Airlines/Aerospace/Defense Companies

Airbus Industrie Toulsouse, France CEO Noel Forgerd www.airbus.com

· Originally a four nation consortium – England, France, Germany, Spain

o France - Aerospatiale Matra

o Spain - Construcciones Aeronauticas (CASA)

o England - British Aerospace (BAE Systems)

o Germany - Daimler Chrysler Aerospace Airbus

· Now legislated by two consortiums:

o European Aeronautic Defense and Space Co. (EADS) with a 80% share – formed from the merger of Matra, Casa, and Daimler

o BAE Systems of UK – a 20% share

Airbus Planes:

· A300/A310

· Operated by more airlines in more countries than any other competing aircraft

· A300 Being phased out July 2007 with the last one coming off the line

· Was Airbus first airliner and launched in May 1969 and entered service with Air France in 1974

· A310 entered service in 1983

· A320 – A 100-220 seat twin jet

· A330 – 316 planes in service with 72 airlines

· A340-600 – There version of a 747

· A350 – Airbus competitor to Boeing’s 7E7 (787)

· Will be a derivative of A330 and cost roughly $160M – will be able to fly further with more capacity

· Will use GE engines and expecting launch of the plane in May 2010

· Airbus is spending $5.3B to develop the plane – estimate in December 2004

· Will be a 255 to 300 seater with range of 8,800 miles

· A350 is about four years behind Boeing’s 787

· Orders:

· 10 total firm orders with the last order being in December of 2004

· 30 commitments from two airline (one is in Chapter 11) – June 2005

· Has received an order for 60 A350’s from Qatar Airlines – June 2005

· 90 total A350 commitments at the end of July 2005

· A380 – A huge split level 555+ seater – will enter service in second half of 2006 - (once called the A3XX)

· Air France, Emirates, ILFC, Singapore, Virgin Atlantic, Qantas, and three other undisclosed airlines were the original airlines that placed orders

· Rolls Royce won contract to build the engines

· Talking about putting a gym, bar, restaurants, even a casino in the plane – cargo will probably bring in more revenue though

· Firm orders:

§ April 2003 – 95 firm orders

§ May 2004 – 129 firm orders from 11 carriers

§ January 2005 – 154 firm orders with all carriers having options to buy more

§ 2006 – 159 firm orders from 16 customers – Emirates ordered 43 and leased 2

§ First commercial flight – Singapore Airlines in 2006 then Emirates of Dubai

· Costing $12B to get off the ground – will be ready in 2005

§ Now seeing cost overruns of $1.93B resulting from Airbus trying to reduce its weight and increase efficiency – December 2004

§ Needs to sell 250 to break even

· The German government loaning Airbus $877.4M, UK government $830M, and France’s government $1.95B for developing the A3XX

· Each plane will cost roughly between $265M to $280M – Now up to $280M in 2004 – Airbus plans to build 750 of them for the next 20 years

· Boeing on the A380 – We think they overestimated the size of the market by four times and Airbus seems very optimistic about trimming the weight off the plane – Randy Baseler – Boeing’s VP of marketing

· Able to seat 840 in the plane if configured for all economy seating

· Airbus claims that the plane will cost 20% less to fly than a 747-400 and seat 35% more passengers – the 747 has had a monopoly for this plane size for almost three decades

· Has 24 wheels on its landing gear

· “The planes design isn’t optimal from an engineering standpoint, but…it will give Airbus customers what they want” – Charles Champion – A380 Project Manager

· Plane will take up to an hour to load and max capacity will be 858 passengers

§ In an emergency, all passengers need to be off the plane in 90 seconds in order to have max capacity seating – In testing

· Major Problems with the A380 Development

· Delay attributed to wiring hurdles

· Over a year behind schedule and $3.8B over budget

· A400M – Military transport plane

· Airbus’s first large scale military plane. Four engine turbo prop that would fill the void between Lockheed Martin’s smaller C-130 and Boeing’s larger C-17

· Building 180 for the European Armed Forces. Deal was announced May 2003 and several tight conditions were in the contract. Airbus had to deliver the planes on time and Airbus would agree to cover any cost overruns.

· 2006 – 192 orders

· Expected to generating 2B Euro of revenue through 2005

· Goldman Sachs estimated that it will control roughly 1/3^rd of the market for military transport till 2030 with orders over 500 units with the A400M.

