3D Insightissue - Issue 21 21 Page 1 January 2015

3D InsightISSUE - Issue 21 21 Page 1 January 2015

3D Insight A Publication by AACO and Seabury Aviation & Aerospace 3D Insight - Issue 21 Page 2

The Major Airlines Outside MENA The latest article in a multi-part series

Background

This is the last article in the multi-part series on which account for more than three quarters of the the AACO carriers’ major non-AACO competitors total capacity between the two regions. In addition examining the competition from Turkey, a country to these two carriers, some attention will also be well connected to the MENA region, as shown in given to SunExpress, Onur Air and Atlasjet Airlines. Figure 1. As with previous articles, there will be a Although these airlines are not the most significant particular focus on the carriers with greatest seat players in the Turkey-MENA market, they are sizable capacity between the focus region and MENA, in airlines in Turkey and should be considered as thisSeat case Turkishcapacity Airlines breakdown and Pegasus Airlines,from MENAmajor competitors excluding in the AACOTurkish domestic market. carriers Done! Figure 1: Seat capacity breakdown from MENA excluding AACO carriers

Seats in June 2012 (K)

Source: Innovata, Seabury analysis.

Confidential – not for third party distribution © Seabury Group 2010 1 3D Insight - Issue 21 Page 3

Focus on Turkey

Introduction Turkey is one of the few transcontinental countries of Europe and Asia makes it a country of significant in the world. Geographically in the Middle-East, geostrategic importance. Turkey lies between Europe and Asia, where the majority of its territory is located. Throughout With an estimated population of 82 million in 2014 history, Turkey has always been a multicultural (CIA World Factbook), Turkey is also the 16th most country, linking European, Arabian and Asian populous country in the world, with a population heritages. Its particular location at the crossroads higher than any European country.

Figure 2: Top 20 largest countries in the world in terms of population

Country population, top 20 countries worldwide Population, in millions, estimated in July 2014

1,356 1,236

319

254

203 196 177

166

142 127 120 108 97 93 87 82 81 81 77 68

Source: CIA World Factbook, Seabury Analysis

Turkey is the 90th most prosperous economy in to be one of the fastest growing economies, terms of Gross Domestic Product (GDP) per capita expanding at a much faster pace than surrounding (on a purchasing power parity basis).1 However, countries in Europe and the Mediterranean region, with an expected average annual GDP growth of outpaced only by Asian countries and a few sub- 4.2% between 2013 and 2019, Turkey is expected Saharan countries, as illustrated in figure 3.

Figure 3: 2013-2019 GDP growth forecast

Confidential – not for third party distribution © Seabury Group 2010 3 2013-2019 GDP growth forecast CAGR

Source: EIU, Seabury Analysis

Confidential – not for third party distribution © Seabury Group 2010 4 3D Insight - Issue 21 Page 4

Introduction to the Top 5 carriers As mentioned earlier, the article will focus on SunExpress, Onur Air and Atlasjet Airlines followed five airlines: Turkish Airlines, Pegasus Airlines, a similar path to Pegasus Airlines. All of them used SunExpress, Onur Air and Atlasjet Airlines. to be predominantly charter and leisure carriers, but started focusing on scheduled services in order Turkish Airlines was established in 1933 and to benefit from the booming economy and the became the flag carrier of Turkey. The airline is a growing middle-class not only in Istanbul and other traditional full service carrier, operating a fleet of major metropolises, but also in smaller Anatolian narrowbody and widebody aircraft in a two-class cities. configuration. Turkish Airlines is 49% owned by the Turkish government and has been a member of SunExpress was founded in 1989 as a subsidiary Star Alliance since 2008. of Turkish Airlines and Lufthansa with the aim of participating in the Turkish tourism market. Today, Pegasus Airlines was founded in 1990 as a joint SunExpress is a medium-sized tourist airline venture by Aer Lingus Group, Silkar Yatırım ve focusing on international and Turkish domestic Insaat Organizasyonu A.S. and Net Holding A.S to tourism. provide charter services. The airline transitioned from charter service to scheduled domestic Onur Air was established in 1992 as a private, service in 2005, when it was acquired by Esas tourist airline. It launched scheduled services in Holding A.S. Today Pegasus Airlines defines itself 2003 and today operates a mix of scheduled and as a low cost airline and operates domestic as well charter flights with a narrowbody fleet. as international routes with a fleet of narrowbody aircraft. While self-proclaimed as an LCC, Pegasus Atlasjet was established in 2001, licensed to carry Airlines demonstrates certain business activity that out passenger and cargo unscheduled flights. is mostly attributable to full service carriers such Atlasjet is headquartered in Istanbul and operates as offering connectivity, although limited, and domestic and international, scheduled and charter distributing through indirect sales channels. flights. 3D Insight - Issue 21 Page 5

Capacity Development

Overview of capacity development in Turkey Seat capacity to and from Turkey has grown namely Turkish Airlines, Pegasus, SunExpress, annually by 18% on average between 2004 and Onur Air and Atlasjet, whose combined capacity 2013, as shown in figure 4. This is well above share has grown from 64% in 2004 to 81% in the global average growth rate of 4% per annum 2013. Other airlines represented less than a (Innovata) for the same period. Much of the fifth of the total seat capacity to Turkey in 2013. expansionCapacity has come development from the Top 5 (all)carriers,

Figure 4: Capacity development to / from Turkey (all carriers)

