Global Airlines

Industry - Raymond and Leo British Airways - Billy Delta Airlines - Trevor Singapore Airlines - Herman

Presentation Agenda
Airline Industry Overview State of the Industry Traffic and Economics Regional Summaries Analysis of
British Airways Delta Airlines Singapore Airlines

Airline Industry Overview

Economy grows, travel grows Current short-term cycle is severe Long-term forecast remains healthy
Industry deregulation stimulates air travel Economic and traffic growth rates vary by region
New routes and more frequencies
Economies will grow 3.2% annually Air travel will be 5.1% RPKs negative growth SARS virus

State of Industry
Air Traffic Cycles Long-term Trend

Air Travel Cycles

Annual negative world traffic growth

In 1991 and in 2001-2002

Air Travel Cycles Cont

Long-term trends remain healthy Drivers for long-term air travel growth
Economic growth Globalization of trade Airline network service improvements Declining fares Deregulation and liberalization

Air Travel Cycles Cont

In short term, air travel is more volatile
Consumer confidence Business profits Depressed income High-technology stock market bubble September 11 Outbreak of SARS

Long-term Trend

Long-term Trend Cont

Keys:
Forecast shows 5% fewer world RPKs (Revenue per kilos) at the end of 20 years than without this unusual short-term cycle Yet, air travel growth will continue the pace at 5.1% annually

Traffic and Economics

Economic and Traffic Forecast

World GDP is forecast to grow by 3.2%
over the next 20 years Mature economies, GDP growth will average between 2~3% Emerging economies, GDP growth may average over 4%

Forecast Cont

Regional Summaries

European Airline Industry

Companies
Company in focus: British Airways
Others: Air France KLM Lufthansa Virgin Atlantic

Source: Air Transport Association

Industry Highlights 2002/03

Passengers
13.8 millions reduction

Breakeven Load Factor

69.4%; compared to a 69.2% load factor

Profit
USD$0.87 billions loss

Factors influencing the industry

SARS phenomenon Iraqi War Post 9/11 recovery phrase External Shocks
Currency Appreciation Security & Insurance

Source: Association of European Airlines

Competition
External
Internal
The US Airlines in the North Atlantic market

Consolidation & Alliances

Substantially increased of no-frills competition in Europe Ryanair, Easyjet, Go, bmibaby, Virgin Exp, etc
Star, Oneworld, KLM/Northwest, SkyTeam

Regulatory Environment
Deregulation is a global trend
First stage of liberalization in European Airlines

European governments wants:

Low fares Consequence Increased demand Increased demand for infrastructure growth

Trends
Slow recovery Mature economies with low growth rates Continuation of liberalization Growing international networks Rise of No-Frills carriers

Source: Association of European Airlines

N. American Airline Industry

Companies
Company in focus: Delta Airlines
Others: United Airlines American Airlines Southwest Airlines Northwest Airlines

Industry Highlights 2002/03

Passengers
17.4 millions reduction

Breakeven Load Factor

Increased from 76.7% to 81.4%; compared to 72.1% load factor

Profits (Loss)
USD$12.1 billions loss

Factors influencing the industry

Post 9/11 recovery/syndrome
Customer avoidance of air travel

Government tax & Security policies Insurance Escalating fuel prices Economic downturn Iraq War and SARS phenomenon

Source: Air Transport Association

Competition
85% of the passengers have more than 2
or more carriers Growth of hub-and-spoke
Increased competition in small markets

Alliances

Star SkyTeam OneWorld

Regulatory Environment
Deregulations
Mature liberalization

Post 9/11 Financial Effect

Increase financial burden for airlines Additional insurance costs

Increased tax burden

Source: Air Transport Association

Source: Air Transport Association

Trends
Slowly recovering Mature economies with low growth rates Low fares Cost-cutting strategies Efficient airline networks