· A400M partners: Airbus - 64.8%, EADS-Casa - 25.8%, Turkish Aerospace - 5.2%, Flabel (Belgium) - 4.2%

· 3Q2007 – Airbus parent, EADS had to take a $2b charge on the program

· Airbus, EADS CFO, Hans Peter, is expecting to take a loss on the first 180 A400M’s

· Delays and problems have been attributed to politics, technology and poor product management, all of which Airbus as excelled at in the past.

· Main delay has been with the turboprop engines from Europrop.

· Europrop had to design the engines from scratch and has had project management problems.

· Airbus added significant weight to the plane with complex military electronic and defense systems thus altering the original turboprop design.

· Airbus former CEO wanted to use Pratt & Whitney engines who’s bid was 20% lower and would have used an existing design but France and German said they would not purchase the plane with Pratt & Whitney engines.

· Building for Germany, France, UK, Spain, Belgium, Turkey, S. Africa, Malaysia and Luxembourg – will be delivered 2009

Airbus Deliveries and Stats:

· 1998 - sold 100 jets to several south American airlines for around $4B - once dominated by Boeing’s 86% market share

· 1999 had 3600 orders and had 2200 aircraft in service with 176 operators

· 2000 – delivered 39% of the big jets sold world-wide

· July 31, 2000 – total orders 3877 – total delivers 2355 – carriers 172

· Airbus has topped Bowing in sales from 2001 to 2004 – Mostly likely won’t repeat in 2005

· Plane Deliveries:

o 2001 – 325

o 2002 – 303

o 2003 – 305 – Delivered more planes than Boeing for the first time in history (Boeing delivered 281)

o 2004 – Expected to deliver 300 to 305 planes and wants a 10% margin by 2006

o 2005:

o Has 123 firm orders as of April 2005

o 2006 – Delivered 434 which was a record for Airbus

o 2007 – 1341 net orders

o 2008 – Expecting to deliver 500 planes

o 2009 – Expecting to deliver 525 planes

Airbus General Info:

· Generously subsidized by the European governments – they’ve had a long held dream of a powerful Airbus

• Get direct subsidies and claims that Boeing receives subsides as well but Boeing gets them through its R&D and defense contracts
• Airbus gets preferential loans from four European government which are labeled “Launch Aid”

· Airbus offers the most profitable and modern aircraft in the 107-185 seat range

· Fully hedged against a low dollar/high euro through 2005 and most of 2006

· Northwest Airlines is their largest US customer and third largest customer worldwide

· Designing a plane to compete with Boeing’s 7E7 (787)

• A350 – Will be a derivative of A330 and cost roughly $160M – will be able to fly further with more capacity
• Airbus will be able to develop the plane for around $2.5B compared to Boeing’s cost to develop the 7E7 of $8B
• Airbus is extremely good at refining their planes into the next generation – Their designing new wings for further efficiency
• Will use the same engine as Boeing’s 7E7
• Possibly will put a damper on Boeing’s 7E7 sales
• Commitments:

o April 2005 – 10 firm commitments

· CEO Noel Forgerd resigned May 2005 in a planed move to become CEO of EADS

· Head of Airbus Commercial Plane Sales – John Leahy

· Air Canada announced that they will replace all of their long range planes with planes from Boeing – Big shock to Airbus in 2005

· EADS buying BASE Systems 20% stake in Airbus

Air France-KLM Chairman Jean-Cyril Spinetta Roissy, France www.airfrance.com

· Air France merged with UTA in 1992 (Union des Transports)

· Air France stats pre KLM Merger

o Had 70% of the French market

o 3rd world wide in international passenger transport

o 4th world wide in international air freight

o 226 aircraft, over 1250 daily flights, 198 destinations, 83 countries with a fleet average age of fleet being 9 years old

o SkyTeam - global alliance with AeroMexico, Delta, and Korean Air

· Merger with KLM Royal Dutch Airlines– Announced September 2003

• Created a jointly owned Franco-Dutch Holding Company with KLM Royal Dutch
• Similar to a merger but easier than dealing with EU laws
• Each airline will become a subsidiary of the Holding Company
• The French Government will own 44% of the holding company, Air France Shareholders will own 37%, KLM shareholders will own 19% and a special purpose foundation will control 55% of the voting rights to preserve KLM’s overseas landing rights and Dutch nationality
• Will become the third largest airline in the world
• EU Approved the merger – February 2004
• Now world’s third largest airline and Europe’s largest
• 1Q2004 – First quarter with results contributed from the combined Air France-KLM merger

· Dutch Government reduced their stake in Air France-KLM to 6% from 14.1% in 2005. They sold their shares to a Dutch foundation to keep the shares in Dutch “hands”