All carriers Seats per annum, million 120

110 19% Other carriers - International 100 90

80 +18% p.a. 70 42% Top 5 - International 60

50 Other carriers - Domestic 40

20 36% 39% Top 5 - Domestic 10 35% 29% 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Note: Top 5 airlines include Turkish Airlines, Pegasus Airlines, SunExpress (including SunExpress Germany), Onur Air and Atlasjet Airlines Source: Innovata, Seabury analysis

Figure 5 shows the Top 5 carriers and details their fast growth within the last few years. Pegasus above-market growth. While togetherConfidential their capacity – not for third party wasdistribution named © Seabury Group“The 2010 Fastest Growing Airline” of 6 grew by 21% per annum on average between 2004 Europe’s major scheduled airlines in terms of seat and 2013, the increase was unequally distributed capacity for 2011, 2012 and 2013 by the Official between the carriers. Turkish Airlines, which had Airline Guide (OAG)2. SunExpress has grown at over 95% capacity share among the Top 5 carriers a similarly rapid rate within the last decade. The in 2004, accounted for 56% of the capacity in schedule data suggests an average annual growth 2013. This represents an average growth of 14% of 38% in terms of capacity. However, this growth per annum, still higher than the world average of is likely to be an overestimate, driven by a shift 4% between 2004 and 2013, but lower than those from pure charter traffic – not captured by Innovata of its smaller competitors in Turkey. Founded as – to mixed traffic of both charter and scheduled a charter airline in 1990, Pegasus grew rapidly to flights. Onur Air and Atlasjet are the two smallest become the second largest airline in Turkey. While airlines of the Top 5, representing a combined figure 5 does not capture the charter operations of capacity share of 7%. Pegasus in its early years, it illustrates the airline’s 3D Insight - IssueCapacity 21 development (top 5) Page 6

Figure 5: Capacity development to / from Turkey (Top 5)

Top 5 carriers Seats per annum, million 100 3% 90 4%

80 15%

70 +21% p.a. 60 22%

30 56% 20

10 96% 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Note: Top 5 airlines include Turkish Airlines, Pegasus Airlines, SunExpress (including SunExpress Germany), Onur Air and Atlasjet Airlines Source: Innovata, Seabury analysis

Confidential – not for third party distribution © Seabury Group 2010 7 Domestic capacity development A closer look at the domestic market highlights its capacity share in the domestic market shrank the growth of secondary carriers within the last to 39% in 2013. Turkish Airlines remains the decade. In 2004, Turkish Airlines was nearly in a largest airline in Turkey in terms of domestic share monopoly, dominating the domestic scheduled but is now closely followed by Pegasus Airlines market. Between 2004 and 2013, it grew by an and SunExpress. Onur Air and Atlasjet remain average annual rate of 10%, less than the total significantly smaller in the domestic market, with a market’sDomestic 22% average capacity growth rate. development As a result, combined capacity share of 12%.

Figure 6: Capacity development within Turkey (all carriers)

All carriers Seats per annum, million 45 5% 40 7%

35 21%

30 +22% p.a. 25 27% 20

10 39% 5 100% 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Source: Innovata, Seabury analysis

Confidential – not for third party distribution © Seabury Group 2010 0 3D Insight - Issue 21 Page 7

Figure 6 also highlights the development of low- is, for most of them, their largest domestic hub. cost carriers (LCC) and other leisure airlines in SunExpress is the only exception as the airline the domestic Turkish market. Pegasus Airlines, operated only two routes out of the city in July 2014, SunExpress, Onur Air and Atlasjet accounted for focusing its capacity on other domestic airports. more than 60% of the domestic capacity in 2013, Atlasjet and Onur Air primarily serve routes to and without taking into account pure charter flights. This from Istanbul with scheduled flights. SunExpress’ represents a dramatic change since 2004 when major base is in Izmir but it also links many cities to the domestic market was dominated by Turkish Antalya with domestic scheduled service. Primarily Airlines. based in Istanbul, Pegasus Airlines also operates numerous point-to-point flights linking secondary Figure 7 illustrates the domestic network as of July cities. In contrast, Turkish Airlines operates a hub- 2014. It shows that Istanbul, the largest Turkish and-spoke system with major bases in Istanbul and city, is well served from most parts of the country. Ankara, as illustrated below. All ofDomestic the Top 5 airlines capacity operate from Istanbul, which

Figure 7: Domestic network in July 2014

Domestic network July 2014

Istanbul

Ankara

Izmir

Antalya

Source: Innovata, Seabury analysis

Confidential – not for third party distribution © Seabury Group 2010 9 International capacity development The development of the international market differs 49% between 2004 and 2013, thus growing faster from that of the domestic market. While LCCs and than the market, which grew at an average pace leisure airlines have grown fast in both international of 16% per annum. In 2013, Turkish Airlines had and domestic markets, in international markets significant dominance amongst the international this growth has not come at the expense of the airlines serving Turkey with more than four times national carrier Turkish Airlines. In fact, the latter the capacity of the second international carrier, has seen its capacity share grow from 45% to namely Pegasus Airlines. 3D Insight - IssueInternational 21 capacity development Page 8

Figure 8: International capacity development (all carriers)

All carriers Seats per annum, million 70 65 23% Others - FSC 60 55 50 9% Others - LCC 2% 45 +16% p.a. 6% 40 11% 35 30 25 20 49% 15 45% 10

5 45% 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Note: SunExpress includes SunExpress Germany Source: Innovata, Seabury analysis

Figure 8 also highlights the changesConfidential – notin for thirdthe party distributionFigure © Seabury9 illustrates Group 2010 the development of Turkish 10 competitive landscape of Turkish Airlines. While Airlines in the international market. The comparison the national carrier was facing competition mainly between its network in 2007 and 2014 clearly from other full service airlines in 2004 with LCCs demonstrates the aggressive growth of the national representing only 10% of the total international carrier. The airline developed its long-haul network capacity, it faced much stronger competition from dramatically with numerous additional destinations LCCs in 2013. The latter represented about 28% in North America and Asia supported by a large of the entire international capacity in 2013 and number of new destinations in sub-Saharan Africa produced more seats than the non-Turkish FSCs. and in South America, where the airline was not Until today, their market share increase has been present in 2007. at the expense of other FSCs rather than Turkish Airlines.

