

0.6

0.8

1

1.2

2001 2002 2003 2004 2005

Year

Do

lla

rs

Fuel Strategies Consumed 1.3B gallons of jet fuel in 2005

Hedge on short and long term basis

2005: 85% at $26/barrel crude oil Savings of $892 Million

2006: 65% at $32 2007: 45% at $31 2008: 30% at $33 2009: 24% at $35

Competition and Challenges Increasing low fare and lower cost

competitionRising fuel costsCompetition from surface

transportation in short-haul markets

Risk FactorsBusiness very sensitive to price of fuelBusiness is labour intensive

82% of employees are unionizedRelies heavily on technology for daily

operationsChanges in government regulation can

have a major impact on businessAirline industry is very competitive

Labour UnionsEmployee Group Union CBA Expiry

CSRs AFL-CIO November 2008

Flight Attendants TWU June 2008

Field agents TWU June 2008

Pilots SWPA September 2006

Plane Technicians AMFA February 2009

Mechanics AMFA August 2008

Flight simulator technicians

Teamsters November 2011

Flight instructors SWPIA December 2012

Flight dispatchers SWEA December 2009

Stock clerks Teamsters August 2008

Aircraft Data737 Type Seats Average

Age (Yrs)# of

Aircraft# Owned # Leased

300 137 14.7 194 110 82

500 122 14.7 25 16 9

700 137 3.8 229 224 2

Totals 9.1 448 352 93

Operating Data

($’s in millions) 2005 2004 2003 2002 2001

RPM (000s) 60,223,100 53,418,353 47,943,066 45,391,903 44,493,916

ASM (000s) 85,172,795 76,861,296 71,790,425 68,886,546 65,295,290

Load factor 70.07% 69.50% 66.78% 65.89% 68.14%

Financials

Revenue Composition

Revenue Composition 2005

Passenger

FreightOther

Income StatementIncome Statement (Millions)

  2005 2004 2003 2002 2001

Operating Revenues          

Passenger 7,279 6,280 5,741 5,341 5,379

Freight 133 117 94 85 91

Other 172 133 102 96 85

Total operating revenues 7,584 6,530 5,937 5,522 5,555

Operating Expenses          

Salaries and benefits 2,702 2,443 2,224 1,993 1,856

Fuel and oil 1,342 1,000 830 762 771

Maintenance materials and repairs 430 457 430 390 398

Agency commissions  - -  -  55 103

Aircraft rentals 163 179 183 187 192

Landing fees and other rentals 454 408 372 345 311

Depreciation and amortization 469 431 384 356 318

Other operating expenses 1,204 1,058 1,031 1,017 976

Total operating expenses 6,764 5,976 5,454 5,105 4,925

Operating income 820 554 483 417 630

Net interest and other 54 (65) 225 (24) 197

Income before taxes 874 489 708 393 827

Taxes 326 176 266 152 317

Net Income 548 313 442 241 510

Income Statement HighlightsProfits increase 75% from 2004

33rd consecutive year for profitseffective cost control measuresSuccessful fuel hedging program

Net income fairly erratic

Balance Sheet (1/2)Assets (Millions)

  2005 2004 2003 2002 2001

Current Assets          

Cash and cash equivalents 2,280 1,048 1,865 1,815 2,279

Short-term investments 251 257  - -  - 

Accounts receivables 258 248 132 175 71

Inventories of parts and supplies 150 137 93 86 70

Deferred income taxes  -  -  - -  46

Fuel hedge contracts 641 428 164 113  -

Prepaid expenses and other current assets 40 54 59 43 52,114

Total current assets 3,620 2,172 2,313 2,232 2,520

Non-current assets          

Flight equipment 10,999 10,037 8,646 8,025 7,534

Ground property and equipment 1,256 1,202 1,117 1,042 899

Deposits on flight equipment purchase contracts 660 682 787 389 468

Less depreciation and amortization (3,488) (3,198) (3,107) (2,810) (2,456)

