International Airlines

International Airlines

Presented By:

Zaki Kasmani David Tran Laurence Wong

Cecilia Fan

Industry Outlook

Just Kidding! OR??

Basic Definitions

 ATK (Available Tonne Kilometres) :

 Used to measure available total capacity (combined passenger and cargo)

 ASK (Available Seat Kilometers):

 The number of seats an airline has available multiplied by the number of kilometers they are flown

 Used to measure airline capacity

 RPK (Revenue Passenger Kilometers):

 The number of passengers multiplied by the number of kilometers they are flown

 Used to measure actual passenger traffic

 PLF (Passenger Load Factor):

 % of ASK used

 FTK (Freight Tonne Kilometers):

 Used to measure actual freight traffic

 UNIT COST:

 The average operating cost incurred per ATK

 YIELD:

 The average amount of revenue received per RPK, net of taxes

 Revenue divided by RPK

Types of Airlines

• Legacy: International & National

traditional airlines (ie: British Airways, Delta Airways)

• Discount: Regional (Europe) or National (US) (ie: Easyjet, Southwest)

• Cargo

Airline Characteristics

 Capital intensive industry (highly leveraged)

 Largest operating costs: Labour & Fuel

 Historically low labour productivity

 Very sensitive to global business cycles

 Very competitive

 Sensitive to geopolitical events ie: 9-

Types of Routes

 Point to point (linear): direct flight to destination (low-cost/discount model)

 Hub and spoke: connection flight (traditional model)

 Hub: airport that is used as a transfer point

 Spoke: routes that airplanes take

Past & Present Injuries

 Deregulation (October 28, 1978)

 Terrorist attacks (Sept 11, 2001)

 The collapse of the dotcom bubble (late 1990)

 The war in Iraq (2003 - present)

 The SARS epidemic in Asia (start November 2002)

 Fiercer competition from new low-cost carriers

 High taxation

Future Threats

 Additional terrorist attacks

 Future price of oil

 Further competition from regional airlines

 Security impact on cost and travel convenience

 Decrease in consumer confidence

 World economy

 Business cycle

 Debt (airline industry’s debt load exceeds the US industry average)

 Aircraft cost & maintenance

Bankruptcy Protection

 2002-2005: Majority of US legacy airlines entered & emerged from Chapter 11; some still working through restructuring (Delta)

 Focus was cost reduction: reduced labour costs, pension restructuring, capital

restructuring (fleet overhaul to cheaper,

more fuel efficient aircraft – avoid the Jetsgo

predicament)

Growth Projections

Global Traffic Outlook

Historical Data

Historical Data

Fuel Costs

Fuel Costs

Labour Costs

Average Wages and Salary Accruals per Full-Time Equivalent Employee by Transportation Industry (Current $)

  199

1

199 2

199 3

199 4

199 5

199

6 1

9 9 7

1 9 9 8

199 9

200 0

Cumulative Growth

All industries 27,3

2 6

28,6 7 2

29,4 4 4

30,1 7 7

31,0 3 4

32,0 8 7

33,4 9 0

35,2 0 1

36,7 5 4

38,8 4 6

42.16%

Transportation, total 30,0 1 8

31,5 7 5

31,3 9 2

31,9 4 6

32,2 8 3

33,0 7 4

34,4 0 7

35,9 0 7

37,1 7 8

38,4 8 4

 

 

Air 34,4

8 7

36,0 5 8

35,8 5 2

36,2 5 7

36,4 1 9

36,9 8 9

38,6 9 1

40,4 4 1

42,5 2 3

43,8 2 0

27.06%

Trucking and warehousing 26,9 2 1

28,3 3 6

28,2 9 3

29,1 1 2

29,6 0 5

30,3 4 2

31,7 5 4

32,9 4 9

34,0 0 7

35,0 2 4

 

  Local and interurban

passenger transit 18,0 6 4

18,9 5 0

18,9 5 5

19,5 0 4

19,9 8 0

20,6 4 8

21,2 1 9

22,0 0 8

22,7 9 2

23,7 4 5

 

