Reformulating U.S. AviationJohn Heimlich — VP & Chief Economist, Air Transport Association of AmericaJuly 30, 2008

© ATA 2008 -- 2

The Air Transport Association of America, Inc.

Combination Services (12)

AirTran AirwaysAlaska Airlines

American AirlinesContinental Airlines

Delta Air LinesHawaiian AirlinesJetBlue AirwaysMidwest Airlines

Northwest AirlinesSouthwest Airlines

United AirlinesUS Airways

All-Cargo Services (6)

ABX AirASTAR Air Cargo

Atlas Air / Polar Air CargoEvergreen Int’l Airlines

FedEx CorporationUPS Airlines

Associate Members (3)

Air CanadaAir Jamaica

Mexicana

© ATA 2008 -- 3

Sources: Seabury APGDat airline schedules (July 25, 2008)

The L.A. Metro Area is Not Immune from Service Cuts

Los Angeles (LAX) Dec-07 Dec-08 Change

Airlines 55 56 1

Weekly Flights 5,914 4,989 (925)

Destinations 153 144 (9)

Ontario (ONT) Dec-07 Dec-08 Change

Airlines 11 9 (2)

Weekly Flights 867 575 (292)

Destinations 34 17 (17)

© ATA 2008 -- 4

For Whom the Bell TollsU.S. Airline Bankruptcies Since End of 2007 Include Numerous Shutdowns

Out of Business

Last Day of OpsMAXjet

25-Dec-07Big Sky

7-Jan-08Aloha

31-Mar-08ATA

2-Apr-08Skybus

5-Apr-08Eos

27-Apr-08Champion

31-May-08Air Midwest

30-Jun-08Vintage Props & Jets 1

18-Jul-08ExpressJet 2

2-Sep-08

Continuing Operations

Ch. 11 FilingFrontier

11-Apr-08Gemini Air Cargo

18-Jun-08

Note: Oasis Hong Kong Airlines and Silverjet are among the non-U.S. airlines that have ceased operations

1. Intends to re-launch operations should market conditions permit2. Ceasing branded commercial operations only; will continue to fly as Continental Express

© ATA 2008 -- 6

EIA Sees Jet Fuel Prices Soaring in 2008 and 2009Average Price of U.S. Jet Fuel per Barrel

30.38

56.6466.05

72.34

127.39132.75

7.455.39 3.61

4.93

9.24

15.91

16.69

18.59

25.2824.93

31.0826.18

41.51

25.98

$0

$20

$40

$60

$80

$100

$120

$140

$160

2000 01 02 03 04 05 06 07 08F 09F

Jet Fuel Crack Spread

Crude Oil (West Texas Intermediate)

Source: Energy Information Administration (www.eia.doe.gov/steo)

“The Stone Age did not end for lack of stone, and the Oil Age will end long before the world runs out of oil.” (Sheikh Zaki Yamani, former oil minister of Saudi Arabia, Oct. 23, 2003)

$50

$75

$100

$125

$150

$175

$2002

-Ja

n-0

7

31

-Ja

n-0

7

1-M

ar-

07

29

-Ma

r-0

7

27

-Ap

r-0

7

25

-Ma

y-0

7

25

-Ju

n-0

7

24

-Ju

l-0

7

21

-Au

g-0

7

19

-Se

p-0

7

17

-Oc

t-0

7

14

-No

v-0

7

13

-De

c-0

7

14

-Ja

n-0

8

12

-Fe

b-0

8

12

-Ma

r-0

8

10

-Ap

r-0

8

8-M

ay

-08

6-J

un

-08

7-J

ul-

08

4-A

ug

-08

2-S

ep

-08

22

-Se

p-0

8

12

-Oc

t-0

8

1-N

ov

-08

21

-No

v-0

8

11

-De

c-0

8

31

-De

c-0

8

Jet: NY Harbor

Jet: Gulf Coast

Jet: Los Angeles

Crude Oil (WTI)

Crack S

pread

© ATA 2008 -- 7

Sources: Energy Information Administration and ATA

Do

llars

per

Bar

rel

Jet Fuel Prices Maintaining Premium to Soaring Crude OilAverage Refining Crack Spread Fluctuating Around $30 per Barrel

© ATA 2008 -- 8

($5)