Total non-current assets 9,427 8,723 7,443 6,646 6,445

Other assets 1,171 442 122 76 31

Total Assets 14,218 11,337 9,878 8,954 8,997

Balance Sheet (2/2)Liabilities and Stockholder's Equity

  2005 2004 2003 2002 2001

Current liabilities          

Accounts payable 524 420 405 362 505

Accrued liabilities 2,074 1,047 650 529 548

Air traffic liability 649 529 462 412 450

Aircraft purchase obligations  - -  -  -  222

Short-term borrowings  -  -  - -  475

Current maturities of long-term debt 601 146 206 131 40

Total current liabilities 3,848 2,142 1,723 1,434 2,240

Long-term debt less current maturities 1,394 1,700 1,332 1,553 1,327

Deferred income taxes 1,896 1,610 1,420 1,227 1,058

Deferred gains from sale and leaseback of aircraft 136 152 168 184 192

Other deferred liabilities 269 209 183 134 166

Total Liabilities 7,543 5,813 4,826 4,532 4,983

Stockholder's equity          

Common stock 802 790 789 777 767

Capital in excess of par 424 299 258 136 50

Retained earnings 4,557 4,089 3,883 3,455 3,228

Accumulated other comprehensive income 892 417 122 54 (32)

Treasury stock  - (71) -  -  - 

Total stockholders equity 6,675 5,524 5,052 4,422 4,013

Total liabilities and equity 14,218 11,337 9,878 8,954 8,996

Cash Flow Statement (1/2)Cash flow from operations (millions) 2005 2004 2003 2002 2001

           

Net Income 548 313 442 241 511

Adjustments to net income:          

Depreciation and Amortization 469 431 384 356 318

Deferred income taxes 257 184 183 170 208

Amortization of sale and leaseback of aircraft (16) (16) (16) (15) (15)

Amortization of scheduled airframe inspections 49 52 49 46 43

Income tax benefit from stock options exercises 65 35 41 38 54

Changes in assets and liabilities:          

Accounts and other receivables (9) (75) 43 (103) 67

Other current assets (59) (44) (19) (10) (9)

Accounts payable and accrued liabilities 855 231 129 (149) 203

Air traffic liability 120 68 50 (38) 73

Other (50) (22) 50 (16) 32

           

Net cash flow from operations 2,229 1,157 1,336 520 1,485

Cash Flow Statement (2/2)Cash flow from investing (millions) 2005 2004 2003 2002 2001

Purchases of property and equipment (1,210) (1,775) (1,238) (603) (998)

Change in short-term investment 6 124 (381) - -

Payment for assets of ATA airlines (6) (34) - - -

Debtor in possession loan to ATA airlines - (40) - - -

Other - (1) - - -

Net cash flow from investing (1,210) (1,726) (1,619) (603) (998)

Cash flow from financing          

Issuance of long-term debt 300 520 - 385 614

Proceeds from revolving credit facility - - - - 475

Proceeds from trust arrangement - - - 119 266

Proceeds from employee stock plans 132 88 93 57 44

Payments of long-term debt (149) (207) (130) (65) (111)

Payments of trust arrangement - - - (385) -

Payments of revolving credit facility - - - (475) -

Payments of cash dividends (14) (14) (14) (14) (13)

Repurchase of common stock (55) (246) - - -

Other (1) (8) 3 (4) (5)

Net cash flow from financing 213 133 (48) (382) 1,270

Net change in cash 1,232 (436) (331) (465) 1,757

Cash at beginning of period 1,048 1,484 1,815 2,280 523

Total cash at end of period 2,280 1,048 1,484 1,815 2,280

Cash Flow Analysis

(dollars in millions)

2005 2004 2003 2002 2001

Cash Flow From Operations

2,229 1157 1,336 520 1485

Free Cash Flow

1,019 (569) 98 (83) 487

Cash Flow AnalysisErratic free cash flowCF from operations increased 83%

increase in accounts payableHigher net income in 2005

CF from investing used mainly to purchase new planes33 new planes in 2005

$300M in debt issued in 2005$520M in debt issued in 2004

Stock Chart (1 Year)

Stock Chart (5 Year)