 

Railroad 45,8

9 3

50,2 6 7

50,4 4 0

51,7 1 9

50,4 6 5

55,2 9 9

57,2 3 5

60,6 3 2

60,6 2 3

62,6 7 3

 

 

Water 34,7

0 3

36,3 1 1

36,8 3 3

37,3 5 7

37,7 6 9

38,8 5 7

40,3 2 9

42,3 1 7

43,4 3 6

44,9 8 0

 

  Pipelines, except natural

gas 47,0

0 0

51,5 2 6

50,4 2 1

54,6 4 7

58,1 8 6

54,7 8 2

58,8 8 1

64,9 9 1

65,3 7 9

66,5 4 0

 

  Transportation services

^c

27,1

6 9

28,5 3 4

28,7 9 2

29,5 8 8

30,8 0 1

31,5 1 1

32,7 9 4

34,6 0 3

36,2 0 4

38,6 0 2

 

  Aggregate Economy 24,5

6 5

25,6 4 6

26,3 7 4

26,9 3 6

26,9 9 8

27,7 8 9

28,8 0 8

29,7 4 4

30,6 1 8

31,9 4 9

30.06%

SOURCE : U.S. Department of Commerce, Bureau of Economic Analysis, National Income and Products Accounts, tables 6.6b and 6.6c, Internet site http://www.bea.doc.gov/bea/dn1.htm available as of Feb. 17, 2004

AGGREGATE ECONOMY DATA SOURCE: US Bureau of Labour Statistics

Labour Costs

Career/Industry Group Minimum Salary Average Salary Maximum Salary

Airport $25,000.00 $43,722.70 $79,200.00

AP Mechanic $14,137.20 $44,504.22 $75,000.00

Avionics $18,000.00 $48,191.44 $150,000.00

Computer $35,322.00 $52,957.83 $70,543.00

Dispatch $25,000.00 $32,000.00 $55,000.00

Engineering and Aerospace $20,000.00 $67,484.60 $115,000.00

Executive $60,000.00 $72,500.00 $80,000.00

Flight Attendant $16,800.00 $17,099.00 $24,000.00

Ground-Ramp $50,000.00 $57,500.00 $65,000.00

Management $16,476.00 $62,024.21 $120,000.00

Office and Administrative $14,137.20 $33,479.23 $64,728.00

Labour Cost Implications

 More median salaries above average than below = higher overall salary cost than for economy in general

 Wide range in salaries, unionized labour;

senior international route pilots can earn up to $190,000 USD per year

 Majority of pensions are defined benefit:

higher salaries = significantly higher

pension obligations

Barriers to Operations

 Airports: generally locally owned authorities, lease out gates to airlines for long terms

 Exclusive use, preferential use, or common use

 Signatory airlines receive preferential rates vs. non signatory (most new entrants). ie: Pittsburgh Int’l Airport non signatory rates min. 20% higher

Gate access at airports can be a significant

barrier

Barriers to Operations

 In practice, established airlines can exercise

significant dominance: gates are usually assigned via non market practices (bidding). Ability to bid depends on access. Large airlines can make

contributions to/lobby municipal governments to restrict competing airlines’ access to airport

 Majority in Interest (MII) clauses grant airlines rights to approve airport capital improvement plans (can restrict expansion to maintain monopoly access to a

“hot” airport)

Barriers to Operations

 FAA is currently reviewing gate lease practices in an attempt to make access more equitable. However, oversight still lies with the airport owner (local

authority)

Therefore, a carrier’s ability to grow may not be

determined by its cost efficiency but rather by its

ability to land at high traffic destinations

Bottom Line

Airlines MUST reduce costs to achieve a return to sustained

profitability.

