The Future of European Air TransportationChallenges and Opportunities

Performance of Traditional Airline Model

• In 2001 airlines lost almost $13 billion

• In 2002 losses exceeded $11.5 billion

• US majors lost $11.4 billion in 2002 following a loss of $7.5 billion in 2001 (after approximately $5 billion in aid)

• Half of 2001 losses occurred before September 11th

• Clearly industry was in serious decline before that tragic day

                                                                                                                                                                              

                  

Performance of the “New” model

• “Low-cost” became an industry term

• Positions traditional airlines as “high cost”

• Successful “low-cost” airlines broke traditional performance mould:

– Ryanair 2002 operating profit €263.5m up 61.7% from €162.9m in previous year

– Southwest operating profit $417.3m in 2002 was 30th successive year of profitability

Aer Lingus performance pre-September 11th 2001

• 2001 Budget

- Operating Profit of €64M (5% margin)- Net cash on the Balance Sheet- 6% increase in average fares - 12% growth in passenger numbers- 19% increase in transatlantic revenues

• By July, 2001Forecast Operating Loss of €38M and net debt of €22M

• Debt financing negotiated but not in place

Path to Crisis

• Immediate post 9/11 forecast showed if no action takenOperating Loss of €90M in 2001 Operating Loss of €152M in 2002

• No credit facilities available

• Immediate Cash Crisis – depleted by January

• Immediate action while developing a Survival Plan

• 2001 Operating Loss reduced to €52M and year end net cash €66M

Crisis post-September 11th 2001

• Facing closure: Aer Lingus identified as a likely casualty

• Transatlantic Market in chaos 40% of revenues50% of profit60% of capacity (ASKs)Load factors fell to <40% within 2 weeks of 9/11

• Cost base and work practices unsustainable

• Action must be urgent and radical

• Change must be permanent – develop Survival Plan

Survival and beyond

• €190 million cost reduction – 16%

• 33% reduction in staff

• Become relevant !

• Not the “normal” cyclical downturn – fundamental change in the business

• Certain assumptions proved invalid:– “Recovery” of business traffic– Fares levels

Ireland – Heathrow average yields 2001 to date

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2002 €86.122002 €86.12

2003 €70.862003 €70.86

2001 €101.272001 €101.27

Ireland – Heathrow average yields 2002

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2001 €101.272001 €101.27

2002 €86.122002 €86.12

2003 €70.862003 €70.86

Ireland – Heathrow average yields - actual versus “plan”

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20022002

Ireland – Heathrow average yields - actual versus “plan”

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Plan assumed return to 2000 levels of Premier Traffic

Plan assumed return to 2000 levels of Premier Traffic

“Plan” €100.71“Plan” €100.71

Actual €86.12Actual €86.12

€31.48€31.48

20022002

Building a Sustainable Business – the challenge

• €190 million cost savings secured by April/May

• Be “relevant” in the market

• Significant reduction in fares

• Remove traditional restrictions

• Pricing transparency -

• Maintain customer service ethos

Cost Base and Price

• The key to a sustainable and profitable business in the changed environment is aggressive and relentless cost management.

• Aggressive cost control means aggressive pricing.

• Aggressive pricing makes you relevant and attractive to the customer.

• Price stimulated air travel after 11 September.

• Aer Lingus - costs and prices are down- passenger numbers and load factors are up

Cost reductions achieved to date - €344 Million

2003 Versus 2001Fuel -31%Airport Charges -28%En Route 6%Aircraft Hire -51%Maintenance -12%Distribution -56%Misc DOCS -49%Staff Costs -21%Overheads -36%Depreciation -21%Total -30%

Change in business model

2003 Versus 2001Change in Overall Capacity (ASK) -6%Change in Passenger Traffic (RPK) 7%Change in Passenger Load Factor + 11 PointsChange in Average Yield -23%Cost per RPK -35%

Cost reductions achieved to date - €344 Million

2003 Versus 2001Fuel -31%Airport Charges -28%En Route 6%Aircraft Hire -51%Maintenance -12%Distribution -56%Misc DOCS -49%Staff Costs -21%Overheads -36%Depreciation -21%Total -30%

Distribution

• Focus on “cost to check-in”

• Benchmarking against Ryanair showed a massive cost disadvantage

• More than €20 per passenger per sector difference

• Commission to travel trade represented significant cost

• Internet distribution provided solution

• Worldwide online sales increased from 2% to 50%

• >60% of total Irish sales now via website

• 150,000+ site visitors a day

• €1.5 million+ revenue a day

• Distribution costs reduced by €76 million representing 22.1% of total cost reduction programme

• Unit distribution costs down by 70% in 2004

Cost reductions achieved to date - €344 Million

• Staff related costs reduced by €67 million representing 19.5% of total cost reduction programme

• Significant that 80% of total cost reduction programme is in non staff related costs

• Traditional cost cutting programmes often fail because of difficulties addressing staff costs

• Next step change in the cost base will come from fleet standardisiation

Fleet – standardise, less complexity

• European fleet – move to single aircraft type

• 17 new Airbus A320 ordered (CFM engines)

• Fleet change complete by end 2005

• Funding from internal resources without recourse to external financing

• Long haul fleet review initiated

Cost categories – in order of scale

• Aer Lingus spends more on airport charges than we do on fuel

• Fuel is always considered a significant part of an airline’s cost base

• Airport charges do influence route decisions

1 Staff Costs2 Airport Charges3 Fuel4 Maintenance5 Depreciation6 Misc DOCS7 Overheads8 Distribution9 Aircraft Hire

10 En Route

Growth - Opportunities

• There is enormous potential in the development of further US gateways.

