FINANCIAL FORECAST March 2011

HIGH FUEL PRICES SQUEEZE AIRLINE PROFITS

Ê We have cut our forecast for airline industry profits (net post-tax) in 2011 from US$9.1 billion to US$8.6
billion, a 46% reduction from the US$16 billion of profit we estimate the industry generated last year. This
downgrade is due to the recent surge in oil and jet kerosene prices. In line with market forecasts we now
assume an average crude oil price of US$96 a barrel this year, significantly up on our previous forecast of
US$84 a barrel. The reduction in profitability would have been much greater were it not for upward revisions
to economic growth this year together with relatively stable and high load factors. When economies are
strong higher yields make it possible for airlines to limit the profitability damage from high oil prices. Clearly
the risk to this outlook is that should economies weaken, under pressure from commodity prices and debt,
airline profits could weaken much faster than we portray here.

Global commercial airline profitability

8.0 20

6.0 15
EBIT margin
4.0 (left scale) 10

2.0 5
% revenues

US$ billion

0.0 0

-2.0 -5

-4.0 Net post-tax losses -10 Source:

(right scale) ICAO, IATA
-6.0 -15

-8.0 -20
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010E
2011F

Ê In this economic environment business travel and air freight demand will be more robust than price-sensitive
leisure travel. Long-haul network airlines will be best placed. Regional differences will also remain during
2011 with a particular contrast between weak European home markets but still strong traffic originating from
the so-called ‘emerging’ markets. Asia-Pacific airlines are expected to continue to be the most profitable.
System-wide global commercial airlines 2007 2008 2009 2010E 2011F 2007 2008 2009 2010E 2011F
EBIT margin, % revenues Net profits, $ billion
Global 3.9% -1.6% -0.7% 5.0%
3.1% 14.7 -16.0 -9.9 16.0 8.6
including exceptional items 16.5 -36.1 -9.8 16.0 8.6
Regions
North America 5.5% -1.8% 1.2% 5.1% 4.0% 5.5 -9.6 -2.7 4.7 3.2
including exceptional items 7.3 -24.4 -2.7 4.7 3.2
Europe 4.0% 0.1% -2.2% 1.7% 1.1% 6.4 0.0 -4.3 1.4 0.5
including exceptional items 6.4 -1.0 -4.3 1.4 0.5
Asia-Pacific 2.9% -4.7% -1.8% 8.9% 4.6% 3.0 -4.7 -2.7 7.6 3.7
including exceptional items 3.0 -8.7 -2.6 7.6 3.7
Middle East 0.0% 1.0% -1.5% 4.6% 3.2% -0.1 -0.3 -0.6 1.1 0.7
Latin America 2.0% 2.3% 2.8% 4.7% 2.3% 0.1 -1.4 0.5 1.0 0.3
including exceptional items 0.1 -1.7 0.5 1.0 0.3
Africa 1.0% -0.9% -0.9% 1.1% 0.0% -0.2 -0.1 -0.1 0.1 0.0
Source: ICAO data to 2007-8. IATA estimates for 2009,2010 and forecast for 2011.
Exceptional items include revaluations of goodwill associated with restructuring and of 'mark to market' fuel hedging.

IATA Economics www.iata.org/economics 1

 March 2011
Industry Financial Forecast

CAN YIELDS KEEP UP WITH RISING FUEL PRICES?

Ê Stronger than expected economic growth has boosted current and expected demand for oil, an upward
pressure on energy prices accentuated by investor demand for commodities. Political turmoil in the Middle
East and North Africa has added to that pressure recently, but even if geopolitical risk diminishes the upward
revisions to the economic growth outlook justify the upward revisions in oil price forecasts for this year.
Ê Jet kerosene prices have doubled since their low point in early 2009, reaching US$113 a barrel in early
2011. At around a quarter of total operating costs that price rise has added some 25% to unit costs. Over
the same period the average return fare, excluding fuel surcharges, has risen 20%. Including surcharges the
impact of increased costs has, so far, been offset by increased revenues.

Jet kerosene price and average international return fare

190 900

170 Jet kerosene price

(left scale) 850

150
800 Source: IATA,
Platts

US$ return fare

130
US$ per barrel

Passenger fare 750

110 (right scale)
700
90
650
70

50 600

30 550
2006 2007 2008 2009 2010 2011

ONLY IF LOAD FACTORS STAY HIGH THIS YEAR

Ê The ability to offset high fuel prices depends critically on a combination of strong economies, leading to
strong demand for air transport, and limited capacity growth. This produces the tight supply-demand
conditions essential for airline profits to remain robust to high fuel costs. For the last 12 months passenger
load factors have remain close to record highs. Freight load factors had slipped but are rising again.