Cost Minimization Strategies

 Oil price forecasted to drop to $45-55 per barrel

range in 2007 (March 22 WTI spot:$60.82)

Cost Minimization Strategies

1a) Acquire more fuel efficient aircraft:

 Current Long Range Aircraft Fuel Consumption

 Boeing 747-400 3.5 L/100 passenger KM (Average)

 New Long Range Aircraft Fuel Consumption

 Boeing 787: 2.4 L/100 passenger KM

 Airbus A380: 3.0 L/100 passenger KM

 Airbus A350: 3.0 L/100 passenger KM

Cost Minimization Strategies

 1b) Acquire more regional jets:

 Regional Jets

 Bombardier CRJ 200 (50 seat): ~3.12L/100 passenger KM

 Bombardier CRJ 700 (78 seat): ~2.60L/100 passenger KM

 All Russian aviation companies now

under one banner – United Airplane

Cost Minimization Strategies

1b) Acquire more regional jets:

• cost savings: Flights at capacity, lower cost (less people required to maintain and fly aircraft)

SOURCE: Bombardier

SOURCE: Bombardier

Cost Minimization Strategies

2) Reduce Labour Costs

a) Increase labour productivity through additional training, performance monitoring

b) Decrease salary/pension costs by:

• hiring non-union workers where possible (new divisions)

• renegotiating existing salary contracts

• phasing out defined benefit pension plans in favour of

Cost Minimization Strategies

3) Refine Business Model

• Legacy airlines can employ 2 models:

 point to point low cost model on domestic routes

 traditional hub model on international routes.

Thus far, traditional airlines (especially US based ones) have been entering bankruptcy protection to enable a restructuring that encompasses all 3 strategies.

However, this is not exactly conducive to increasing

consumer and investor confidence

Growth Projections

China Traffic Growth

Growth Strategies

• China & India:

 burgeoning middle class now has resources to travel.

 Increased trade and foreign investment means increased number of foreign business people visiting, and increased frequency of visits

Focus on regions that are expected to yield

the highest rate of RPK growth:

Investment Criteria

1) Cost efficiency:

• fuel efficient fleet, appropriate business model,

reasonable labour costs (non union, or balanced union power)

• well funded pension obligations (defined contribution superior)

2) Exposure, or plans to operate in future high growth areas (China, India, Latin America)

3) Healthy financial structure; should not be overly leveraged, reasonable CAPX

4) Enough market power to secure additional airport access; ability to “withstand” competition from other carriers at high traffic airports (dominate?)

Given the investors’ current distaste for airlines,

bargains could (?) be found

Southwest Airlines

Company Snapshot

 Listed on: NYSE

 Symbol: LUV

 Industry: Regional Airlines

 Market Cap: $14.14B

 Stock Price: $17.65 (Closing 03/24/06)

 Dividend Yield: .02 (0.10%)

 P/E: 26.23

 Shares Outstanding: 804,661,597

Background

 1967: Incorporated in Texas (Rollin King and Herb Kelleher)

 1971: Commenced service with 3 Boeing 737s serving Dallas, Houston, and San Antonio

 Short to medium-haul point-to-point regional carrier

 Today: 448 Boeing 737s, 61 cities, 31 states

 31,729 employees as of January 1, 2006

 Posted 33 ^rd consecutive year of profits in 2005

 Largest US carrier based on originating US passengers

boarded and scheduled US departures

Mission

 “Dedication to the highest quality of

customer service delivered with a sense of warmth, friendliness, individual pride, and company spirit.”

 “… to provide our employees a stable

work environment with equal opportunity

for learning and personal growth.”