• Aer Lingus is restricted to just four gateways (New York, Boston, Chicago and Los Angeles) under the US/Ireland Bilateral Agreement (special agreement for Baltimore).

• US carriers can fly from anywhere in the US. No restrictions.

• We will open a number of further gateways in the US if this situation changes. This could lead to a doubling of transatlantic visitors to Ireland within a short timescale with major benefit to Irish business and tourism.

• In 1994 we operated 34 flights per week to 2 gateways. By 2001 this increased to 120 flights per week to five gateways.

Premier class shorthaul review

• Companies are seeking to reduce expenditure on travel resulting in a significant reduction in business traffic

• Fewer companies are approving Business Class travel for journeys less than 6 hours

• Low Cost carriers now acceptable to wider number of companies for business travel

• Price and flexibility of ticket now a greater driver of behaviour than class of service

Premier class shorthaul

• Aer Lingus Premier loads have reduced since 2001

• Significant number of routes have very low average Premier loads

• 2003 v. 2002 Heathrow Premier traffic declined by 31% UKP by 11% Continent by 14%Overall short haul –24%.

• This follows a decline in 2002 v. 2001 of 18%, and in 2001 v. 2000 of 10%

Average Premier bookings per flight - 2003

>10 per Flight >5 & <10 per Flight <5 per FlightDUB-BRU-DUB DUB-AGP-DUB DUB-ALC-DUBDUB-LHRDUB DUB-AMS-DUB DUB-BCN-DUBORK-LHR-ORK DUB-BHX-DUB DUB-BLQ-DUBSNN-LHR-SNN DUB-CDG-DUB DUB-FCO-DUB

DUB-DUS-DUB DUB-JER-DUBDUB-EDI-DUB DUB-LIS-DUBDUB-FAO-DUB DUB-MIL-DUBDUB-FRA-DUB DUB-PMI-DUBDUB-GLA-DUB DUB-PRG-DUBDUB-GVA-DUB DUB-VIE-DUBDUB-MAD-DUB ORK-AGP-ORKDUB-MAN-DUB ORK-AMS-ORKDUB-MUC-DUBDUB-NCE-DUBORK-CDG-ORK

Premier Class withdrawn from all routes except for flights to Heathrow and from Dublin to Brussels, Amsterdam, Frankfurt, Manchester, Birmingham, Edinburgh and Glasgow

Premier Class withdrawn from all routes except for flights to Heathrow and from Dublin to Brussels, Amsterdam, Frankfurt, Manchester, Birmingham, Edinburgh and Glasgow

Aer Lingus – The Transformed Business Model

• The key is cost

• Simplify the business – less complexity

• More direct routes – 31 new routes launched

• Quality service

• Low fares – more passengers

Key operational highlights 2003

• Passenger numbers up 6.2% to 6.6 million

• Passenger load factor up 3 points to 81%

• Record year for Transatlantic passengers, up 19.4% to 1.1 million

• Transatlantic passenger load factor up 3 points to 86%

• Transatlantic revenues account for 38% of total passenger revenues

• Continental European passengers up 27.6% to 2.1 million

• 28 new European routes introduced since 2001

2003 performance

• Operating profit of €83.0 million – up 30% on 2002

• Operating margin of 9.3% (6.7% in 2002)

• Profit for the year of €69.2 million – up 96% on 2002

• Cash position improved – free cash increased to €384.8 million

• Net cash increased to €226.2 million

• Shareholders’ funds increased to €321.9 million

Profit and Loss

2003 2002 2001€ million € million € million

Turnover 888.3 958.6 1,097.2

Operating costs 805.3 894.8 1,149.3

Operating profit (loss) (1) 83.0 63.8 -52.1

Operating margin (%) 9.3% 6.7% -4.7%

EBITDAR - Continuing Operations (2) 186.9 176.8 104.3

Net exceptional cost - -25.7 -104.1

Profit (loss) for the year 69.2 35.3 -139.9

Earnings (loss) per share (€ cent) 27.1 13.8c -54.7c

(1) Operating profit on continuing operations before employee participation.

(2) Earnings before employee participation, interest, tax, depreciation, amortisation and aircraft rentals.

Balance Sheet

2003 2002 2001€ million € million € million

Shareholders' funds 321.9 255.6 223.9

Free cash 384.8 367.3 169.5

Net cash and liquid resources (1) 226.2 154.9 66.0

(1) Free cash plus restricted cash deposits less f inance lease obligations and debt.

Key statistics – Continuing operations

2003 2002 2001

Passengers flown (scheduled) 6,594,650 6,210,891 6,307,371

Passenger load factor (flown %) 81% 78% 71%

Premium class bookings (%) 7% 10% 13%

Average Flown Fare - Europe 82.52 92.32 103.10

Average number of aircraft operated 32.9 32.8 36.9

Average sector length - Europe (kms) 727 639 597

Average number of employees 4,281 4,650 6,108

Internet sales at year-end 50% 28% 8%

Future Fundamentals

• No return to the old model

• More cost reduction across all cost captions

• Lower costs mean more low fares

• More routes

• More

• Less complexity!

• More profits