Asian Airline Industry

Northeast Asia
Annual GDP growth is forecast at 2.1% This low rate is driven by Japan Korea will grow at a faster rate than Japan Air travel will grow above world average
Globalization and liberalization Fully deregulation Air travel growth at 6.2%

Northeast Asia Cont

Fragmentation will
continue
North America will remain popular Europe continues to grow

Southeast Asia
A mixture of countries at varying stages of
economic growth GDP is forecast to grow at 4.7% annually over the next 20 years The region is diverse
Economic and cultural interchange

Southeast Asia Cont

Southeast Asia has
strong cultural ties with both Europe and North America
VRF (visiting friends and relatives)

Region with its natural

resources and cultural attractions is forecast to develop as a leisure destination for Asia

Southwest Asia
GDP outlook is forecast to grow at 5.5% Subject to:
Privatization Globalization Infrastructure Tourism development

Overall traffic growth of the region will

average 7.0%

Southwest Asia Cont

Traffic within Southwest
Asia will average 8.7%, one of the worlds highest Encompasses several air travel markets
Middle class travels for business Pilgrimage Tourists and VFR

China
GDP forecast of 5.9% per year is the
highest in the world China is the fastest growing region
Air travel expands at 7.6%

World Trade Organization

Globalization is a major driver

China Cont
Airline industry is
modernizing
Airline consolidation Infrastructure investment Network and fleet rationalization Participation in major alliances

Airlines Analysis

Stock Price: 224

1=1.68 US Dollar
(Nov 7, 2003)

British Airways
Background British Airways is a public limited company BA, is the leading airline in Europe One of the biggest in the world It manages almost 330 planes, 550 destinations in 133

countries BA has holdings in other airlines, such as the Australian, Quantas, and the Spanish Iberia. Major destinations are Europe, America, Africa, Australia, South Pacific and Middle East

British Airways
Strategies
Low-cost strategy 650 m in cost saving by March 2003 Reduced manpower by 4446 people Corporate Mission Low fare in UK domestic market Greater use of e-technology for customers, staff and agents Focus on business class passengers

British Airways
Main Competitors
Europe Market Lufthansa and Air France are dominating the
market

North America Market United Airlines & Delta are dominating the market

British Airways
Alliance
Oneworld alliance 8 airline members:
British Airways, Aer Lignus, American Airlines, Cathay Pacific, Finnair, lberia, LanChile and Qantas.

SWOT Analysis
Strengths
Strong brand name Good reputation Reduce net debt

Weaknesses
Reduce boeing aircrafts Routes reduced Reduce service and flights Increase insurance cost Increase security cost Downturn in passenger demand cutting flights to the US and the Middle East

SWOT Analysis
Opportunities
Open skies between US and UK Predict growth in Europe market

Threats
Economic weakness SARS Middle East developments Price competition with other airlines in Europe

Financial Ratio
2003 0.0253 0.00708 0.0317 15.45 0.0455 2002 0.01 -0.0128 -0.0643 -17.35 0.104

ROA ROI ROE P/E P to BV

Financial Data
Total Revenue=$12,147 i by 7.8% Total Expense=$7616 i by 10.21 Net Income=$72 h by 2.39 Net asset=$3,592 h by 3% Earnings per share=6.7 Operating margin=3.8% h by 5.1 pts Net debt/total capital ratio=60.7% i by
5.3 pts

Operating Data

RPK= 100,112 h by 5.8% ASK= 139,132 i by 0.9% Passenger Load Factor=71.9 h by 1.5% RTK= 14,213 i by 2.9% ATK= 21,328 i by 6.7% Overall Load Factor=66.6 h by 4% Passengers Carried(000)=38,019 i by 5% Tonnes of Cargo Carried(000)=764 h by 1.2%

Stock Valuation
1 Year Price Chat
1year price range: 85.00 - 215.75 Todays stock price: 224

