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

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 – The US Airlines in the North Atlantic market Internal – Substantially increased of no-frills competition in Europe • Ryanair, Easyjet, Go, bmibaby, Virgin Exp, etc Consolidation & Alliances – 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 world’s 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 ROA ROI ROE P/E P to BV

2003

0.0253

0.00708

0.0317

15.45

0.0455

2002

0.01

-0.0128

-0.0643

-17.35

0.104

Financial Data • • • • • • • Total Revenue=$12,147 i Total Expense=$7616 i by 7.8% by 10.21

Net Income=$72 h Net asset=$3,592 h by 2.39

by 3% Earnings per share=6.7

Operating margin=3.8% h by 5.1 pts Net debt/total capital ratio=60.7% i 5.3 pts by

Operating Data • • • • • • • • RPK= £ 100,112 h ASK= £ 139,132 i by 5.8% by 0.9% Passenger Load Factor=71.9 h RTK= £ 14,213 i by 2.9% ATK= £ 21,328 i by 6.7% by 1.5% 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 Today’s stock price: £ 224 £ 215.75

Stock Valuation

Last Trade

7 Nov · 224.00 p Day's Range 214.00 - 225.50

Change

+10.75 (+5.04%) Bid 221 Ask 224.25

Prev Cls Volume Div Date

213.25 26,714,080 N/A Open 214 Avg Vol 14,566,425 Ex-Div N/A 52-wk Range EPS (ttm) P/E Mkt Cap 85.00 - 215.75

6.7

31.83 2.425B

Div/Shr 0 Yield N/A

Sales per activity

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

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 3,208 3,388 3,400 3,409 2,763 2,863 3,450 3,253 3,272 1,201 1,262 1,304 1,220 1,133 886 1,007 1,136 1,067 1,078 7,688 8,340 9,278 8,940 8,892 -117 -244 -172 -310 -166 223 144 470 308 451 168 91 92 21 -101 -10 295 -110 380 62 124 24 33 84 442

Sales per geographic Core Market

United Kingdom

Geographic areas

47.00% Europe Asia / Pacific Americas Rest of the World Data as of 31/03/2003 64.00% 7.00% 19.00% 10.00%

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 £2058 2002 £2016 10842 11646 £12900 £13662 £12900 £13662

Income Statement

Year 1999 2000 2001 2002 2003

Revenues* 8,892 8,940 9,278 8,340 7,688 Expenses 8,686 8,961 9,164 8,482 7,616 Net Profit* 206 -21 114 -142 72

* in million( s) of Pound St erling ( EPS in Pence)

Revenue Composition

Revenue

1% 6% 8% 85% Scheduled services passenger Scheduled services-freight and mail Non-scheduled services Other revenue

Cost Structure 10% 9% 13% 8% 8%

Cost Structure

28% 11% 3% 10% Emplo yee co sts Eepreciatio n and amo risatio n A ircrah o perating lease co sts Fuel and o il co sts Engineering and o ther aircraft co sts Landing fees and en ro ute charges 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*

300 200 100 0 -100 -200 1999 2000 2001

Year

2002 Net Profit* 2003

Earnings Per Share Over 5 Years

Year

Earnings per share

2003

6.7

2002

-13.2

2001

10.6

2000

-2

1999

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

British Airways • Fleet Valuation – Avg Fleet age(yrs): 7.5

– Avg Life (yrs): 25 – Depreciation Method: Straight-Line – Avg Salvage Value: 0 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 21 27 10 28 28 Avro Rj100 16 British Aerospace 146 5 Total MV Owned Qty 5 56 43 21 13 33 24 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 ValueDep'n 1152.5

345.75

10332 6514.5

3099.6

1954.35

2389.8

955.5

1518 1224 716.94

286.65

455.4

367.2

871.5

1296 490 1176 1218 664 187.5

261.45

388.8

147 352.8

365.4

199.2

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

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 are……undervalued

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 Dec 31, 2002 Cash & Cash Equivalents Total Current Assets $1,969 $3,902 Property & Equipment $16,524 Other Assets

Total Assets

$4,294

$24,720

Dec 31, 2001 $2,210 $3,567 $16,097 $3,941

$23,605

Balance Sheet - Liabilities Period Ending Dec 31, 2002 Dec 31, 2001 Total Current Liabilities $6,455 $6,403 Non-current Liabilities $16,530 $12,349 Total Liabilities $22,985 $18,752 Common Stock Retained Earnings Accumulated income (loss)

Total Equity

$271 $1,639 ($1,562)

$893

$271 $2,930 $25

$3,769

Fleet / Net MV Assets Aircraft Type Owned Capital Lease Operating Lease 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 Total 18 71 77 15 4 51 21 8 8 63 16 29 4 73 15 473 42 3 45 3 10 26 41 24 8 7 57 15 122 313 Total 21 52 26 71 121 15 28 59 21 8 15 120 16 29 19 195 15 831 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

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 Delta’s 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 Delta’s equity is undervalued.