Figure 9: Turkish Airlines network

Turkish Airlines network Network in July 2007 Network in July 2014

Source: DiioMi, Seabury analysis

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Figure 10 illustrates the international capacity above. Africa and South America are new markets development from Turkey since 2004. In 2013, the served directly from Turkey. It is interesting to note largest capacity flow from Turkey was to the EECA that capacity grew fast to all regions, at average region. The other flows were much smaller but annual rates well above 10%. grewInternational faster in the last decade, growth at a rate by of region17% and

Figure 10: International traffic growth, by region

Capacity development by region since 2004 Capacity to and from Turkey, all carriers

Note: Line thickness proportional to number of seats in 2013; 100% growth implies there was no service previously Source: DiioMi, Seabury analysis

Focus on MENA

Confidential – not for third party distribution © Seabury Group 2010 Capacity between Turkey and the MENA region has 64% in 2013, achieving an average annual growth12 shown strong growth of 20% from 2004 to 2013, of 24%. During this period, the AACO carriers saw faster than the average international capacity to their market share decrease from 33% to 28% and Turkey of 16% (Figure 8). The Top 5 Turkish carriers grew slightly slower than the market, at an average increasedTurkey their –capacity MENA share capacity from 49% indevelopment 2004 to pace of (all18% percarriers) annum.

Figure 11: Turkey – MENA capacity development (all carriers)

All carriers Seats per annum, million 13 12 8% Other +9% 11 10 28% AACO +18% 9 8 +20% 7 6 5 4 64% Top 5 +24% 3 2 17% 33% 1 49% 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2004-2013

Note: Top 5 airlines include Turkish Airlines, Pegasus Airlines, SunExpress (including SunExpress Germany), Onur Air and Atlasjet Airlines CAGR (%) Source: Innovata, Seabury analysis

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Among the AACO carriers, there is no clear flynas, Qatar Airways and Egyptair. Also, the fact dominance of any airline. Saudia and Emirates are that the largest five AACO carriers represent only the largest two AACO carriers operating between 51% of the total capacity illustrates how the market Turkey and the MENA region, but their capacity is fragmented. sharesTurkey are not dramatically – MENA different capacity from those development of (AACO carriers only)

Figure 12: Capacity share among AACO carriers

AACO carriers on Turkey – MENA Capacity share among AACO carriers in 2013 100%

49% Others

7% 8% 9%

13%

14%

2013 Source: DiioMi, Seabury analysis

Focus on Africa Confidential – not for third party distribution © Seabury Group 2010 15

Africa has been one of the focus regions for Turkish and African countries in the last seven years. It Airlines in the recent years. As shown below, the grew from 7 destinations in Africa in July 2007 to airlineFocus added many on Africanew routes between Istanbul 36 destinations in 2014.

Figure 13: Turkish Airlines’ development in Africa

Turkish Airlines’ network development in Africa

Source: Innovata, Seabury analysis

Confidential – not for third party distribution © Seabury Group 2010 16 3D Insight - Issue 21 Page 11

One of the strengths of the airline is that it can opposed to only 12 in 2009. As the national airline fly narrowbody aircraft into much of North and of Turkey, Turkish Airlines has been benefiting West Africa, as well as the western parts of from the strategy of its country to increase trade Central Africa. But it is also and foremost its close with Africa, with the government designating the cooperation with the Turkish government, whose carrier on new or extended bilateral agreements. relations with Africa constitutes one of the prime orientations of its foreign trade policy. Turkey- Turkish Airlines announced it will add up to 10 new Africa relations have gained momentum since the African cities to its network in 2015 as it looks to declaration of Turkey as a strategic partner of the strengthen its position on the continent including continent by the African Union in January 2008 and strengthening its position in markets between were further enhanced in 2013 with a reinforced South Africa and the Democratic Republic of the political-economic partnership.3 As an illustration, Congo. there are now 35 Turkish Embassies in Africa as

Alliances

Turkish Airlines joined Star Alliance on 1 April airline’s membership has also been tarnished with 2008, sponsored by Lufthansa. This initiative was less fortunate events as when it made headlines driven by its ambition to become a global brand to with alliance partner member Lufthansa last compete with the world’s leading airlines and was year as tension arose between the two. The two considered as a vital milestone in the expansion carriers were originally seen as close strategic of the airline. Joining the alliance enabled the partners (they created SunExpress together as Turkish carrier to provide its customers with a a joint-venture), but with Turkish Airlines’ rapid wider choice of flight options by expanding its expansion, Lufthansa accused the Turkish network through code share agreements. It carrier of unfairly capturing market share from also extended the benefits of its frequent flier them on the German market. As a consequence, programme by unifying member privileges, such Lufthansa decided to drop mileage earning rates as lounge access and reciprocal earn and burn and codeshare flights with the Turkish airline. opportunities, with other Alliance members. In 2013, Turkish Airlines increased its strategic role The other airlines of the Top 5 do not take part in any in the alliance by taking part in newly formed of the three global alliances, in line with traditional strategic committees through representatives’ LCC and leisure airline business models. reorganisation of the alliance. However, the 3D Insight - Issue 21 Page 12