Stock Valuation
Last Trade Change 7 Nov 224.00 p +10.75 (+5.04%) Day's Range Bid Ask 214.00 - 225.50 221 224.25 52-wk Range EPS (ttm) P/E 85.00 - 215.75 6.7 31.83 Prev Cls Volume Div Date 213.25 26,714,080 N/A Open Avg Vol Ex-Div 214 14,566,425 N/A Mkt Cap Div/Shr Yield 2.425B 0 N/A

Sales per activity Passenger 85.00% Maintenance 8.00% Freight and mail 6.00% Non-scheduled 1.00%
Data as of 31/03/2003

Geographical analysis of group turnover and operating profit/(loss) million Turnover Europe The Americas Africa,Middle East and Indiansub-continent Far East and Australasia Operational profit/(loss) Europe The Americas Africa Middle East and Indiansub-continent FarEast and Australasia 2003 2002 2001 2000 1999 2,838 2,763 1,201 886 7,688 -117 223 168 21 295 3,208 2,863 1,262 1,007 8,340 3,388 3,450 1,304 1,136 9,278 3,400 3,253 1,220 1,067 8,940 3,409 3,272 1,133 1,078 8,892

-244 -172 -310 -166 144 470 308 451 91 92 62 124 -101 -10 24 33 -110 380 84 442

Sales per geographic Core Market United Kingdom 47.00% Geographic areas Europe 64.00% Asia / Pacific 7.00% Americas 19.00% Rest of the World 10.00%
Data as of 31/03/2003

Balance Sheet

Total Asset=12900 Current Asset=2725 Total Liabilities=10626 Current Liabilities=2904 Total Shareholder Equity=2274

Balance Sheet Shareholder's funds Total debt and others Total Total assets 2003 2002 2058 2016 10842 11646 12900 13662 12900 13662

Income Statement

Year Revenues* Expenses Net Profit*

1999 2000 2001 2002 2003 8,892 8,940 9,278 8,340 7,688 8,686 8,961 9,164 8,482 7,616 206 -21 114 -142 72

* in million(s) of Pound Sterling (EPS in Pence)

Revenue Composition
Revenue 8% 1% 6% Scheduled servicespassenger Scheduled services-freight and mail Non-scheduled services Other revenue

85%

Cost Structure
Cost Structure
Emplo yee co sts Eepreciatio n and amo risatio n

A ircrah o perating lease co sts

Fuel and o il co sts

10% 13% 8%

9%

28%

Engineering and o ther aircraft co sts Landing fees and en ro ute charges

10% 8% 11% 3%
Other o perating co sts

Selling co sts

A cco mmo datio n, gro und equipment co sts and currency differences

Profits Over 5 Years

Net Profit* 300 200

Net Profit*

Profit

100 0 -100 -200 1999 2000 2001 2002 2003

Year

Earnings Per Share Over 5 Years

Year Earnings per share 2003 2002 2001 2000 1999 6.7 -13.2 10.6 -2 19.5

Cash Flow Statement

Cash and Cash Equivalents
( Net cash inflow for capital expenditure and financial investment + Net cash inflow/(outflow) for acquisitions and disposals = Cash used in financing)

Cash Flow Statement Net Net Net Net cash provided by operatiing activities cash used in investing activities cash (used in)/ provieded by financing activities Cash inflow/(outflow) 2003 2002 1185 866 -249 -327 279 75 158 (4) 1215 614

Cash and cash equivalents

British Airways
Fleet Valuation
Avg Fleet age(yrs): 7.5 Avg Life (yrs): 25 Depreciation Method: Straight-Line Avg Salvage Value: 0
Qty 5 56 43 21 13 33 24 21 27 10 28 28 16 5 Price 230.5 184.5 151.5 113.8 73.5 46 51 41.5 48 49 42 43.5 41.5 37.5 Initial Value Dep'n 1152.5 345.75 10332 3099.6 6514.5 1954.35 2389.8 716.94 955.5 286.65 1518 455.4 1224 367.2 871.5 261.45 1296 388.8 490 147 1176 352.8 1218 365.4 664 199.2 187.5 56.25 Current Value 806.75 7232.4 4560.15 1672.86 668.85 1062.6 856.8 610.05 907.2 343 823.2 852.6 464.8 131.25 20992.51