Key Officers

 Herbert Kelleher

 Position: Founder / Executive Chairman

 Age: 74

 Years of Service: 28

 Gary Kelly

 Position: CEO

 Age: 50

 Years of Service: 20

 Colleen Barrett

Quick Facts

 Average passenger airfare is $93.68

 Average passenger trip is 775 miles

 Ranked first in customer satisfaction

 Adopted the first profit sharing plan in US airline industry in 1973

 Employees own at least 10% of stock

 Member of fortune 500

 Received 260,109 resumes and hired

2,766 new Employees in 2005

Destinations

Strengths & Weaknesses

 Strengths

 Known for superior customer service

 Low-cost, no-frills

 Direct one-way travel

 Point-to-point efficiency

 Largest carrier for domestic service

 One fleet type

 Hedge against exposure to fuel prices

 Only airline rated investment grade

 Weaknesses

 Point-to-point creates excessive expenditure

 Too many locations, administrative costs

 Risk to shocks in US

economy, since it is a

domestic carrier

Operating Expenses

2005 Operating Expenses

40%

7%

7%

18%

Wages & Benefits

Fuel

Maintenance

Aircraft rentals

Landing fees

Fuel Costs

Fuel Costs

771 762 830

1000

1342

0 200 400 600 800 1000 1200 1400 1600

2001 2002 2003 2004 2005

Yea r

C o st ( M il li o n s)

Average Cost Per Gallon

0.71 0.68 0.72

0.83

1.03

0 0.2 0.4 0.6 0.8 1 1.2

2001 2002 2003 2004 2005

Year

D o ll ar s

Fuel Strategies

 Consumed 1.3B gallons of jet fuel in 2005

 Hedge on short and long term basis

 2005: 85% at $26/barrel crude oil

 Savings of $892 Million

 2006: 65% at $32

 2007: 45% at $31

 2008: 30% at $33

 2009: 24% at $35

Competition and Challenges

 Increasing low fare and lower cost competition

 Rising fuel costs

 Competition from surface

transportation in short-haul markets

Risk Factors

 Business very sensitive to price of fuel

 Business is labour intensive

 82% of employees are unionized

 Relies heavily on technology for daily operations

 Changes in government regulation can

have a major impact on business

Labour Unions

Employee Group Union CBA Expiry

CSRs AFL-CIO November 2008

Flight Attendants TWU June 2008

Field agents TWU June 2008

Pilots SWPA September 2006

Plane Technicians AMFA February 2009

Mechanics AMFA August 2008

Flight simulator

technicians Teamsters November 2011

Flight instructors SWPIA December 2012

Flight dispatchers SWEA December 2009

Stock clerks Teamsters August 2008

Aircraft Data

737 Type Seats Average

Age (Yrs) # of

Aircraft # Owned # Leased

300 137 14.7 194 110 82

500 122 14.7 25 16 9

700 137 3.8 229 224 2

Totals 9.1 448 352 93

Operating Data

($’s in millions) 2005 2004 2003 2002 2001

RPM (000s) ^{60,223,100 53,418,353 47,943,066 45,391,903 44,493,916} ASM (000s) ^{85,172,795 76,861,296 71,790,425 68,886,546 65,295,290}

Load factor ^{70.07% 69.50% 66.78% 65.89% 68.14%}

Financials

Revenue Composition

Revenue Composition 2005

Passenger

Freight Other

Income Statement

Income Statement (Millions)

2005 2004 2003 2002 2001

Operating Revenues

Passenger 7,279 6,280 5,741 5,341 5,379

Freight 133 117 94 85 91

Other 172 133 102 96 85

Total operating revenues 7,584 6,530 5,937 5,522 5,555

Operating Expenses

Salaries and benefits 2,702 2,443 2,224 1,993 1,856

Fuel and oil 1,342 1,000 830 762 771

Maintenance materials and repairs 430 457 430 390 398

Agency commissions - - - 55 103

Aircraft rentals 163 179 183 187 192

Landing fees and other rentals 454 408 372 345 311

Depreciation and amortization 469 431 384 356 318

Income Statement Highlights

 Profits increase 75% from 2004

 33 ^rd consecutive year for profits

 effective cost control measures

 Successful fuel hedging program

 Net income fairly erratic

Balance Sheet (1/2)

Assets (Millions)