Brokerage	Recommendation	Sentiment
Merrill Lynch
Goldman Sachs
CSFB

Alaska Air Group (ALK) Seattle, WA CEO William Ayer www.alaskaairlines.com

· Founded in 1932 in Anchorage, Alaska (McGee Airways)

• Named Alaska Airlines in 1944
• Alaska Air Group formed as Holding Company in 1985

· Alaska Air Group owns Alaska Airlines and Horizon Air

• Alaska Air Group completed acquisition of Horizon Air October 1987

Alaska Air Group General Info:

· 9^h largest in nation - 2003

· Powerhouse in Northwest section of the US – 2003 market share

• West Coast to/from Alaska – 89.02% market share
• Seattle/Portland and California – 68.80%
• Seattle/Portland and Nevada – 55.15%
• Seattle/Portland and Arizona – 54.30%

· Number of Planes:

• Alaska Airlines: 108 planes
• Horizon Air – 64 planes

· Tends to be more affected by seasonality than other airlines because much of its traffic is to and from Alaska

· Alaska and Horizon service 87 destinations – September 2004

· Horizon is the 8^th largest region jet liner in the US

· Revenue from freight and mail was 4.4% of total in 1999

· Previous CEO John F. Kelly resigned post to William Ayer May 2003

· Pilot concession of May 2005:

· Pilots agreed to a 26% reduction in pay as well as an increase on their portion of healthcare costs

· Goal of profit margins of 20% and growth rate of 8% to 10% a year by 2010

· “They are big enough to achieve economies of scale but small enough that little things…like cost cutting.. can make a difference” – Jamelah Leddy, McAdams Wright Ragen

Brokerage	Recommendation	Sentiment
Merrill Lynch
Goldman Sachs
JP Morgan

America West Holdings (AWA) CEO Doug Parker Tempe, AZ www.americawest.com

· 8th largest airline in the US

· Began service in 1983

America West General Info:

· Hubs in Phoenix and Las Vegas

· Serves 95 cities with 900 daily departures - 2004

· Aircraft: 2004

• America West – 139
• America West Express - 49

· Code sharing:

• Agreement with Continental – it took two years to get the kinks out of the system

· GE Capital Aviation Service – America West’s largest aircraft lessor

· After Sept 11^th

• America West received Federal loans
• Has seven years to pay them back
• Federal government has 18.75M in warrants that represent 33% of AWA’s stock with an exercise price of $3 and can’t be called for 10 years
• The Government agreed to guarantee $380M of a $429M loan to keep them out of CH.11

· Pilot union agreement - December 2003

• Three year agreement to a 14% pay raise over the life of the contract

· With Government federal loans – the government has final say over how much the company can spend in labor costs

· Old CEO William A. Franke

· Merging with US Air – Announced May 2005

· Combination of the two will make it the 6^th largest US airline

· Expecting $600M in cost savings from the merger

· US Air is receiving a $250M loan from Airbus which will help US Air get out of Chapter 11

· GE will be the largest creditor of the two companies

· Both labor unions need to agree to combine their seniority lists. The employees with the least seniority most likely are the ones to lose out

· CEO of America West, W. Douglas Park will be the new CEO and the new company will be based in Tempe Arizona

· Will have 361 jets in their inventory and will reduce the workforce to accommodate those numbers

· Air Canada will be a 7% stake in the new combined entity with Air Canada providing the only outsourced maintenance other than the companies own

Brokerage	Recommendation	Sentiment
Morgan Stanley
Merrill Lynch
Deutsche Securities

AMR Corp - American Airlines (AMR) Fort Worth, TX CEO Gerard J. Arpey www.aa.com www.amrcorp.com

• Largest airline in the world
• AMR became the holding company for American Airlines in 1982
• Serves 243 cities with 970 aircraft and 4100 daily departures

AMR Acquisitions, Divestures, Etc.

· Acquired TWA for $500M with the assumption of $3B in aircraft leases - 2001

o AMR had TWA to go into Chapter 11 (TWA’s third time) to be able to deal with creditors more effectively

o AMR recieves TWA’s hub in St. Louis, 195 aircraft, 170 landing sites, 175 gates and maintenance operations in NY, L.A., St. Louis, and Kansas City

o Also included are TWA’s 26% stake in Worldspan computer reservations (co-owned by Delta and Northwest)

o TWA controled 76% of the passenger traffic out of St. Louis and #3 at New York’s Kennedy with 17.5%

o TWA merger pushed AMR from No.2 airline in the world to No.1

· Spun off Sabre Holdings March 2000 – world’s largest reservation software for travel agents – ticker symbol is (TSG)