$0

$5

$10

$15

$20

$25

$30

$35

$40

$452

-Ja

n-0

7

14

-Fe

b-0

7

29

-Ma

r-0

7

11

-Ma

y-0

7

25

-Ju

n-0

7

7-A

ug

-07

19

-Se

p-0

7

31

-Oc

t-0

7

13

-De

c-0

7

29

-Ja

n-0

8

12

-Ma

r-0

8

24

-Ap

r-0

8

6-J

un

-08

21

-Ju

l-0

8

2-S

ep

-08

2-O

ct-

08

1-N

ov

-08

1-D

ec

-08

31

-De

c-0

8

JetDieselGasoline

Sources: Energy Information Administration Weekly Petroleum Status ReportPro

du

ct C

rack

Sp

read

(D

olla

rs p

er B

arre

l)Jet Fuel Maintaining Premium to Gasoline and Diesel

Key Factors Include U.S. Ethanol Mandates and Global Demand for Middle Distillates

$25-$30 Prem

ium

$61.2

$33.1

$38.5

$22.7

$15.5

$41.2

$16.8 $15.0$12.8

10

20

30

40

50

60

70

2000($0.81)

2001($0.78)

2002($0.71)

2003($0.85)

2004($1.16)

2005($1.66)

2006($1.97)

2007($2.10)

2008F($3.40)

Expense ($ Billions)

Consumption (Billion Gals.)

© ATA 2008 -- 9

2008 Jet Fuel Expense1 Will Break 2007 Record Total Expense (Excluding Taxes and Into-Plane Fees) Could Exceed $61 Billion

Sources: ATA, Energy Information Administration, Department of Transportation

1. U.S. passenger and cargo airlines2. Based on $75K to employ one FTE3. Based on approx. $70M per aircraft

Equivalent of 267,000 Airline Jobs2

or 286 New Narrow-body Jets3

Note: Value in parentheses below year is average price paid per gallon excluding taxes, into-plane fees, pipeline tariffs and hedging costs

1.00

1.25

1.50

1.75

2.00

2.25

2.50

2.75

3.00

3.25

3.50

3.75

4.00

4.251

Q0

2

1Q

03

1Q

04

1Q

05

1Q

06

1Q

07

1Q

08

1Q

09

Labor Fuel

© ATA 2008 -- 10

Surging Fuel Expense Offsetting Labor RestructuringFor Passenger Airlines, Fuel CASM Has Overtaken Labor CASM

Un

it O

per

atin

g C

ost

(¢

per

Ava

ilab

le S

eat

Mile

)

Source: ATA Passenger Airline Cost Index

7

8

9

10

11

12

13

144

Q0

0

2Q

01

4Q

01

2Q

02

4Q

02

2Q

03

4Q

03

2Q

04

4Q

04

2Q

05

4Q

05

2Q

06

4Q

06

2Q

07

4Q

07

Total

Excl. Fuel

Excl. Fuel and Transport-Related*

Airlines Effectively Managing Controllable Costs Carrier Cost Hikes Overwhelmingly a Function of Higher Fuel Prices

Op

erat

ing

Co

st (

¢) p

er A

vaila

ble

Sea

t M

ile

Source: ATA Passenger Airline Cost Index

* Expenses incurred for providing air transportation facilities associated with the performance of service which emanate from and are incidental to air transportation services performed by the carrier

© ATA 2008 -- 11

(4-Week Moving Average)

© ATA 2008 -- 12

Relative to 2000, Jet Fuel Prices Overwhelming FaresSince 2000, Average U.S. Jet Fuel Price Up 265%, Domestic Fares Up 1%

Average U.S. Jet Fuel Price(Cents per Gallon)

Source: U.S. Energy Information Administration

Avg. Fare to Fly 1,000 Miles Domestically (U.S. Dollars, Excluding Govt. Taxes)

70

130

190

250

310

370

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

1H

08

$125

$130

$135

$140

$145

$150

$155

$160

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

1H

08

Source: ATA passenger revenue report (mainline + regionals)

Up 1.0%

Up 265

.3%

© ATA 2008 -- 13

69.4

7.0 7.5

0

10

20

30

40

50

60

70

80

Jet Fuel Price Domestic Airfares* International Airfares*

Source: EIA and ATA passenger revenue report

% C

han

ge

Yea

r-o

ver-

Yea

r (J

anu

ary-

Jun

e)Ticket Prices* Lagging Fuel Prices in 2008

* Fares per mile flown, also known as passenger yield

“It’s very difficult for airlines to simply raise prices to levels that cover their higher fuel costs. Raising prices chokes demand: If tickets get too expensive, business travelers make alternate plans, pick cheaper airlines or buy discounted tickets further in advance. For vacationers, if prices get too high, they don’t buy or they switch to cheaper destinations. Airlines can price themselves right out of a sale.”