Income Statement - Revenue Period Ending Dec 31, 2002 Dec 31, 2001 Passenger Cargo Other

Total Operating Income

$12,321 $458 $526

$13,305

$12,964 $506 $409

$13,879

Revenue Allocation (2002)

3% 4%

Passenger Cargo Other

93%

Income Statement - Expense Period Ending Dec 31, 2002 Dec 31, 2001 Salaries $6,165 $6,124 Aircraft Fuel Depreciation Contracted Services Other Expenses

Total Operating Expense

$1,683 $1,148 $1,003 $3,306

$13,305

$1,817 $1,283 $1,016 $3,639

$13,879

Expense Allocation (2002)

25% 8% 9% 13% 45%

Salaries Fuel Depreciation Contract Service Other

Earnings Trend

1803 1318 1637

Operating Income

-1602 -1309

Net Income

1998 1067 1999 1196 2000 815 2001 2002 -1230 -1287 1998 1999 2000 2001 2002

EPS Trend

-2 -4 -6 -8 -10 8 6 4 2 0 6.34

1998 7.2

1999 7.05

2000 -9.99

2001 -6.69

2002

Cash Flow Statement Net Cash from Operations Less: Net Cash from Investments Add: Net Cash from Financing Net Cash Inflow / Outflow Major Changes $285 (1109) 583 $1977 • Operations – Flight equipment less spending (2321)  (922) • Investing – Boston Airport Terminal (485)  58 • Financing – Short Term Obligations 701  (1144)

Ratios Year 2002 Valuation Ratios 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) Delta N/A 2.37

0.798

-3.28% -66.72% -6.12% -8.75% American N/A N/A 0.712

-5.49% -351.26% -9.60% -7.56% United 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) Number of Aircraft in Fleet Average Age of Aircraft (years) Employees 2002 102,029 141,719 72.0% 79.0% 1,405 2,514 831 9.0

75,100 2001 101,717 147,837 68.8% 77.3% 1,583 2,649 814 9.1

76,300

Stock Valuation Last Trade Delta Air Lines (NYST: DAL) 12.89

Day’s Range Trade Time Change Prev Close Open Bid Ask 1y Target Est Nov 5 / 03 -0.06 (0.46%) 12.95

12.95

N/A N/A 19.40

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

Today’s 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 con’t • Ranking in 2002 – World 4 th – World 2 nd largest airline in RPK 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 11 th 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 con’t • Weakness: – Relied on long haul flight – Located in SARS outbreak area

SWOT Analysis con’t • Opportunities: – Work with partners – Demand increase – Competitors’ struggle

SWOT Analysis con’t • 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 Assets selling – sold 5 Pratt and Whitney engines finance corp.

Strategies con’t • • • 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

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

Total assets $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

Operating profit

Operating profit over 5yrs

1,600.0

1,400.0

1,200.0

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 6% 5% 3% 6% 4% 9% 11% 17% 22% 17% fuel s taff aircraft depreciation and rental aircraft maintenance and overhaul handling s ales landing and parking inflight meal and other pas s enger cos ts communication and IT others

Income statement

Income statement con’t

Cash flow statement (in S$million) Net cash provided by operating activities Net cash used in investing activities Net cash inflow/(outflow) Cash and cash equivalents at end period

Q2/03

$ 456.8

(218.1) $ 99.3

Q2/02

$ 459.0

(219.2) (123.9) $ 115.9

H1/03

$ 168.9

(365.4) 163.2

$ (33.3)

H1/02

$ 1,178.3

(581.7) (379.9) $ 216.7

$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 con’t

Operating data con’t

Ratios ROA ROE ROI Net debt to equity Price to book equity As at 30SEP03 0.02

0.03

0.54

0.10

1.44

As at 30JUN03 -0.02

-0.03

-0.47

0.12

1.46

Stock valuation • Ticker: SIAL.SI

• Trade in Singapore Stock Exchange • Shares issued (as at 30SEP03): 1.22B

Stock valuation con’t Last Trade 7 Nov ?

12.50

SIA LTD

(SES:SIAL.SI) Change Prev Cls 0.00 (0.00%) 12.5

Open 12.5

Volume 1,089,000 Day's Range 12.50 - 12.70

52-wk Range 8.25 - 12.90

N/A Bid 12.4

N/A EPS?ttm) 0.874

Ask 12.5

N/A 0

P/E 14.3

P/S N/A PEG N/A Mkt Cap N/A Div/Shr 0.15

Yield 1.2

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