China Regional Jet Forum

1
Regional Jet Success in North America and
Implications for China

• China Regional Jet Forum
• September 2005

2
Outline

• U.S. airline domestic traffic growth history
• Environmental factors which stimulated north
  America RJ growth
• Todays environment and key market drivers
• Regional jet outlook
• Opportunities for RJ growth in China

3
Starting in 1992 ...
... the regional jet revolution
4
U.S Airline domestic traffic regional traffic
growing
Domestic Majors
35
Regional
30
25
20
15
10
Annual Change In Traffic (RPM)
5
0
-5
-10
-15
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
1988
5
Factors Enabling RJ Market Growth

• Deregulation in U.S.
• Government development funding and aircraft
  financing
• Discovery of New Markets
• Regulations
• Passenger preference
• Labor cost

Uses of Regional Jets
Turboprop
Turboprop
Complement
Replacement
12
9
Jet Complement
New Route
29
25
Jet Replacement
25
Turboprop Complement
New Route
Jet Replacement
Jet Complement
Turboprop Replacement
RJs Have Evolved into a Competitive Necessity
From 1991 to 2005
6
Characteristics of RJ Economics 1990s

• Higher operating cost for original 50 pax
• but serving high-yield routes
• Lower labor cost relative to major operators
• Direct relationship with Majors is essential
• High yield rather than high load factor operations

Economic Formula for Success is Very Different
from Majors
7
Airline Yield / Cost Relationship
Regional
Major
Revenue Yield
Regionals realize higher yields than Majors
per seat-mile
2X Yield at 500 SM
Operating Cost
Per seat cost of small jets naturally higher than
larger jets of Majors
500 Statute Miles
Distance
Regionals, with High ASM Cost, Must Operate in
High Yield Markets
8
Todays Environment and Key Market Drivers

• Approximately 2000 RJs operating in North
  America continued RPM growth
• 50 pax market approaching saturation in USfew
  new orders
• Scope clause allowing 70 pax or higher
• Majors / LCCs evaluating 90 seats for mainline
  operation

9
US Fleet Capacity in 05( Fleet WB NB RJ)
16
59
25
All US
Figures do not include Turboprops
10
Regional Jet Relationships-Sep 05
Alaska
Air Canada
Northwest
Jazz
Horizon
Chautauqua
Pinnacle
Mesaba
AWAC
US Airways
Chautauqua
Frontier
PSA
United
Horizon
Mesa
Mesa
Skywest
TransStates
TransStates
MidAtlantic
America West
Indep Air
Mesa
American
Delta
Chautauqua
TransStates
AMR Eagle
ASA
Chautauqua
COMAIR
Continental
Skywest
ExpressJet
Established Hub Infrastructure Served by Regional
Jet Operations
11
Falling yields and increasing fuel prices a
one-two punch for airlines
Change in International Yield vs Fuel Price

• Industry Losses
• 01-04 36B
• US 05E 6B
• US 1Q 05 3.1B
• Airline yields on 20 year decline
• U.S. carriers no pricing power, improving
  capacity management
• Fuel price increases offsetting cost declines
  putting pressure on regional airlines

85 90 95 00
04
Fuel CAGR 3.2
Yield CAGR (2.1)
Fuel Price Impact on 1Q05 Net Income
BA
AA
NW
LH
JBU
CO
DL
SWA
12
Profit PoolUS Airlines in 2004
Majors under pressureRegionals most profitable
13
Revenue/Cost per Available Seat Mile (RASM/CASM)
Regional Squeeze

• Regionals RASM Y/Y decrease of 9.3CASM up 3
  across segments
• Regionals impacted the most
• Financial condition of majors forcing reduction
  in fees
• Majors forcing regionals to re-bid
• Profitability pressure on 50 pax
  operatorsgrowth in 70 Pax

14
Scope Clausemoving to 70 pax allowing
flexibility for new capacity
Contract
Contract
44/45
50
70
Seats
60
gt70
44/45
50
70
Seats
60
gt70
(Amendable)
(Amendable)
Not Allowed
Not Allowed
Not Allowed
Not Allowed
Not Allowed
Not Allowed

United and US Airways under discussions with
pilot unions about
scope relaxation up to 100 seats.
No Scope Clause
No Scope Clause
No Scope Clause
Number of 50, 70 and 86 seat RJs lt 75 units
Source Embraer GE
Scope Clause can be modified annulled if
operators are in Chapter 11
15
Regionals Expanding into Longer Range
16
Delivery Forecast Comparison 2005-2024
GE, Embraer Boyd Group all Forecast Solid RJ
Growth
17
Forecast for new deliveries weighted towards 70
seat and above
Annual Delivery Forecast
30-60 Seat 60-90 Seat 90-120
Seat Seat Segment
E190/95 B737/717 A318 ARJ21
ERJ135/40/45 CRJ200
E170/75 CRJ700/900
Source GEAE
18
North America Regional Jet Journey

Key Milestones

Future

• 1978 Airline Deregulation
• Development of major airlines and hubs
• Regional airlines use turboprops for hub feed
• Essential air service further promotes regional
  airlines

• Today
• 50 pax saturation
• Tough financial condition for majors
• Scope relaxation growth in 70 90 pax
• Some majors increasing offload of domestic
  service to regionals focusing on international
  routes
• Regional airlines RPM growth continues

• 1980s-1990s
• Hubs compete for feeder traffic
• Regional jets emerge for larger hub catchment
• More people
• flyingeconomic
• social development

• 1938 Act
• Civil Aeronautics Board Established

Regional Aviation Evolving Continues to Grow
19
Future RJ Opportunities For China
Key Milestones


Future Opportunity

• Today
• Three major hubs formed in
• east coast
• Regional airlines starting to form
• Support for RJs for development of Western China

• Continue government support for regional jet
  growth
• Develop RJ hub for increased point-to- point and
  major hub feed
• Establish essential air service for smaller and
  remote cities
• Establish competitive cost structure and prices
  to allow RJ success

• 1990s 2000s
• Double digit growth in RPMs
• Major airlines consolidate
• Hubs developing

Continued Focus Support Will Lead to Bright RJ
Future in China