Revenue development The following section will focus on the revenue Pegasus Airlines revenues grew by almost 20% per development of the Top 5 Turkish carriers. As only year on average between 2011 and 2013. In 2013, Turkish Airlines and Pegasus Airlines disclose their the national carrier generated almost ten times as financial figures, the analysis will focus on these much revenue as the low cost airline. However, two carriers. except for 2011, the latter generated higher profit As shown in Figure 14, both Turkish Airlines and margins with EBIT margins above 10%. Revenue and EBIT margin Figure 14: Revenue and EBIT margin

Turkish Airlines Group Pegasus Airlines Revenue in US $ billions, EBIT margin in percent Revenue in US $ billions, EBIT margin in percent

+18% 9.8 +19% 11% 8.2 10% 7.0 8% 6% 4%

0.9 1.1 1.3 0%

2011 2012 2013 2011 2012 2013

Note: Turkish Airlines Group = TÜRK HAVA YOLLARI ANONİM ORTAKLIĞI and its subsidiaries Source: S&P Capital IQ, Seabury analysis

Unit revenue development Over the last few years, both Turkish Airlines and period. As a result, Turkish Airlines’ revenue per Pegasus Airlines saw dramatic revenue increases available seat kilometre dropped from US¢ 8.9 of almost 20% per year. The following section aims to US¢ 8.6. The decrease in yield can be partly to understand the evolution of unit revenue during explained by the depreciation of the Turkish lira Confidential – not for third party distribution © Seabury Group 2010 28 this period of aggressive capacity growth. compared to the US dollar. Between 2011 and Turkish Airlines saw an increase in load factor over 2013, the Turkish currency lost 25% against the two consecutive years from 2011 to 2013, reducing US currency (Figure 21), negatively impacting the the gap to the 81% European average (IATA). This yield when analysed in the US dollar, although only steady increase in load factor was not sufficient to 14.2% of Turkish Airlines’ revenue was collected in compensate for the loss in yield during the same Turkish lira4. Turkish Airlines Figure 15: Turkish Airlines’ unit revenue development

Passenger load factor Yield RASK RPK / ASK Revenue per RPK, in US¢ / RPK Revenue per ASK , in US¢ / ASK

100% 15 15 +4% -5% 77% 79% 11.9 80% 11.0 73% 10.7 -2% 10 10 8.9 60% 8.5 8.6

40% 5 5

20%

0% 0 0 2011 2012 2013 2011 2012 2013 2011 2012 2013

Note: Turkish Airlines Group revenue, including subsidiaries Source: S&P Capital IQ, Seabury analysis

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Pegasus Airlines showed similar trends in load effects on the yields when expressed in US dollars factor and yield as Turkish Airlines. (currency in which Pegasus Airlines incurs more than half of its expenses)5. Therefore, the unit Pegasus Airlines’ load factor increased by 3% to revenue increase reported by the airline in lira 80% between 2012 and 2013 but remains lower became a unit revenue decrease in US dollars. than those of typical low cost airlines (e.g. easyJet achieved a 89% load factor in 2013). This can be With a 3% load factor increase and a 6% yield partly explained by its fast growth (+16% yoy ASK decrease, Pegasus Airlines’ RASK decreased by growth vs. +4% for easyJet for the same period). 3% between 2012 and 2013. In the near future, Pegasus Airlines expects further pressure on With 44% of its revenue collected in Turkish lira, yields offset by increasing load factors and a the depreciation of the latter currency had negative resulting stabilised RASK. Pegasus Airlines Figure 16: Pegasus Airlines’ unit revenue development

Passenger load factor Yield RASK RPK / ASK Revenue per RPK, in US¢ / RPK Revenue per ASK , in US¢ / ASK

100% 15 15 +3% 80% 80% 78%

10 -6% 10 60% 8.3 7.8 -3% 6.5 6.3 40% 5 5

20%

0% 0 0 2012 2013 2012 2013 2012 2013

Source: Pegasus Airlines Annual Report, S&P Capital IQ, Seabury analysis

Compared to other airlines, Pegasus Airlines Pegasus Airlines. Turkish Airlines, on the other found itself in the lower range of RASK, but still hand, sits in the middle of the benchmark set, with above other LCCs such as Ryanair and Air Arabia. higher revenue per ASK than Emirates but lower However the latter benefit from the advantage than those of Europe’s major airline groups. of longer average stage lengths Confidentialcompared – not for third to party distribution © Seabury Group 2010 30 RASK

Figure 17: Unit revenue benchmark

RASK benchmark (selection of airlines) Revenue per ASK in US $ cents

AF-KLM IAG airberlin easyJet Turkish Vueling Norwegian AS Emirates Oman Air Pegasus FSC ryanair LCC Air Arabia

0 2 4 6 8 10 12 14 Note: Values for most recent financial year (year ending September 2013, December 2013 or March 2014) Source: S&P Capital IQ, Seabury analysis