Type Concorde Boeing 747-400 Boeing 777 Boeing 767-300 Boeing 757-200 Airbus A319 Aorbis A320 Boeing 737-300 Boeing 737-400 Boeing 737-500 Turboprops Embraer Rj145 Avro Rj100 British Aerospace 146 Total MV Owned

Net MVA vs Mkt Cap

Net MVA vs Mkt Cap Est fleet value = 21US B Current assets =2.725 B Total debt =5.149 B Net MVA =18.57US B

vs

Mkt cap=2.425B

Therefore, the assets areundervalued

Recommendation
Good News Improved net income Increased cash inflow Reduced net debt Decreased operating costs Recommendation: S-T: buy Bad News Decreased in revenue Downturn in passenger demand Assets undervalued

L-T: hold

Delta Airlines
U.S. Carrier

Nov. 5 / 03

Stock Price: $12.89

Background Information
Founded 1924 Headquarters: Atlanta, Georgia CEO: Leo F. Mullin Employees: 70,000+ Daily Flights + Partners: 6,130 Destinations: 453 cities in 82 countries

Strategies
Build adequate liquidity Significant reduction in costs Become more competitive in the low-fare
sector
Song, a highly competitive, wholly owned subsidiary

Competitors / Alliances
Competitors American Airlines United Airlines International Airline companies (minimal) Alliances Atlantic Southeast Airlines Comair, Inc. Other Delta connection carriers Skyteam Alliances Codeshare partners

SWOT
Strengths Well positioned hub networks Partners & Alliances Good Employee Relations Technological Innovation
Weaknesses Lower fairs due to high competition Less demand due to 911 Higher Expense

Map of Hub Network

SWOT Analysis
Opportunities Boston airport terminal project More international flights and coverage Threats Low-fare airline companies Demand for air travel does not increase

Balance Sheet - Assets

Period Ending Cash & Cash Equivalents Total Current Assets Property & Equipment Other Assets Dec 31, 2002 $1,969 $3,902 $16,524 $4,294 Dec 31, 2001 $2,210 $3,567 $16,097 $3,941

Total Assets

$24,720

$23,605

Balance Sheet - Liabilities

Period Ending Total Current Liabilities Non-current Liabilities Total Liabilities Common Stock Retained Earnings Accumulated income (loss) Dec 31, 2002 $6,455 $16,530 $22,985 $271 $1,639 ($1,562) Dec 31, 2001 $6,403 $12,349 $18,752 $271 $2,930 $25

Total Equity

$893

$3,769

Fleet / Net MV Assets

Aircraft Type B-727-200 B-737-200 B-737-300 B-737-800 B-757-200 B-767-200 B-767-300 B-767-300ER B-767-400 B-777-200 MD-11 MD-88 MD-90 EMB-120 ATR-72 CRJ-100/200 CRJ-700 Owned 18 71 77 15 4 51 21 8 8 63 16 29 4 73 15 Capital Lease 42 3 Operating Lease 3 10 26 41 24 8 7 57 15 122 Total 21 52 26 71 121 15 28 59 21 8 15 120 16 29 19 195 15 Average Age 23.5 17.8 16.1 2.2 11.3 19.6 12.9 6.9 1.8 2.9 8.9 12.5 7.1 11.8 8.5 3.7 0.3

Total

473

45

313

831

9.0

NMV Asset Evaluation

Total Market Value of Owned Fleet (in millions) Less: Total LT Debt Add: Current Assets Total NMV of Assets (Not including investments) $14186 9576 3902 $8512

Deltas market capitalization is sitting at 1.65 billion, which is less than total NMV of assets which sits at 8.5 billion. This shows that Deltas equity is undervalued.