Loads factors on international passenger and freight markets

seasonally adjusted

58% 80%
Passsenger load factor
56% (right scale) 79%

54% 78% Source: IATA

77%
52%
76%
% AFTKs

% ASKs

50%
75%
48%
74%
46%
Freight load factor 73%
44% (left scale)
72%
42% 71%

40% 70%
2006 2007 2008 2009 2010 2011

IATA Economics www.iata.org/economics 2

 March 2011
Industry Financial Forecast

Ê Looking ahead the published schedules suggest an increase in passenger capacity at an annualized rate of
just over 6%. For the year as a whole an additional 1400 new aircraft delivered will add 5% to the fleet.
Normalization of the underutilized twin aisle fleet could add another 1% to capacity. As a result we forecast
that overall capacity this year will continue to rise at a pace of 6% throughout the year. As long as demand
growth remains close to that increase, load factors should stay close to current highs and supply-demand
conditions will remain tight, allowing a 1-2% rise in yields to provide some offset to higher fuel prices.

PROMISING RISE IN AIR TRAVEL AND FREIGHT

Ê Demand for air transport remains robust. After the weather-related dip in December there was a strong
rebound in both air travel and freight volumes in January. Air travel looks back on its strong 2010 trend
increase of 7% a year. International markets, measured by RPKs, are now 6% larger than their pre-
recession peak and, so far, showing few signs of a slow down. By contrast air freight had peaked in May last
year as the business inventory restocking cycle came to an end. As expected this looks to have been a
temporary pause. Growth in final sales of capital and consumer goods now appears to have started a further
upward leg to growth in air freight markets.
Ê Economic growth forecasts have been revised higher in the past 3 months, despite the rise in commodity
prices. World GDP is now forecast to rise 3.1% in 2011, up from the 2.6% forecast in December. As a result
of this, and the strengthening of business confidence, we are now forecasting growth in passenger markets
of 5.6% this year, and growth of 6.1% in air cargo. Overall this generates an expansion of 5.7% in tonne
kilometers flown, not far from the expected 6% expansion in capacity.

International air freight and passenger volumes

seasonally adjusted
260 14

RPK
240 13
RPK, billions

FTK, billions

220 FTK 12
Source: IATA

200 11

180 10

160 9
2005 2006 2007 2008 2009 2010 2011

Ê We expect marked regional differences in travel growth to remain throughout this year, reflecting the stark
differences in economic performance around the world. Parts of Europe are mired in recession, as a result
of the on-going banking and government debt crisis. European airlines will suffer from the resulting weak
home markets, though long-haul business travel and outbound freight look more robust. Asia-Pacific, Latin
American and African airlines should continue to benefit from the strong economic growth in these regions,
albeit slower than in 2010 as central banks attempt to suppress an emerging inflation problem. Airlines in
the Middle East are expected to benefit from strong regional economies and further gains in their share of a
number of long-haul markets.

System-wide global commercial airlines 2007 2008 2009 2010E 2011F 2007 2008 2009 2010E 2011F
Traffic (TKP), % change over year Capacity (ATK), % change over year
Global 6.0 0.7 -4.3 10.3 5.7 5.8 1.1 -3.5 5.2 6.0
Regions
North America 3.5 -2.4 -6.3 9.9 4.0 3.2 -2.8 -5.6 3.9 4.0
Europe 2.1 0.9 -7.7 5.0 3.9 3.5 2.9 -5.4 1.5 4.8
Asia-Pacific 7.8 -0.2 -2.2 12.6 6.4 6.9 0.6 -4.8 5.8 5.9
Middle East 16.4 3.6 9.5 20.0 14.6 14.5 4.7 11.1 15.8 15.5
Latin America 9.9 3.3 0.0 14.5 6.0 6.9 3.2 1.4 9.6 6.9
Africa 4.5 5.1 -5.4 15.0 6.5 5.8 7.2 -1.5 9.5 7.4
Source: ICAO data to 2008. IATA 2009-2010 estimates, 2011 forecasts. Dom.and int. traffic. Includes pax and cargo by weight.