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Revenue development initiatives The role that ancillary revenue sources play in and cancellation fees, airport check-in and seat bolstering airline revenues continues to grow. With selection fees. The airline plans to keep growing its its roots among low-cost carriers, ancillary revenue ancillary revenue stream and aims at increasing its generation is now a fundamental component of ancillary revenues to at least 10 to 12 Euros (US$ most airlines revenue generation strategies. As 12-15) per passenger by 2017 (from approximately expected, the leaders in this field remain traditional EUR 7 / US$ 8 in 2013 according to IdeaWorks). low-cost carriers, as illustrated in Figure 17. As is the case with most full service legacy carriers, According to the 2014 Ideaworks Ancillary Turkish Airlines pursues a less aggressive ancillary Revenue Yearbook, Pegasus Airlines reported revenue strategy compared to its LCC counterpart. that ancillary revenue accounted for around 15% The airline’s ancillary revenue accounts for under of total revenue for the past period - an increase 5% of total revenue, putting it in line with other of 64% year-on-year. The carrier has implemented global legacy carriers. Ancillary revenue sources a number of rigorous ancillary revenue initiatives for Turkish Airlines are driven from more traditional including pre-order and in-flight sales of food and sources including excess baggage and ticket beverage, duty-free sales on-board international cancellation and change fees. flights,Ancillary excess baggage revenues charge, reservation change

Figure 18: Ancillary revenue as % of total revenue

Ancillary revenue benchmark (selection of airlines) % of total revenue 35% FSC LCC

25%

19%

15% 14% 13% 12% 9% 7% 6% 6% 6%

2% 2% 1% 1%

Source: 2014 Ideaworks Ancillary Revenue Yearbook, Seabury analysis

Confidential – not for third party distribution © Seabury Group 2010 32 Product Turkish Airlines became one of the most prestigious and “Best Business Class Lounge Dining” in the airlines in the world in terms of product. The airline 2014 Skytrax World Airline Awards. The airline has retained a four-star airline rating from Skytrax also received the “Best Airline in Europe” award since 2007 and received several awards to mark its for the fourth consecutive year, testament to the name in the aviation industry. It has been chosen consistency of its product. “Best Airline in Europe”, “Best Airline in Southern As shown below, Turkish Airlines scored highly on Europe”, “Best Business Class On-board Catering” all of the many points covered by the survey. 3D Insight - Issue 21 Page 15

Figure 19: Turkish Airlines’ Skytrax review SkyTrax Rating (TK)

Turkish Airlines’ Skytrax ratings Average rating

Seat Comfort 4.1 Website 4.0 Staff Grooming / Presentation 4.0 Quantity of Onboard Food served 4.0 Quality of Onboard Food / Beverages 4.0 Premium Economy 4.0 Inflight Entertainment 4.0 Economy Class 4.0 Cabin safety 4.0 Business Class 4.0 Baggage Delivery 4.0 Airport Check-in 4.0 Aircraft / cabin appereance 3.9 Lounge 3.9 Blankets / Pillows 3.9 Newspapers / Magazines 3.8 Cabin crew 3.8 Washroom Cleanliness 3.7 Ground Assistance 3.5 Delays / cancellations 3.5 Transfer Services 3.2 Dine-on-Demand 3.0 Cockpit Communications 3.0 Boarding process 3.0

Overall 4.0

Source: Skytrax, Seabury analysis 0 1 2 3 4 5

Confidential – not for third party distribution © Seabury Group 2010 0 Turkish Airlines has rolled out a new business Pegasus Airlines’ overall rating by the latest class cabin on its Boeing 777-300ERs and Airbus Skytrax publication was two out of five. This rating A330-300s, now equipped with 180-degree lie-flat is lower than those of most European and Middle seats. The airline also offers complimentary Wi-Fi Eastern low cost airlines. easyJet, germanwings, for all passengers on its Boeing long-haul fleet. Its Norwegian, Transavia, Vueling and Wizz Air in new lounge at its Istanbul Atatürk hub, with over Europe as well as Air Arabia in the Middle East are 63,500 square feet over two levels, has made all three star airlines. The only notable exception in headlines in 2014 and reinforced Turkish Airlines’ Europe is Ryanair, which is also a two star airline. positioning as a four star airline. The lounge offers a fully-stocked library, a children’s playground, Like Pegasus Airlines, Onur Air is classified as a pool tables, showers, private rooms for napping, two star airline by Skytrax. Atlasjet and SunExpress an arcade and a golf simulator. are not rated by Skytrax. 3D Insight - Issue 21 Page 16

Cost management Airlines around the world are putting increasing the gap with competing low cost airlines on the emphasis on cost management in an industry short and medium haul markets. As in the revenue suffering from declining yields and cost structures improvement section, this section will focus on with high shares of non-controllable, external Turkish Airlines and Pegasus Airlines, the only costs (e.g. fuel costs or airport costs). Most large two airlines of the Top 5 airlines that disclose their network carriers conduct recurrent cost cutting financial results. exercises to address declining yields and to reduce

Both Turkish Airlines and Pegasus Airlines have from approximately US$ 90 per barrel in 2010 to been able to keep their unit cost stable since 2010, approximately US$ 120 per barrel in 2013. During as shown in the figure below. Pegasus Airlines has the same period of time, Turkish Airlines has managed to keep its unit cost at the same level of managed to reduce its unit cost from US¢ 8.4 per US¢ 6.1 per ASK despite a jet fuel price increase ASK to US¢ 8.1 per ASK, i.e. a reduction of 4%. CASK in USD Figure 20: Unit cost development