Scott McCartney, “What to Expect as Airlines Cope With Soaring Fuel Costs,” Wall Street Journal (May 22, 2008)

55

60

65

70

75

80

85

90

95

100J

an

-07

Ap

r

Ju

l

Oc

t

Ja

n-0

8

Ap

r

Ju

l

Oc

t

Ja

n-0

9

U.S. Consumer Sentiment at Lowest Level Since May 1980

“[This] level of confidence is not only consistent with a recession; it is suggestive of a severe recession.”

Scott Hoyt, Director of Consumer Economics, Moody’s Economy.com (June 27, 2008)

© ATA 2008 -- 14Source: University of Michigan via https://customers.reuters.com/community/university

Key Factors:Household debtDeclining stock pricesDeclining U.S. dollarRising food pricesRising energy pricesRising unemployment

U. M

ich

. Co

nsu

mer

Sen

tim

ent

Ind

ex (

Dec

-64=

100)

© ATA 2008 -- 15

Portion of Ticket Needed to Buy Fuel Exceeds 40%Airline Fuel Expense per Passenger-Mile Will Exceed 7 Cents in 3Q08

Fuel Cost (¢) per Passenger Mile Fuel Cost as % of Passenger Revenue

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

1Q

08

2Q

08

10%

15%

20%

25%

30%

35%

40%

45%

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

1Q

08

Source: ATA quarterly airline cost index, reflecting systemwide (domestic and international) operations

$18,005$512$574$2,136

$8,197

$428$265$554

$2,806

$1,960$573

PFC

Sept. 11th Fee

ASIF

INS Fee

Customs Fee

APHIS Fees

Passenger Taxes

Int'l Dep./A

rr. Taxes

Waybill Tax

Jet Fuel +

LUST Taxes

TOTAL

* Some taxes and fees shown include collections from non-U.S. carriers

Sources:• Department of Homeland Security• Federal Aviation Administration• Office of Management and Budget• Transportation Security Administration

DHS Collections = $3.8B

AATF + LUST = $11.4B

“Special” Aviation Taxes/Fees* Add $18B BurdenEstimated Collections Shown in $Millions

© ATA 2008 -- 16

$0.53$1.49

($9.12)

($10.89)

($14)

($12)

($10)

($8)

($6)

($4)

($2)

$0

$2

$4

1979-1989 1990-2000 2001-2007 1Q08

“It’s Only a Few Bucks per Passenger”In “Deregulated” Era, ATA Member Airlines Average $1.76 Net Loss per Passenger

Sources: ATA Annual Reports of the U.S. Airline Industry and carrier reports and www.acte.org/resources/press_release.php?id=307

Air

line

Net

Pro

fit

per

Pas

sen

ger

En

pla

ned

*

* Based on ATA-member passenger airlines only for each respective year

© ATA 2008 -- 17

1979-2007 Average = ($1.76) per pax

(12)

(10)

(8)

(6)

(4)

(2)

0

Flights (2.3) (1.6) (5.0) (8.5) (8.7)

Seats (1.0) (1.3) (4.5) (8.4) (8.1)

ASMs* (0.1) (1.3) (5.4) (10.0) (9.4)

1q08 2q08 3q08 4q08 1q09

Soaring Fuel Prices Forcing Industry ContractionReduction in Domestic Route Frequency and Seating Capacity Reverses 2007 Trend

Source: ATA analysis of Seabury APGDat airline schedules as of July 25, 2008

© ATA 2008 -- 18

% C

han

ge

in D

om

. Ser

vice

vs.

200

7

* An available seat mile (ASM) is one seat flown one mile and is the standard unit of capacity in the passenger airline sector

© ATA 2008 -- 19

Dozens of U.S. Station Closings Announced or Implemented by Individual U.S. Airlines in 2008

BFLCLDMCEMRY

ANC

MGM

TXK

DRO

BDL

BMIMDWRFD

SDF

BWI

COUIRKJLNSTL

TUP

AZOLANMKG

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BKWCKBLWBMGWPKB

CDCCNYVEL

FMN

GRIMCK

MHKSLN

SHD

© ATA 2008 -- 20

CV

G

HN

L

MC

O

LA

X

LA

S

MD

W SA

N SL

C

IAH

TP

A

PH

X OR

D LG

A

BW

I FL

L

DF

W IAD MIA A

TL BO

S

SE

A

JF

K EW

R

DE

N

MS

P

SF

O

DT

W

PH

L

DC

A CL

T

(28)

