Cargo Trends and what the Cargo Executives think will shape the. Mr. Niko Herrmann, Partner, Oliver Wyman

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1 Cargo Trends and what the Cargo Executives think will shape the revenue recovery in 2010 Mr. Niko Herrmann, Partner, Oliver Wyman 6

2 Supported by: March 2010 View from the Top Global Air Cargo CEO Survey Niko Herrmann, Partner C O N F I D E N T I A L

3 Survey Participants We targeted the top 50 cargo-carrying airlines as well as key industry players and got an outstanding 50% response rate Participants by region Latin America Africa North Russia America 16% 3%3% 6% Europe 36% Participant characteristics Strong coverage of global leaders in air cargo 60% of top 10 55% of top 20 36% of top 50 overall, more than 30 surveys and interviews Middle East 17% 19% Asia Even split between 16% all-cargo carriers 32% belly carriers 52% combination carriers 8

4 The recovery (1/4) Cautious confidence is the prevailing assessment of early signs of recovery in the cargo market Confidence: We are out of the worst Upswing will last, but will be modest Strength of upswing will differ across regions Asia will lead Q was strong, short-term inventory replenishment 2010 seems to continue as end of 2009 with strong traffic levels Concerns: Recovery is still fragile Low growth on low base While the growth begins, 2010 will be a year during which things settle Unstable economies in some European countries are having a negative effect on an otherwise positive outlook Consumer behavior has changed to saving rather than spending, confidence still unstable, as jobless rates soar Pressure on yields will continue, extremes of Dec 09 unsustainable I don t see any economic reasons for a cargo boom this year 9

5 The recovery (2/4) Not surprisingly, most CEOs are still somewhat cautious about the recovery for the overall cargo market Q: Do you expect a lasting positive trend for the air cargo industry? Percent of replies 55% 39% 6% Current rebound is No substantial growth, Lasting temporary, relapse into a but also no further upswing for air recession in 2010 is likely decline in 2010 freight in 2010 I think the global economy still has to recover; while growth will begin, 2010 will still be a year during which things settle. 10

6 The recovery (3/4) but are substantially more bullish when looking at their own business! Q: How do you see your business developing in 2010? Percent of replies 0% 23% 16% 10% 40% 55% 76% 67% 43% Much better Better Same Worse 86% better or much better 0% 10% 3% 26% 17% 4% 10% Volume Yields Costs Margins 11

7 The recovery (4/4) 94% of CEOs expect to reach 2007 revenue levels again before 2013 much sooner than reported in most of the trade press Q: When do you expect to reach again revenue levels as in 2007? Percent of replies 38% 48% 7% 3% 3% % 12

8 Where the volume growth will come from Unsurprisingly, CEOs expect the highest growth to come from from Asia Market growth expectations by region (distribution of answers) -- - o China & North Asia! Asia Pacific Latin America!! Africa! Russia / CIS! North America! Europe MENA!! = distribution of answers, total = 100%! = expected future sales push 13

9 Yield a more tepid recovery For yield recovery, the expectations are more or less evenly distributed between flat and moderate growth Yield growth expectations by region (distribution of answers) -- - o China & North Asia Asia Pacific Latin America Africa Russia / CIS North America Europe MENA = distribution of answers, total = 100% 14

10 Crisis strategies Customer first? Only 1/3 of participants explicitly mentioned customers as the focus of their recovery strategies Strategies to fight the crisis (as mentioned by: percent of participants) Productivity improvement Network management Fixed cost reduction Capacity reductions Product portfolio changes Customer initiatives Pricing/Yield Management 47% 43% 40% 37% 37% 33% 30% 67% 15

11 Products Cold Chain and Pharma are widely expected to lead the recovery in both volume and yield Growth expectation by product category (average) - o Cold Chain Pharmaceuticals Express Perishables Electronics / IT General Cargo Valuables Mail Volume Yield 16

12 What sells? Nothing new on this front the crisis hasn t changed customers eye for quality and reliability, but sharpened focus on pricing Expected changes in importance by product category and service attribute (average of responses) General Cargo Express Mail Price Speed On Time Handling + o o o + + Temp. / Cold Chain o/ Pharmaceuticals Perishables + o/ Electronics / IT + o/+ + + Valuables o o o + + o + o o/+ o 17

13 Investments E-freight remains the No. 1 investment priority with Security and Cold Chain capabilities following somewhat closely Important innovations for competitiveness? o + ++ E-freight Security improvements Cold chain capabilities Enhanced traceability CO 2 emission reduction Lightweight containers Special handling facilities Green warehouses Short-term invest focus Percent of respondents 67% 40% 43% 37% 30% 40% 27% 20% 18