· Acquired Get There Inc. – B2B travel

o Online travel site that sells directly – will cut distribution costs by 80%

· Part owner of Orbitz.com – online reservation system (Owned by AMR, Continental, Delta, Northwest, and UAL)

· New alliance with Mexicana Airlines for destinations in Mexico – January 2004

· Acquired a 20% of US AIR for $1.3B

AMR CEO Succession:

· Robert Crandall - Former CEO

o First to come up with frequent flier program - got the idea from S&H Green Stamps

o Fierce cost cutter – removed olives from salads which saved AMR $100,000 annually

o Yield Management – where inventory (airline seats) are sold at different prices with different restrictions at different times – was able to match People Express low fares and still get business travelers premiums

· Donald Carty took over from Robert Crandall

o CEO Donald Carty resigned April 2003 while company was teetering on bankruptcy and union problems

o Gerard J. Arpey to take over, was company’s COO and President

AMR Notables and Initiatives:

· AMR and UAL control 82% of the slots at Chicago O’Hare

· Diminished its opportunities by scaling back in California

· Low fair carriers compete with 75% of AMR’s routes – up from 60% in 2000 – 2003 stat

· 2002:

• Needed to fill 87.3% of their plane for the flight to be profitable
• Had a net loss of $3.2B in 2002

· Hubs and Spoke:

• American tried to run a complex operation designed to grab as many high-paying customers as possible – Was a complicated hub and spoke model

· Now focusing on maximizing efficiency

• Restructuring hubs in Miami and Los Angeles to make them more efficient, already completed in Dallas and Chicago – 2003/2004

· Looking to expand internationally 16% by the end of 2004 – Primarily in Asia and Latin America

· Leases 1/3 of its 819 planes

· Reducing the number of types of planes it flies form 14 to 6 to help cut costs – Announced January 2005

AMR General Info:

· Cost Cutting:

• Looking to cut $3B to $4B in annual savings
• “We need to shed $3B in annual expenses to be competitive” – CEO Donald Carty – 2002
• Planes:

· Reducing capacity by 9% and phasing out 74 Fokker 100 jets and 767-300’s

· Not taking any deliveries on new planes from Boeing in 2004 or 2005

• 2003 – cut unit cost by 8.9%

· Won $1.8B in concession from its employees to help them stay out of Chapter 11

• Eliminating food service in coach on domestic flights starting February 1 2005

· Will save the airline $30M a year

· Will offer food for sale on some flights

· Debt:

• Has $4B remaining in payments on Enhanced Equipment Trust Certificates
• Certificates held by investors that buy the financing of planes to take advantage of the favorable deprecation rates on the planes
• AMR needed to have $1B in cash on June 30, 2003 to avoid violating its credit line – Had $1.3B in cash at the end of March 2003

· Received $300M to $350M on May 16, 2003 from the US Government bail-out program

· AMR and Pilots:

• Pilots currently cost AMR 12% of their operating cost – May 2003

· “From the brink of bankruptcy to break-even in six months is an impressive accomplishment” – Sam Buttrick – USB

· 3Q2003 – Filled 76% of their seats

· Labor Contract of 2003 – Employees agreed to huge cuts in pay and major changes in work rules in Spring of 2003

o Union agreed to allow a payroll cut of $1.8B a year so AMR will avoid Chapter 11

· Fuel Hedges in 2004:

• Under 30% of fuel costs considered hedged

· Fuel costs:

• 2007 - $2.12 a gallon and expecting it to rise to $2.65 a gallon in 2008 including hedges.

· 2005:

• Expected to loose $600M in revenue in 2005 – Micheal Linenberg – Merrill Lynch
• AMR think it will pay $1.3B more in fuel costs in 2005 than in 2004 (In 2004, AMR paid $1B more than in 2003)
• 2Q2005 – Posted a 2Q2055 profit

· Booking:

• AMR expected to book 20% of its seats through G2 by 2006 and at least 5% by the end of 2005 due to tis lower cost and flexibility compared to Sabre

· US Mail – Contract that expires in 2011 allowing AMR to carry US Mail in a deal worth up to $100M a year

Brokerage	Recommendation	Sentiment
Merrill Lynch
CSFB
JP Morgan

Boeing (BA) Seattle WA CEO James McNerney Jr. www.boeing.com

· Nations biggest exporter and worlds largest procurer of aerospace parts

· 75% of the jets in the sky are Boeing

· Organized into five major units: Air Traffic Management, Boeing Capital Cor