Unit cost development CASK, US¢ / ASK 10

9 8.4 8.5 7.8 8.1 8 7 6.3 6.1 6.1 5.8 6 5 4 3 2 1 0 2010 2011 2012 2013

Source: S&P Capital IQ, Seabury analysis

Both airlines have been helped by the depreciation first quarter of 2010 and the fourth quarter of 2013, of the Turkish Lira that dropped 25% between the as shown below. Exchange rate Figure 21: Exchange rate Confidential – not for third party distribution © Seabury Group 2010 38

Exchange rate TRY/USD 1 TRY in USD 1.0 0.9 0.8 0.7 0.6 -25% 0.5 0.4 0.3 0.2 0.1 0.0 2010 2010 2010 2010 2011 2011 2011 2011 2012 2012 2012 2012 2013 2013 2013 2013 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

Source: OANDA, Seabury analysis

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Overall, both airlines are competitive in terms of benefiting from a longer average stage length. unit costs in their respective categories. With a Pegasus Airlines also benefits from a low cost unit cost of US¢ 8.1 per ASK, Turkish Airlines was structure. Its unit cost was about 30% higher than one of the full service carriers with the lowest cost ultra-low cost Ryanair but more than 20% lower per ASK in 2013. Out of the selection of FSC, only than easyJet and other major European LCCs in Emirates had a slightly lower unit cost, the latter 2013.

CASK benchmark Figure 22: Unit cost comparison with selection of airlines

Unit cost benchmark CASK, US¢ / ASK, in 2013 FSC 14 LCC 12

Note: figures correspond to FY13 (as defined by each individual carrier) Source: S&P Capital IQ, Seabury analysis

Labour Turkish Airlines has increased its personnel and FSC vs. LCC). efficiency from 1,644 passengers perConfidential employee – not for third party in distribution © Seabury Group 2010 42 2010 to 2,084 passengers per employee in 20136. Turkish carriers have access to affordable labour This increase in labour efficiency (combined with forces as shown in Figure 22, which compares the depreciation of the Turkish lira) was translated employment costs across different European into a decrease in personnel cost per ASK of countries. With an hourly employment cost of almost 25% in US dollars. €6, Turkey has one of Europe’s lowest costs of employment. Employment in Turkey is three times Pegasus Airlines followed the opposite trend as its less expensive than in Spain, more than four times labour efficiency decreased from 6,641 passengers less expensive than in Germany and five times per employee in 2012 (almost at easyJet’s level of less expensive than in France. This is a material 6,797 passengers per employee in 2013) to 5,417 advantage for the Turkish carriers ensuring lower passengers per employee in 2013.7 The gap in labour cost (corresponding to employees directly terms of passengers per employee between the employed by the airlines) but also lower handling two Turkish carriers can be explained by their costs (ground handling, catering, airport services, different business models (long haul vs. short haul etc.). Labour Figure 23: Employment cost by country in Europe

Employment cost Hourly labour cost, in Euro

38 37 36 33 31 31 28 28 27 27 27 24 20 18 16 15 13 11 11 9 8 8 7 6 6 6 4 3

Note: excluding apprentices, cost per employee in full-time units in business economy, average by country Source: Eurostat (2008), Seabury analysis

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Aircraft utilisation Turkish Airlines increased its average aircraft The production rates reached by the two Turkish utilisation by 5% between 2010 and 2013. carriers are among the highest in the industry. According to the airline, its narrowbody utilisation With almost 15 hours per day, Turkish airlines went from 11.9 to 12.2 hours per day (+3%) and utilises its widebody fleet more than any airline its widebody utilisation from 13.3 to 14.9 (+12%). of the benchmark set. Pegasus Airlines achieved Pegasus Airlines also improved aircraft utilisation the highest narrowbody aircraft utilisation, more between 2012 and 2013, and reported a daily productive with its aircraft than other European utilisation of 12.6 hours in 2013, up 8% compared LCCs such as WizzAir and easyJet. Turkish Airlines to the previous year. also achieved very high asset utilisation, with its narrowbody utilisation being higher than easyJet’s. Utilisation benchmark Figure 24: Aircraft utilisation

Aircraft utilisation benchmark Hours per day, average in FY13* Long haul only Short haul only All

14.9 13.6 13.3 12.6 12.4 12.2 12.1 11.0 9.9 8.4

Note: *except WizzAir (FY14) Source: Airlines’ annual reports and investor presentations, CAPA, Seabury analysis

Fleet Turkish Airlines is by far the largest Turkish airline the three variants of the types: the Boeing sub- in terms of fleet of passenger aircraft. With 228 fleet comprises B737-700s, -800s and -900ERs, aircraft as of October 2014, the national carrier is while the Airbus sub-fleet comprises A319s, A320s more than four times the size of the second largest and A321s. This mix gives the airline maximum Turkish operator, Pegasus Airlines. Turkish Airlines flexibility to adjust aircraft capacity to best match is also the only Turkish operator withConfidential widebody – not for third partythe distribution market © Seabury demand.Group 2010 45 aircraft in its fleet, with 40 Airbus aircraft (33 A330s and 7 A340s) and 18 Boeings. Pegasus Airlines, as a traditional low-cost airline, uses mainly B737-800 aircraft. However, its fleet The narrowbody fleet of Turkish Airlines is also includes 4 A320s. SunExpress operates a comprised of a mix of B737s and A320 Family single-type fleet of 21 B737-800s, while Atlas Jet aircraft, each of them representing approximately and Onur Air operate fleets of Airbus narrowbodies. half of the narrowbody fleet. Both sub-fleets include 3D Insight - IssueCurrent 21 fleet as at October 2014 Page 19