Price Comparison

Profitability ComparisonSouthwest

  2005 2004 2003 2002 2001

ROE (%) 8.21 5.67 8.75 5.45 12.71

ROA (%) 3.85 2.76 4.47 2.69 5.67

Profit Margin (%) 7.23 4.79 7.44 4.36 9.18

Discount Airlines

  2005 2004 2003 2002 2001

ROE (%) 5.83 10.98 5.56 -10.09 24.73

ROA (%) -14.36 -54.38 -14.89 -11.66 -3.45

Profit Margin (%) 6.73 11.6 8.51 10.5 2.46

Industry

  2005 2004 2003 2002 2001

ROE (%) -2.14 -3.37 0.74 27.03 -149.58

ROA (%) -14.36 -54.38 -14.89 -11.66 -3.45

Profit Margin (%) -4.46 1.64 -4.55 -5.82 0.06

Other RatiosSouthwest

  2005 2004 2003 2002 2001

Current Ratio 0.94 1.01 1.34 1.55 1.13

Debt/Equity 0.21 0.31 0.26 0.35 0.33

Discount Airlines

  2005 2004 2003 2002 2001

Current Ratio 1.53 1.81 1.74 1.62 1.33

Debt/Equity 98.33 86.96 97.69 -174.02 -29.77

Industry

  2005 2004 2003 2002 2001

Current Ratio 1.15 1.22 1.15 1.18 1.09

Debt/Equity -77.15 86.72 234.36 -27.41 2,626.20

Recommendation

HOLD

+ Excellent management Proven business strategy 33 consecutive years of profit Steady dividends

- Intense competition Low profit margins Erratic cash flow Seasonal industry

Thank You Come Again!!

Singapore Airlines

Background

• Founded in 1972.• National airline of Singapore.• Second largest carrier by market value.• Full member of global Star Alliance.• Route network reaches out to over 90

destinations in close to 40 countries.• Numerous awards.• Trades in US as an ADR (Symbol: SPAAF).

Global Route Map

Recent Awards

TIMEReaders' Travel Choice Awards 2005Preferred AirlinePreferred First/Business ClassBest Frequent Flyer Programme

Business Traveller (China)Best Airline in the WorldBest Asian Airline Serving China

Commonwealth Magazine (Taiwan)The Most Admired Company 2005 AwardsWinner - Airline Industry Category  (8th year)

Asia Risk Magazine (HK)Asia Risk Awards 2005Corporate Risk Manager of the Year

TTG Asia Travel AwardsHall of Fame 2005

Travel Inside, Sabre, Swiss Postal Services, JPM Magazines (Switzerland)Golden Travel Star Award 2005 – SIA Switzerland (12th consecutive year)

Global Finance Magazine (US)Global Finance Award 2005 (Airlines Sector)Best Airlines Company – AsiaBest Airlines Company - Global

Subsidiaries

• SIA Group consists over 50 subsidiaries and associates, including:– SilkAir– SIA Engineering Company (SIAEC)– Singapore Aero Engine Services Private Limited

(SAESL)– Singapore Aircraft Leasing Enterprise (SALE)– Singapore Airlines Cargo (SIA Cargo)– Singapore Airport Terminal Services (SATS)– Singapore Flying College

Ownership in Other Airlines

• Virgin Atlantic Airways (49%)– Operates long-haul routes between London

and North America, the Caribbean, Africa, Asia and Australia.

• Tiger Airways (49%)– A low-cost airline based in Singapore.– Singapore's first true low-cost carrier.– Destinations encompass airports within a four

hour flying radius of Singapore.

Group Fleet

List of Major Shareholders

Temasek Holdings

• Temasek Holdings– Owns and manages the Singapore

Government's direct investments, both locally and overseas.

– Singapore Ministry of Finance is the single shareholder of Temasek Holdings.

DBS and Raffles

• DBS– Set up in 1968 as a development financing

institution led by the Singapore government.– Major shareholders include DBS, Raffles, and

Temasek.

• Raffles Holdings– Owned by Temasek and CapitaLand (which in

turn is owned by Temasek).– Singapore Airlines is also a shareholder.

Objectives for Future Growth

• Re-engineer business to meet any challenger head-on.

• Develop a sustainable business position through careful cost management and planning.

• Continue to work hard to access the heavy-protected Trans-Pacific route between Australia and the USA.