14 Competition from ocean The slowdown of supply chains has shown viable alternatives to customers not all of this is likely to reverse again Q: Do you expect a lasting change in customer decision behavior? Percent of replies (multiple answers possible) 64% 71% 11% Expect customers to be even more price sensitive in the future Customers will more carefully evaluate the benefit of air transport Customer behavior will be no different than before the crisis With the advantages of good speed and reliability, ocean shipping is expected to continue their relentless competition with air cargo. A considerable portion of current air cargo volume is predicted to go ocean in the future. 19

15 Airline response The search continues for lasting high-yield niches Q: How do you intend to change your product portfolio? Percent of respondents (multiple answers possible) 68% 61% 14% Strengthening of premium products (e.g. express / valuables) Increase of value added products (e.g. timedefinite, guaranteed) Reduction of portfolio complexity, pure commodity service The air cargo market has matured, and efforts are required to meet customer needs and survive the competition. Therefore, the share of high-profit h products (frozen, refrigerated, express, pharmaceuticals, etc.) will expand. 20

16 Forwarder relationships Some resentment, some realizations, but mostly the professional partnerships survived the acrimony of the crisis Relationship quality (distribution of answers) 36% 28% 18% 18% Relationships remained unchanged with our key ypartners Focus on the key forwarders has helped forge deeper relations Established new partnerships with different forwarders Relations have deteriorated as forwarders squeezed airlines harder 21

17 Industry consolidation (1/2) Most CEOs expect a tough consolidation as a result of the crisis, but are actively pursuing partnerships in the near term Expectations of participants Percent of respondents (multiple answers possible) Planned activity Percent of respondents Increased M&A Actively 52% looking for M&A 20% More alliances/ partnerships 39% Actively looking for alliances/ partnerships 48% Increased vertical integration 32% No activity planned 32% 22

18 Industry consolidation (2/2) The industry is further polarizing into fewer, larger carriers that have the financial, network, and experience strength to survive Opportunities and Threats CX-CA will be mega-deal Most small niche freighter carriers will become extinct, not sustainable through economic cycles Partnerships with integrators are way forward DHL very active, what about UPS and FedEx? The industry is getting more professional, smaller players will exit as financing gets tougher, customer demand stronger service Alliances are a key component for a smaller airline s expansion 23

19 Future of freighter operators Consolidation will be especially focused in the area of freighters Q: What does the future for freighter versus belly cargo look like? Percent of respondents (multiple answers possible) 81% 22% 7% Only a small number of strong, global freighter operators will remain. More small cargo-only airlines will likely evolve along dedicated traffic lanes More belly carriers will enter into the freighter business 24

20 Larger freighters More than half the operators intend to focus future fleet decisions on larger aircraft, e.g., B777F or B747-8F Future fleet decisions (n=20) Focus on smaller, midsize freighters 16% No major changes planned 20% 56% Focus on large freighters 8% Reduction of number of freighter aircraft 25

21 Green cargo ETS is perceived primarily as an added cost to be passed on ETS change to air cargo Percent of respondents (multiple answers possible) Impact on fleet decisions, focus on fuel efficiency 71% Perceived advantage Percent of respondents Decreased competitiveness due to increased cost pressure / fleet disadvantage 13% Declining margins, as carriers can't forward costs Accelerated consolidation due to rising cost pressure 19% 29% 87% Increased competitiveness due to young fleet and already green business model 26

22 Lessons learned (1/2) Most participants desire to increase financial flexibility, apply more conservative business planning, and diversify risk in the future Top answers on lessons learned Percent of respondents (multiple answers possible) Increase financial flexibility 64% Apply more conser- vative planning 54% Further diversify risk 54% Pursue closer relations with forwarders Pursue closer relations with shippers 46% 43% 27

23 Lessons learned (2/2) Speed is key in reacting to a crisis of such magnitude Comments Decisive and fast reaction has been key; opportunistic dithering has cost many carriers millions We're strengthening our risk management practices by setting up processes to perceive danger signs in advance and take prompt action at an appropriate time. Creativity and flexibility in internal processes are organizational capacities that need to be acquired best before the next crisis The industry needs to unite again on key issues; everyone was desperately fighting on their own, need to get more active as a group again In order to add value, express cargo such as door-to-door is going to be important. To make this come true, cooperation between carries will be a significant factor. 28

24 Obstacles Will air cargo achieve a fast return to sustainable industry profitability? The biggest obstacles in our industry are still Percent of respondents (multiple answers possible) Commoditization of air freight and 84% competitive pressure Increasing cost burden or regulation 55% Lack of appropriate tools and techniques to manage margin 42% Lack of talent in the industry 19% 29

25 Conclusion Industry expects cautious return to normal The environment is getting increasingly tough, especially for carriers who once thought cargo could easily de-risk P&L and B/S How to become more nimble and flexible and responsive ahead of the next downturn? More carriers start to think whether they have the critical mass and the market/network strength to get the best out of their capacity Adam Smith should you continue to be involved in air cargo? What can you do to escape continued commoditization? Value-added products become the new commodity how to differentiate your product portfolio? Specific bilateral partnerships will be increasingly important who to work with? Under what economic/operating model? 30

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