2005 2004 2003 2002 2001

Current Assets

Cash and cash equivalents 2,280 1,048 1,865 1,815 2,279

Short-term investments 251 257 - - -

Accounts receivables 258 248 132 175 71

Inventories of parts and supplies 150 137 93 86 70

Deferred income taxes - - - - 46

Fuel hedge contracts 641 428 164 113 -

Prepaid expenses and other current assets 40 54 59 43 52,114

Total current assets 3,620 2,172 2,313 2,232 2,520

Non-current assets

Flight equipment 10,999 10,037 8,646 8,025 7,534

Balance Sheet (2/2)

Liabilities and Stockholder's Equity

2005 2004 2003 2002 2001

Current liabilities

Accounts payable 524 420 405 362 505

Accrued liabilities 2,074 1,047 650 529 548

Air traffic liability 649 529 462 412 450

Aircraft purchase obligations - - - - 222

Short-term borrowings - - - - 475

Current maturities of long-term debt 601 146 206 131 40

Total current liabilities 3,848 2,142 1,723 1,434 2,240

Long-term debt less current maturities 1,394 1,700 1,332 1,553 1,327

Deferred income taxes 1,896 1,610 1,420 1,227 1,058

Deferred gains from sale and leaseback of aircraft 136 152 168 184 192

Other deferred liabilities 269 209 183 134 166

Total Liabilities 7,543 5,813 4,826 4,532 4,983

Stockholder's equity

Common stock 802 790 789 777 767

Capital in excess of par 424 299 258 136 50

Retained earnings 4,557 4,089 3,883 3,455 3,228

Accumulated other comprehensive income 892 417 122 54 (32)

Treasury stock - (71) - - -

Total stockholders equity 6,675 5,524 5,052 4,422 4,013

Total liabilities and equity 14,218 11,337 9,878 8,954 8,996

Cash Flow Statement (1/2)

Cash flow from operations (millions) 2005 2004 2003 2002 2001

Net Income 548 313 442 241 511

Adjustments to net income:

Depreciation and Amortization 469 431 384 356 318

Deferred income taxes 257 184 183 170 208

Amortization of sale and leaseback of aircraft (16) (16) (16) (15) (15)

Amortization of scheduled airframe inspections 49 52 49 46 43

Income tax benefit from stock options exercises 65 35 41 38 54

Changes in assets and liabilities:

Accounts and other receivables (9) (75) 43 (103) 67

Other current assets (59) (44) (19) (10) (9)

Cash Flow Statement (2/2)

Cash flow from investing (millions) 2005 2004 2003 2002 2001

Purchases of property and equipment (1,210) (1,775) (1,238) (603) (998)

Change in short-term investment 6 124 (381) - -

Payment for assets of ATA airlines (6) (34) - - -

Debtor in possession loan to ATA airlines - (40) - - -

Other - (1) - - -

Net cash flow from investing (1,210) (1,726) (1,619) (603) (998)

Cash flow from financing

Issuance of long-term debt 300 520 - 385 614

Proceeds from revolving credit facility - - - - 475

Proceeds from trust arrangement - - - 119 266

Proceeds from employee stock plans 132 88 93 57 44

Payments of long-term debt (149) (207) (130) (65) (111)

Payments of trust arrangement - - - (385) -

Payments of revolving credit facility - - - (475) -

Payments of cash dividends (14) (14) (14) (14) (13)

Repurchase of common stock (55) (246) - - -

Other (1) (8) 3 (4) (5)

Net cash flow from financing 213 133 (48) (382) 1,270

Net change in cash 1,232 (436) (331) (465) 1,757

Cash at beginning of period 1,048 1,484 1,815 2,280 523

Total cash at end of period 2,280 1,048 1,484 1,815 2,280

Cash Flow Analysis

(dollars in

millions) 2005 2004 2003 2002 2001

Cash Flow From

Operations

2,229 1157 1,336 520 1485

Free Cash Flow

1,019 (569) 98 (83) 487

Cash Flow Analysis

 Erratic free cash flow

 CF from operations increased 83%

 increase in accounts payable

 Higher net income in 2005

 CF from investing used mainly to purchase new planes

 33 new planes in 2005

 $300M in debt issued in 2005

 $520M in debt issued in 2004

Stock Chart (1 Year)

