Air Transport Association of Canada

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• Air Transport Association of Canada
• Victoria, BC
• November 5-7, 2006
• Dr. Hugh Dunleavy
• Executive Vice President Commercial Distribution
• WestJet

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Agenda

• WestJet Route Network
• Structure of the Aviation Industry
• Mega-trends in Airline Economics
• Pricing and Airline Economics
• Airline Industry Business Model
• Classic Low Cost Model
• Economic realities in Canada
• Increasing Airport Debt
• Airports and Air Traffic Control What can we do?
• Open Skies The Reality

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Airline EconomicsStructure of the Aviation
Industry
2 companies serve 45 of the market
2 companies serve 40 of the market
4 companies worldwide
2 major companies serve 100 of the market
"natural monopolies"
Aircraft Manufacturers
Leasing companies
Airlines
Ground Handling
Catering
Airports
CRS
30
Return on capital
16
15
11-24
10-13
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Economic Hurdle
500 airlines competing for guests with the
inevitable oversuply of capacity
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Airline Economics Long term pressure on Yield
Yield (US) and Seat Load Factor () 1969-2001
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100
90
10
Seat Load Factor
80
70
8
60
6
50
Yield
40
4
30
20
2
10
0
0
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
Energy crisis
Global Alliances
1st Gulf war
Deregulation
Source ATA, Analysis A/CE, prices adjusted to CPI
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Airline Industry Profitability
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Airline Economics Erratic Passenger Demand
Annual Growth Rate
PKT
GDP
Source PKT IATA, GDP DRI-Wefa
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Airline Economics Airline Pricing Domain
Passenger Demand
Low Fare Airline Domain
Strong Economy
Market Saturation Price Insensitive
Seat Sales

Weak Economy
Traditional airline domain
Fare
Large Fare Change
Small Fare Change
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Classic Low Cost Business Model

• Short-medium haul route structure
• Low Cost emphasis on airline functions / Low cost
  airports
• Point-to-point Low Fare Pricing
• Single price-point available at any instant in
  time for a flight event
• High frequency point-to-point service
• Emphasis on stimulation of passenger demand
• High density population base
• Massive stimulation of price sensitive passenger
  demand
• Tendency towards Load Factor maximization
  (throughput)
• No frills service, minimum cost operation
• Merchandising model to drive ancillary revenue

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Realities of LCC Model in Canada

• Airports as natural monopolies
• Limited alternatives at most cities
• Population does not support multiple airports at
  cities
• Airport Fee structures that do not encourage
  efficiencies
• Taxes and Fees
• Fuel Excise Tax, GST / PST , Security Charge
• Nav Canada Fee
• Airport Improvement Fees, Agriculture Inspection
  Fees

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Price / Load Tradeoffs for an Airline

• Passenger demand uncertain
• Leisure tends to book further in advance of the
  travel date
• Business tends to book closer to departure
• Highly seasonal traffic patterns by Canadian air
  travellers
• Low season demands requires lower fares to
  stimulate travel
• Classical economic theory indicates that the
  demand curve will reduce with increasing price
• In the Canadian market, the demand curves tend
  towards those characteristic of an ologopolistic
  market
• The number of units sold increases dramatically
  as price drops below a threshold level
• Similarly, units sold decreases dramatically as
  price increases above a threshold value

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RISING AIRPORT DEBT

• Due to outdated facilities and local expansion,
  airports have made significant investment in
  facilities assumed from Transport Canada.
• Airport debt per guest has increased by almost
  100 since 2001.

Privileged Confidential
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RISING AIRPORT DEBT

• Significant facility spending has resulted in a
  205 increase in total capital assets .
• Inefficient use of airport facilities has
  resulted in accelerated requirements for facility
  expansion .

Privileged Confidential
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Airport Costs What can we do?

• Airport infrastructure
• Sunk costs, need to maximize the benefits of
  these investments
• Solution is to increase the airport throughput
  (Guests)
• Suggestions
• Increased efficiencies in use of Airport
  facilities
• Revenue Manage the use of Airport services
• Differential pricing for the use of Gates
• Airlines that utilize a gate for 3 hours should
  pay more than an airline that uses the gate for
  30 minutes
• Differential pricing for the use of Slots
• Charge more for airlines that want to use peak
  times of day versus off-peak
• Increased efficiencies in take-off and landings
• Ensure Canadian airports operate at world class
  efficiencies
• Improved efficiency in use of runways

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Air Traffic Control What can we do?

• Adopt more efficient flow patterns for aircraft
• Current model triggers significant and
  unnecessary costs
• Noise profiles were generated some 15 years ago
  based on older technology noisier aircraft
• Next Generation aircraft have a much reduced
  noise footprint
• Aircraft profiles have not changed
• Result
• Airlines continue to endure inefficient profiles
• Increased cost of operations

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Open-Skies Agreements

• Assumes a level playing field for all the
  participants
• Disparity in taxation system
• Disparity in fee structure
• Airport terminals at many US cities are owned by
  the airlines
• Many airports in the US are slot constrained
• Unequal access to slots and gates at constrained
  airports
• Access to slots at non-preferred times forces
  airlines to reduce fares to stimulate travel
• Incumbent and frequently inefficient airlines are
  protected from full competitive market pressures
• Canadian carriers open to further competition,
  but.
• Must ensure that the competitive landscape is
  balanced
• Address the different cost structure issues
• Address the operational issues

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Questions ?