Income Statement - Revenue

Period Ending Passenger Cargo Other Total Operating Income Dec 31, 2002 $12,321 $458 $526 Dec 31, 2001 $12,964 $506 $409

$13,305

$13,879

Revenue Allocation (2002)

3% 4%

Passenger Cargo Other

93%

Income Statement - Expense

Period Ending Salaries Aircraft Fuel Depreciation Contracted Services Other Expenses Total Operating Expense Dec 31, 2002 $6,165 $1,683 $1,148 $1,003 $3,306 Dec 31, 2001 $6,124 $1,817 $1,283 $1,016 $3,639

$13,305

$13,879

Expense Allocation (2002)

25%

45%

8% 9% 13%

Salaries Fuel Depreciation Contract Service Other

Earnings Trend
1803 1318

1637

Operating Income

-1602

-1309

1998

1999

2000

2001

2002

1067

1196 815

Net Income

-1230

-1287

1998

1999

2000

2001

2002

EPS Trend
8 6 4 2 0 -2 -4 -6 -8 -10 1998 1999 2000 2001 2002 -9.99 -6.69 6.34 7.2 7.05

Cash Flow Statement

Net Cash from Operations Less: Net Cash from Investments Add: Net Cash from Financing Net Cash Inflow / Outflow
Major Changes Operations Flight equipment less spending (2321) (922)

$285 (1109) 583 $1977

Investing Boston Airport Terminal (485) 58

Financing Short Term Obligations 701 (1144)

Ratios
Year 2002 Valuation Ratios Delta American United

P/E Ratio
P/BV Ratio Internal Liquidity Current Ratio (MRQ) Management Effectiveness ROA (TTM) ROE (TTM) Profitability Ratios Profit Margin (TTM) Operating Margin (TTM)

N/A
2.37 0.798 -3.28% -66.72% -6.12% -8.75%

N/A
N/A 0.712 -5.49% -351.26% -9.60% -7.56%

N/A
N/A 0.783 -16.26% N/A -27.85% -21.02%

Operating Data
Year
Revenue Passenger Miles (mill) Available Seat Miles (mill) Passenger Load Factor Breakeven Passenger Load Factor Cargo Ton Miles (mill) Fuel Gallons Consumed (mill)

2002
102,029 141,719 72.0% 79.0% 1,405 2,514

2001
101,717 147,837 68.8% 77.3% 1,583 2,649

Number of Aircraft in Fleet

Average Age of Aircraft (years) Employees

831
9.0 75,100

814
9.1 76,300

Stock Valuation
Delta Air Lines (NYST: DAL)

Last Trade Trade Time Change Prev Close Open Bid Ask 1y Target Est

12.89 Nov 5 / 03 -0.06 (0.46%) 12.95 12.95 N/A N/A 19.40

Days Range 52wk Range Volume Avg Vol (3m) Market Cap P/E (TTM) EPS (TTM) Div & Yield

12.68 13.04 6.56 16.05 2,421,300 2,505,181 1.59B N/A -6.741 N/A (N/A)

Stock Price Chart

Recommendation

Hold Moderate Buy

Undervalued according to NMV assets High market share No dividends & negative earnings Very volatile industry

Todays stock price: S$12.50 Exchange rate: S$1 to US$0.57

Background
Found in Oct. 1972
Separated from Malaysian Airways

Started from 10 aircrafts flying 22 cities Right now, spans over 90 cities globally
with about 95 aircrafts Singapore government owned 57% of shares

Background cont
Ranking in 2002
World 4th largest airline in RPK World 2nd largest airline in freight carried

Alliances
Equity partner
acquired 49% shares of Virgin Atlantic Airways in March 2000

Star Alliances
Joined in April 2000, become 11th members with such as Air Canada, United Airline, Lufthansa, Thai Airline, ANA Airways.