Stock Chart (5 Year)

Price Comparison

Profitability Comparison

Southwest

2005 2004 2003 2002 2001

ROE (%) 8.21 5.67 8.75 5.45 12.71

ROA (%) 3.85 2.76 4.47 2.69 5.67

Profit Margin (%) 7.23 4.79 7.44 4.36 9.18

Discount Airlines

2005 2004 2003 2002 2001

ROE (%) 5.83 10.98 5.56 -10.09 24.73

ROA (%) -14.36 -54.38 -14.89 -11.66 -3.45

Profit Margin (%) 6.73 11.6 8.51 10.5 2.46

Industry

2005 2004 2003 2002 2001

ROE (%) -2.14 -3.37 0.74 27.03 -149.58

ROA (%) -14.36 -54.38 -14.89 -11.66 -3.45

Profit Margin (%) -4.46 1.64 -4.55 -5.82 0.06

Other Ratios

Southwest

2005 2004 2003 2002 2001

Current Ratio 0.94 1.01 1.34 1.55 1.13

Debt/Equity 0.21 0.31 0.26 0.35 0.33

Discount Airlines

2005 2004 2003 2002 2001

Current Ratio 1.53 1.81 1.74 1.62 1.33

Debt/Equity 98.33 86.96 97.69 -174.02 -29.77

Recommendation

HOLD

+

 Excellent management

 Proven business strategy

 33 consecutive years of profit

 Steady dividends

-

 Intense competition

 Low profit margins

 Erratic cash flow

 Seasonal industry

Thank You Come Again!!

Singapore Airlines

Background

• Founded in 1972.

• National airline of Singapore.

• Second largest carrier by market value.

• Full member of global Star Alliance.

• Route network reaches out to over 90 destinations in close to 40 countries.

• Numerous awards.

Global Route Map

Recent Awards

TIME

Readers' Travel Choice Awards 2005 Preferred Airline

Preferred First/Business Class Best Frequent Flyer Programme Business Traveller (China) Best Airline in the World

Best Asian Airline Serving China Commonwealth Magazine (Taiwan) The Most Admired Company 2005 Awards Winner - Airline Industry Category (8th year) Asia Risk Magazine (HK)

Asia Risk Awards 2005

Corporate Risk Manager of the Year TTG Asia Travel Awards

Hall of Fame 2005

Travel Inside, Sabre, Swiss Postal Services, JPM Magazines (Switzerland)

Subsidiaries

• SIA Group consists over 50 subsidiaries and associates, including:

– SilkAir

– SIA Engineering Company (SIAEC)

– Singapore Aero Engine Services Private Limited (SAESL)

– Singapore Aircraft Leasing Enterprise (SALE) – Singapore Airlines Cargo (SIA Cargo)

– Singapore Airport Terminal Services (SATS)

– Singapore Flying College

Ownership in Other Airlines

• Virgin Atlantic Airways (49%)

– Operates long-haul routes between London and North America, the Caribbean, Africa, Asia and Australia.

• Tiger Airways (49%)

– A low-cost airline based in Singapore.

– Singapore's first true low-cost carrier.

Group Fleet

List of Major Shareholders

Temasek Holdings

• Temasek Holdings

– Owns and manages the Singapore

Government's direct investments, both locally and overseas.

– Singapore Ministry of Finance is the single

shareholder of Temasek Holdings.

DBS and Raffles

• DBS

– Set up in 1968 as a development financing institution led by the Singapore government.

– Major shareholders include DBS, Raffles, and Temasek.

• Raffles Holdings

– Owned by Temasek and CapitaLand (which in turn is owned by Temasek).

– Singapore Airlines is also a shareholder.

Objectives for Future Growth

• Re-engineer business to meet any challenger head-on.