Figure 25: Aircraft utilisation

In service passenger aircraft # of aircraft as at 1 October 2014

228 7 A340 B777 A320 B73N 33 A330 A319 A321

18 13 33

54 4 81 21 20 50 18 1 6 9 13 9

Source: ASCEND, Pegasus Airlines’ investor presentation Q3 2014, Seabury analysis

The two largest operators, TurkishConfidential Airlines – not for third partyand distribution is ©even Seabury Group younger 2010 with an average age of only24 3.7 Pegasus Airlines, have relatively young fleets. years. The other Turkish operators operate older Even with its ageing, soon to be phased out A340s, fleets. While SunExpress’ average fleet age the average age of Turkish Airlines’ widebody fleet remains under the 10 year mark, Atlasjet and Onur does not exceed 6 years. Its narrowbody fleet’s Air operate significantly older aircraft. average age is 6.5 years. Pegasus Airlines’ fleet Current fleet as at October 2014 - Age

Figure 26: Average fleet age of Turkish Operators

Average fleet age Average age of in-service passenger fleet, years, as at 1 October 2014

18 16 15.6 13.9 14 12 10 9.3 8 6.0 6.5 6 3.7 4 2 0

AVG AVG AVG AVG A321 A320 A319 A320 A321 A320 A319 A321 A340 A330 B777 A320 B73N B73N B73N AVG (NB) AVG AVG (WB) AVG

Note: average Pegasus B73N fleet age of based on 43 of the 50 aircraft, as available in ASCEND Source: ASCEND, Seabury analysis

Despite their ageing fleet, AtlasjetConfidential and – notOnur for third partyAir distribution are © expectedSeabury Group 2010 to receive 179 new narrowbody25 aircraft the only Turkish operators with no current orders. between 2015 and 2020. These new aircraft Turkish Airlines has firm orders for 30 new widebody are likely to be used for both fleet replacement aircraft. Some of these aircraft will surely be used and fleet expansion. In addition to these firm to replace its ageing seven A340s while most of orders, Turkish Airlines also placed options for an its new deliveries are likely to be used for growth additional 38 narrowbody aircraft, all of which are on long-haul markets. The national carrier is also next generation aircraft (MAX and neo). 3D Insight - Issue 21 Page 20

In late 2012, Pegasus Airlines placed an order for More recently, SunExpress finalised an order for 100 new Airbus aircraft. This order of A320neo and 15 737 MAX 8s and 25 Next-Generation 737-800 A321neo aircraft was the largest ever aircraft order airplanes. The order, revealed in February 2014, in the history of Turkish Civil Aviation.8 This order also includes options for 10 additional 737 MAX is split between 75 firm orders (57 A320neo and 8s.9 18 A321neo) and 25 options (all A320neo), with deliveries expected between 2015 and 2022. Backlog as at 9 October 2014 Figure 27: Airlines backlogs as at 9 October 2014

Firm orders Options # of aircraft # of aircraft

209 38 17 777 13 4 A330 25 A320neo A321 25 A321neo 28 60 737 (NG) 737 Max 77 25 10 57 40 65 25 10 18 15 2

Source: ASCEND, Seabury analysis

Confidential – not for third party distribution © Seabury Group 2010 26 3D Insight - Issue 21 Page 21

Infrastructure development

45 airports served the Turkish aviation market International Airport (SAW). Antalya Airport (AYT) in July 2014, geographically distributed across was the third largest airport in July 2014, with more the Turkish territory. The largest, Istanbul Atatürk departing seats than the airport of the Turkish capital Airport (IST), handled more than twice the traffic of Ankara, Esenboğa International Airport (ESB). the second largest Turkish airport, Sabiha Gökçen International growth by region

Figure 28: Airports in Turkey

Turkish airports

Note: Size proportional to departing seats in July 2014 Source: DiioMi, Seabury analysis

With more than 50 million passengersConfidential –handled not for third party in distribution It ©serves Seabury Group the 2010 city of Istanbul, together with20 the 2013, Istanbul Atatürk Airport is the 18th largest Sabiha Gökçen International Airport which sits airport in the world. It is also the fifth largest airport across the Bosphorus and handled over 18 million in Europe, after London Heathrow, Paris Charles passengers in 2013.10 de Gaulle, Frankfurt and Amsterdam Schiphol. Largest airports worldwide

Figure 29: Largest airports worldwide

World’s 30 largest airports Passengers in 2013, in millions

100

IST SIN IAH ICN MIA JFK ATL CLT LAX LAS KUL LHR FRA PEK BKK PHX DXB SFO DEN CAN PVG HND AMS CGK HKG ORD MAD CDG MUC DFW

Source: Airports Council International via Port authority of NY & NJ, Seabury analysis

Focus on Istanbul Istanbul Atatürk Airport (IST) currently has three potential addition of a fourth runway, as requested runways, with capacity for 55 movements per hour by Turkish Airlines. The project, which has been and official terminal capacity of around 40 million approved by the Government12, would increase the passengers11. The airport handled more than 50 airport’s runway capacity to 70 movements per hour. million passengers in 2013 and aircraft movements Increases in terminal capacity, aircraft stands and exceed 55 per hour during most of the day (Figure aircraft parking capacity are also being planned but 29). Studies are currently being conducted on a the lack of available land is a significant constraint. Largest airports worldwide