(24)

(20)

(16)

(12)

(8)

(4)

0

4Sources: Seabury APGDat airline schedules (July 25, 2008) and Federal Aviation Administration

Few FAA “Large Hub” Airports Have Escaped Flight Cuts% Change in Scheduled Domestic Departures: 4Q08 vs. 4Q07

© ATA 2008 -- 21

ON

TM

CI

MK

EO

AK TU

SO

GG S

MF

RN

OP

IT RD

US

JU CM

HJ

AX

AU

SO

MA

CL

E SJ

CB

DL

AB

QS

NA

BU

RM

HT

PD

XO

RF

BN

AS

TL

DA

LS

AT M

SY

PB

IIN

DH

OU M

EM

AN

CB

UF RS

WP

VD

(40)

(35)

(30)

(25)

(20)

(15)

(10)

(5)

0

5

10

15Sources: Seabury APGDat airline schedules (July 25, 2008) and Federal Aviation Administration

Few FAA “Medium Hub” Airports Have Escaped Flight Cuts% Change in Scheduled Domestic Departures: 4Q08 vs. 4Q07

Soaring Fuel Prices Taking Heavy Toll on Airline WorkersU.S. Passenger Airline Jobs Will Fall Below 400,000 Before 2009

390

400

410

420

430

440

450

460

4702

00

3

Ma

y

Se

p

20

04

Ma

y

Se

p

20

05

Ma

y

Se

p

20

06

Ma

y

Se

p

20

07

Ma

y

Se

p

20

08

Ma

y

Se

p

20

09

Ma

y

Se

p

Source: U.S. Bureau of Transportation Statistics

Th

ou

san

ds

of

Fu

ll-T

ime

Eq

uiv

alen

ts (

FT

Es)

© ATA 2008 -- 22

FOR

EC

AS

T

20

40

60

80

100

120

140

160

180

2001

/2/2

00

1

6/2

1/2

00

1

12

/8/2

00

1

5/2

7/2

00

2

11

/13

/20

02

5/2

/20

03

10

/19

/20

03

4/6

/20

04

9/2

3/2

00

4

3/1

2/2

00

5

8/2

9/2

00

5

2/1

5/2

00

6

8/4

/20

06

1/2

1/2

00

7

7/1

0/2

00

7

12

/27

/20

07

6/1

4/2

00

8

12

/1/2

00

8

USD Jet Fuel Spot Price

Euro Jet Fuel Spot Price

© ATA 2008 -- 23

Sources: Energy Information Administration (NYH/USGC/LA) and http://www.oanda.com/convert/fxhistory

U.S

. Do

llar

(US

D)

Eq

uiv

alen

ts p

er B

arre

lU.S. Airlines Paying Transatlantic Premium for Jet FuelUSD-Euro Exchange Rate Has Boosted Fuel Price Differential to Nearly 60%

$55-65 D

ifferential

$9,933

$6,611

AMR+CAL+DAL+NWA+UAUA+LCC LHA:GR

The Transatlantic BluesEquity Market Capitalization (Millions USD) on July 16, 2008

Sources: Bloomberg (for Deutsche Lufthansa AG – LHA:GR) and MSN

© ATA 2008 -- 24

AmericanContinental

DeltaNorthwest

UnitedUS Airways

Lufthansa

U.S. Carriers Suffer From Comparatively Weak CreditStandard & Poor’s (S&P) Corporate Credit Ratings as of July 25, 2008

Investment Grade

Speculative

© ATA 2008 -- 25

© ATA 2008 -- 26

2.923.06

3.84

4.94

5.76

6.11

2.5

3.5

4.5

5.5

6.5

1978 1980 1990 2000 2005 2007

Rev

enu

e T

on

Mile

s (R

TM

s) p

er G

allo

nU.S. Airlines* Greener Than Ever

Fuel Efficiency Up 24% from 2000 to 2007 and 110% from 1978 to 2007

Source: ATA analysis of DOT Form 41 traffic data (T2-Z240) and gallons (T2-Z921)

* U.S. passenger and cargo airlines operating worldwide – passenger and cargo revenue ton miles (RTMs) in all services

“[On]ce government creates an artificial scarcity of carbon, how the credits are allocated creates a huge new venue for political rent-seeking and more subsidies for favored industries. Some businesses will benefit more than others… Congress itself will probably take the largest revenue grab, offering itself a few more bites out of the economy and soaking politically unpopular businesses.”

“McCain’s Climate ‘Market,’” WSJ (May 13, 2008)