• Develop a sustainable business position through careful cost management and planning.

• Continue to work hard to access the heavy-

protected Trans-Pacific route between Australia and the USA.

• Launch the world’s largest aircraft, Airbus A380,

Airbus A380

• “First to fly the A380 - experience the

difference in 2006.”

• Double-decker, four- engined airliner.

• Largest passenger

airliner in the world,

topping the Boeing

747, which was the

largest for 35 years.

Current Stock Information

As of March 24, 2006

• Price: 14.70

• 52-week range: 11.00 - 14.90

• Shares outstanding: 1.22 billion

• Market capitalization: $17.93 billion

• Exchange rate: 0.72 CAD/SGD

Revenue Composition

3-months Chart

1-year Chart

5-year Chart

Key Ratios

Debt-to-

Equity Profit

Margin Return on Equity

SIA 48.42% 10.30% 8.56%

Industry

(International)

64.15% -4.46% -2.14%

Recommendations

Don’t Buy!

AIR CANADA

Background

 Began on April 10, 1937, called Trans-Canada Airlines, subsidiary of Canadian National Railway

 Changed name to Air Canada since January 1, 1965.

 In 1989, Air Canada was completely privatized.

 In January 2000, acquired Canada’s second largest air carrier, Canadian Airlines.

 On April 1, 2003, filed for bankruptcy protection.

 On September 30, 2004, emerged from

ACE Aviation Holdings Inc. (ACE)

 Operating companies and partnerships:

 Air Canada

 Air Canada Cargo

 ACGHS Limited Parternership

 Air Canada Jazz

 Air Canada Technical Services(ACTS)

 Touram Limited

Partnership-(Air Canada Vacations)

 Aeroplan Limited

Partership (85.6%)

Current Stock Information

As of March 24, 2006

 Ticker symbol: TSX: ACE.RV.T

 Price: $34

 52-week range:$30.25-$43.03

 Shares outstanding: 76,852,830

 Market capitalization: 2,612,996,220

2005 Operating Revenues

2005 Operating Expenses

Air Canada and Jazz

 They contribute to the passenger transportation revenue

 Purchases substantially all of Jazz’s fleet capacity based on predetermined rates

 Jazz currently operates scheduled passenger service on behalf of Air Canada

 They linked their regional and mainline

networks to serve connecting passengers more efficiently

 They provide direct passenger air

transportation to 159 destinations

Business Strategy

1. Competitive cost structure

 Lower average salaries, sales and distribution costs

2. Redesigned network to maximize efficiency and leverage international growth

opportunities

 Increase used of large regional jet aircraft

3. Customer Driven Revenue Model for

Passenger Services

Hubs

 Toronto Pearson International Airport is the largest hub.

 Montréal-Pierre Elliott Trudeau

International Airport European hub and Atlantic Canada hub

 Vancouver International Airport hub for Pacific operations

 Calgary International Airport focus

city

Air Canada’s Fleet

 Air Canada’s operating fleet, excluding Jazz

aircraft, at December 31, 2005:

Air Canada’s Future Fleet

Available Seat Miles (ASMs)

Revenue Passenger Miles (RPMs)

Passenger Load Factor (PLF)

Canada Up 0.4 pp

US Transborder Up 2.7 pp

Other International Up 1.4 pp

Passenger Revenue per Revenue

Passenger Mile (Yield)

Passenger Revenue per Available Seat

Mile (RASM)

Average Salary and Employees

Hedges

 Fuel hedges 2005 to 2007

 Increase hedge position of approximately 4% per month to approximately 50% of anticipated jet fuel requirements

 Foreign currency contracts

 Forward contracts and option agreements

on US$521 million of future purchase

Financial Statements

Financial Analysis

ACE North

American Airlines

All Airlines

Debt/Equity 914% 63.72% 64.15%

Profit margin 2.62% -6.97% -4.46%

Stock Price – 1 Year

Stock Price – Since Incorporation

Recommendation

SELL