IATA Economics www.iata.org/economics 3

 March 2011
Industry Financial Forecast

DRIVERS FOR BUSINESS

TRAVEL IMPROVING
Ê Business travel remains a key driver of air passenger markets, and a particularly important segment for
network airline profitability. The leading indicators are still positive. Business confidence, measured below
by the JP Morgan/Markit survey of purchasing managers worldwide, had been dipping during the middle of
last year but, since October, has been rising again and reached a new high in January. Corporate profits are
strong and international trade and investment continues to expand. We expect these drivers to continue to
strengthen business travel during 2011, albeit at a slower pace than the post-recession rebound of 2010. As
long as the major economies remain strong this growth could be profitable, though less profitable than 2010,
despite oil prices remaining close to US$100 a barrel.

Premium travel growth and business confidence

20 65

15
60
10 Premium travel
growth
5 55
% change over year

confidence index
0 Source: IATA,
50
Markit
-5
45
-10

-15 40
Business
-20 confidence
35
-25

-30 30
Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11

Ê The key risk to this relatively benign outlook is the vulnerability of economic growth to high commodity
prices. So far economic growth forecasts have been revised higher, as the corporate sector has started to
spend on investment and jobs. But if rising energy costs significantly weakens economic growth then this
forecast for airline profits in 2011 would deteriorate substantially.
System-wide global commercial airlines 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010E 2011F

REVENUES, $ billion 307 306 322 379 413 465 510 564 482 552 594
% change -6.4 -0.5 5.2 17.7 9.1 12.5 9.6 10.5 -14.4 14.4 7.6
Passenger 239 238 249 294 323 365 399 444 374 425 456
Cargo 39 38 40 47 48 53 59 63 48 63 68
Traffic volumes
Passenger growth, tkp, % -2.7 1.0 2.3 14.9 7.0 5.0 6.4 1.5 -2.1 7.3 5.6
Passenger numbers, millions 1640 1639 1691 1888 2022 2129 2284 2293 2277 2439 2570
Cargo growth, tkp, % -6.0 8.7 3.9 7.9 0.4 4.8 4.8 -1.0 -9.8 18.3 6.1
Freight tonnes, millions 28.8 31.4 33.5 36.7 37.6 39.8 41.8 40.5 36.9 43.6 46.2
World economic growth, % 2.2 2.7 2.8 4.2 3.4 4.0 3.8 1.7 -2.3 3.8 3.1
Passenger yield, % -4.0 -1.7 2.4 2.6 2.7 7.8 2.7 9.5 -14.0 6.1 1.5
Cargo yield % 1.9 -9.5 2.0 7.4 2.4 5.9 5.5 7.4 -14.2 10.2 1.9

EXPENSES, $ billion 319 311 323 376 409 450 490 573 486 524 575
% change 0.5 -2.7 4.0 16.2 8.9 10.1 8.8 16.9 -15.2 8.0 9.7
Fuel 43 40 44 65 91 117 135 189 125 139 166
% of expenses 13 13 14 17 22 26 28 33 26 26 29
Crude oil price, Brent, $/b 24.7 25.1 28.8 38.3 54.5 65.1 73.0 99.0 62.0 79.4 96.0
Non-Fuel 276 270 279 311 318 333 355 384 361 386 409
cents per atk (non-fuel unit cost) 39.7 38.8 38.9 39.5 38.6 38.9 39.3 42.0 40.9 41.5 41.5
% change 1.4 -2.3 0.3 1.4 -2.1 0.8 0.8 6.9 -2.5 1.5 0.0

Break-even weight load factor, % 61.3 61.9 61.1 61.9 62.0 61.2 60.9 64.1 63.0 62.4 63.4
Weight load factor achieved, % 59.0 60.9 60.8 62.5 62.6 63.3 63.4 63.1 62.6 65.6 65.5

OPERATING PROFIT, $ billion -11.8 -4.8 -1.4 3.3 4.4 15.0 19.9 -8.9 -3.4 27.4 18.4
% margin -3.8 -1.6 -0.4 0.9 1.1 3.2 3.9 -1.6 -0.7 5.0 3.1

NET PROFIT, $ billion -13.0 -11.3 -7.5 -5.6 -4.1 5.0 14.7 -16.0 -9.9 16.0 8.6
% margin -4.2 -3.7 -2.3 -1.5 -1.0 1.1 2.9 -2.8 -2.1 2.9 1.4

Source: ICAO data to 2008. IATA 2009 estimates and 2010-11 forecasts. Excludes exceptional accounting items and mark-to-market fuel
hedging losses from net profits
IATA Economics www.iata.org/economics 4