Competitors
Cathay Pacific Japan Airlines Malaysian Airlines

SWOT Analysis
Strengths:
Low debt (debt to equity traditionally <0.1) Encourage employees motivation Profit-sharing program Young aircraft , average age of 5 years old Excellent in-flight services e.g.: free drinks, complimentary headsets

SWOT Analysis cont

Weakness:
Relied on long haul flight Located in SARS outbreak area

SWOT Analysis cont

Opportunities:
Work with partners Demand increase Competitors struggle

SWOT Analysis cont

Threats:
Global economic weakness SARS comeback again Fuel cost increase terrorism

Strategies
Cost cutting
No-pay leave Wage cuts Reduction in staff Less flying allowance paid Postpone profit-sharing bonus sold 5 Pratt and Whitney engines finance corp.

Assets selling

Strategies cont
New route developing
Bangalore Shenzhen L.A.

Re-Fleeting plans
Combination of Air-Bus and Boeing

Price cutting, promotion, flights adding

Balance sheet
Balance Sheet (in S$million) Shareholders' funds Total debt + others Total Total assets 30-Sep-03 30-Jun-03 31-Mar-02 30-Sep-02 $10,614.0 $10,397.7 $10,708.8 $10,480.5 8,798.7 8,380.5 8,475.2 8,387.0 $19,412.7 $18,778.2 $19,184.0 $18,867.5 $19,412.7 $18,778.2 $19,184.0 $18,867.5

Earning per share

EPS over 5 years 140 120 100 80 60 40 20 0 FY 98-99 FY99-00 FY 00-01 Financial year FY 01-02 FY 02-03

EPS (cents)

Operating profit
Operating profit over 5yrs
1,600.0 1,400.0 1,200.0
S$million

1,000.0 800.0 600.0 400.0 200.0 FY 98-99 FY99-00 FY 00-01 Financial year FY 01-02 FY 02-03

Cost structure
Cost structure in Q2/03 3% 5% 6% 6% 9% 17%

4% 22%

fuel s taff aircraft depreciation and rental aircraft maintenance and overhaul handling s ales landing and parking

11%

17%

inflight meal and other pas s enger cos ts communication and IT others

Income statement

Income statement

cont

Cash flow statement

(in S$million) Q2/03 Q2/02 H1/03 H1/02 Net cash provided by operating activities $ 456.8 $ 459.0 $ 168.9 $ 1,178.3 Net cash used in investing activities (218.1) (219.2) (365.4) (581.7) Net cash (used in)/provided by financing activities (139.4) (123.9) 163.2 (379.9) Net cash inflow/(outflow) $ 99.3 $ 115.9 $ (33.3) $ 216.7 Cash and cash equivalents at end period $730.3 $1,241.0 $730.3 $1,241.0

Operating data
Passanger Passengers carried (000's) Revenue passanger-km (million) Available seat-km (million) Passenger load factor (%) Cargo Cargo and mail carried (M kg) Cargo load (M tonne-km) Q2/03 3,644.0 17,772.8 22,379.8 79.4

264.7 1699.6

Operating data

cont

Operating data

cont

Ratios
As at As at 30SEP03 30JUN03 0.02 -0.02 0.03 -0.03 0.54 -0.47 0.10 0.12 1.44 1.46

ROA ROE ROI Net debt to equity Price to book equity

Stock valuation
Ticker: SIAL.SI
Trade in Singapore Stock Exchange Shares issued (as at 30SEP03): 1.22B

Stock valuation
Last Trade 7 Nov ?12.50 Day's Range 12.50 - 12.70 52-wk Range 8.25 - 12.90 N/A N/A EPS?ttm) 0.874 0 N/A

cont

SIA LTD (SES:SIAL.SI) Change Prev Cls 0.00 (0.00%) Bid 12.4 Ask 12.5 12.5 P/E 14.3 P/S N/A PEG N/A

Open 12.5 Mkt Cap N/A Div/Shr 0.15 Yield 1.2

Volume 1,089,000 Avg Vol N/A Div Date 11-Aug Ex-Div 29-Jul

5-year price chart

1-year price chart

Recommendation
Moderate Buy
Good management Recover so fast Low debt Volatile stock, but upward trend