• Launch the world’s largest aircraft, Airbus A380, in 2006.

Airbus A380

• “First to fly the A380 - experience the difference in 2006.”

• Double-decker, four-engined airliner.

• Largest passenger airliner in the world, topping the Boeing 747, which was the largest for 35 years.

Current Stock Information

As of March 24, 2006

• Price: 14.70

• 52-week range: 11.00 - 14.90

• Shares outstanding: 1.22 billion

• Market capitalization: $17.93 billion

• Exchange rate: 0.72 CAD/SGD

• Dividend yield: 0.68%

Revenue Composition

3-months Chart

1-year Chart

5-year Chart

Key Ratios

Debt-to-Equity

Profit Margin

Return on Equity

SIA 48.42% 10.30% 8.56%

Industry

(International)

64.15% -4.46% -2.14%

Recommendations

Don’t Buy!

AIR CANADA

Background Began on April 10, 1937, called Trans-Canada

Airlines, subsidiary of Canadian National Railway Changed name to Air Canada since January 1,

1965. In 1989, Air Canada was completely privatized. In January 2000, acquired Canada’s second

largest air carrier, Canadian Airlines. On April 1, 2003, filed for bankruptcy protection. On September 30, 2004, emerged from

bankruptcy protection. ACE Aviation Holdings Inc. (ACE) is the new

parent of Air Canada.

ACE Aviation Holdings Inc. (ACE) Operating companies

and partnerships: Air Canada Air Canada Cargo ACGHS Limited

Parternership Air Canada Jazz Air Canada Technical

Services(ACTS) Touram Limited

Partnership-(Air Canada Vacations)

Aeroplan Limited Partership (85.6%)

Current Stock Information

As of March 24, 2006Ticker symbol: TSX: ACE.RV.TPrice: $3452-week range:$30.25-$43.03Shares outstanding: 76,852,830Market capitalization: 2,612,996,220Dividend yield: 0P/E Ratio: 12.928

2005 Operating Revenues

Passenger,84%

Cargo, 6%

Others, 10%

Passenger

Cargo

Others

2005 Operating Expenses

Air Canada and Jazz They contribute to the passenger

transportation revenue Purchases substantially all of Jazz’s fleet

capacity based on predetermined rates Jazz currently operates scheduled passenger

service on behalf of Air Canada They linked their regional and mainline

networks to serve connecting passengers more efficiently

They provide direct passenger air transportation to 159 destinations

Business Strategy1. Competitive cost structure

Lower average salaries, sales and distribution costs

2. Redesigned network to maximize efficiency and leverage international growth opportunities Increase used of large regional jet aircraft

3. Customer Driven Revenue Model for Passenger Services Offer five simple fare types ranging from low

one-way fares to Executive Class fares

4. New corporate structure to maximize the value of subsidiaries

HubsToronto Pearson International Airport is

the largest hub.Montréal-Pierre Elliott Trudeau

International Airport European hub and Atlantic Canada hub

Vancouver International Airport hub for Pacific operations

Calgary International Airport focus city

Air Canada’s Fleet Air Canada’s operating fleet, excluding Jazz

aircraft, at December 31, 2005:

Air Canada’s Future Fleet

Available Seat Miles (ASMs)

Revenue Passenger Miles (RPMs)

Passenger Load Factor (PLF)

Canada Up 0.4 pp

US Transborder Up 2.7 pp

Other International Up 1.4 pp

• Compare Q4 2005 to Q4 2004

Passenger Revenue per Revenue Passenger Mile (Yield)

Passenger Revenue per Available Seat Mile (RASM)

Average Salary and Employees

HedgesFuel hedges 2005 to 2007

Increase hedge position of approximately 4% per month to approximately 50% of anticipated jet fuel requirements

Foreign currency contractsForward contracts and option agreements

on US$521 million of future purchase

Financial Statements

Financial AnalysisACE North

American Airlines

All Airlines

Debt/Equity 914% 63.72% 64.15%

Profit margin 2.62% -6.97% -4.46%

ROE 22.09% -4.76% -2.14%

Stock Price – 1 Year

Stock Price – Since Incorporation

Recommendation

SELL