Figure 30: Current activity level at IST

Activity at Istanbul Atatürk Airport Movements on 12 July 2014

36 37 33 35 37 28 30 28 32 30 32 23 26 25 23 18 22 20 20 22 8 6 3 5 Departures

1100 0000 0100 0300 0400 0500 0600 0800 0900 1000 1300 1400 1600 1700 1900 2000 2100 2200 2300 0200 0700 1200 1500 1800

2 2 8 14 12 Arrivals 15 17 25 25 26 29 29 28 28 27 26 29 26 27 34 32 37 36 39 More than 50 movements per hour More than 70 movements per hour Source: DiioMi, Seabury analysis

Sabiha Gökçen International Airport (SAW) has new airport is planned to open in late 2017.14 one runway, with capacity for 28 movements per hour and has plans to add a second runway. Its The new Istanbul airport aims to rival Dubai’s Al terminal capacity is around 25 million passengers Maktoum International Airport (DWC), which opened per annum (the airport handled approximatelyConfidential – not for third 18 party distributionin October © Seabury Group last 2010 year and is expected to eventually0 million passengers in 2013). accommodate 160 million passengers a year. However, its construction faces regular hurdles that Even with the planned enhancements to capacity may delay its opening. In early 2014, the Istanbul at the two existing airports, the Turkish Government Administrative Court ordered the suspension of the and the Turkish aviation sector have agreed that the construction after an environmental organisation construction of a third Istanbul airport is needed. A filed a lawsuit. This decision triggered active tender for a Build Operate Transfer contract was debates between the airlines, the airport operator, completed on 3 May 2013 and won by a consortium the government and other political parties. Besides of construction companies. Cengiz-Kolin-Limak- environmental concerns, location and investor/ Mapa-Kalyon Consortium, a Turkish joint venture, contractor insurance issues were also raised won the tender to build the third Istanbul airport and the perceived urgent need for a third airport after bidding 22 billion euros for a 25-year lease suddenly appeared to be in danger. Nevertheless, to build and operate the planned airport.13 The the new airport project has rallied and Turkey’s first stage of the six-runway airport is planned to (then) Prime Minister Erdogan laid the first stone accommodate 90 million passengers and, in its in June, reiterating that the airport is expected to completed state, will be able to accommodate 150 open in late 2017 and to be fully operational the million passengers. In its final phase, it will have following year. four connected terminals and six runways. The 3D Insight - Issue 21 Page 23

Regulatory Environment

Turkey remains under bilateral agreements, allowing In March 2010, the European Union and the Turkish the country to actively control the competition. But authorities initiated a “horizontal” air transport with the aggressive growth plan of its national carrier, agreement which removes nationality restrictions Turkish Airlines, Turkey has grown its international in the bilateral air services agreements between network rapidly, increasing the number of bilateral EU Member States and Turkey. This allows any EU agreements from 81 in 2003 to 162 in 2014. airline to operate flights between any EU Member State and Turkey, where a bilateral agreement with Turkey exists and traffic rights are available.15

Closing thoughts

Turkey has played a major role in the global largest of them, Pegasus Airlines, is on its way to aviation industry in the last decade. Its national becoming one of the reference low cost airlines in airline, Turkish Airlines, has become one of the Europe. With a low cost structure, it is expected to largest global airlines and has invested heavily stimulate traffic by giving access to air travel to the in its product and its brand to establish itself as growing middle class, both in Turkey and abroad. a reference airline. With the aim to be the airline Armed with successful network and budget serving the largest number of countries worldwide, carriers, Turkey is expected to have a growing Turkish Airlines has grown its international network role in the global aviation market. The country and will continue to do so. With a distinctive seems to be working together with all actors of the slogan, “Globally Yours”, Turkish Airlines aims aviation industry with an ambitious global aviation at becoming an airline of choice to connect the strategy. It will be the home of one of the largest world via Istanbul. Turkey is also the home of airports in the world, the third Istanbul airport, dynamic leisure airlines that are transitioning and actively supports the national carrier in its from charter carriers to scheduled airlines. The expansion into emerging markets such as Africa.

1 Source: CIA World Factbook 2 Source: Press article “Pegasus Airlines’ Secrets of Success Shared At World Low Cost Airlines Congress 2014”, flypgs.com 3 Source: Ministry of Foreign Affairs of Turkey, http://www.mfa.gov.tr/turkey-africa-relations.en.mfa 4 Source: Turkish Airlines’ Dec. 2013 investor presentation: http://investor.turkishairlines.com/documents/ThyInvestorRelations/download/trafik/sunum_aralik_2013.pdf 5 Source: Pegasus Airlines’ FY2013 investor presentation 6 Source: Turkish Airlines 2014 Q3 Results Summary 7 Source: Seabury analysis based on airline’s investor presentations and annual reports 8 Source: http://www.flypgs.com/en/about-pegasus/news/690/pegasus-airlines-places-the-largest-ever-aircraft-order-in-the-history-of-turkish-civil-aviation.aspx 9 Source: http://boeing.mediaroom.com/2014-02-19-Boeing-SunExpress-Finalize-Order-for-15-737-MAXs-25-Next-Generation-737s 10 Source: http://www.sabihagokcen.aero/corporate-info/airport-traffic-report 11 Source: http://centreforaviation.com/analysis/turkeys-aviation-market-healthy-growth-to-continue-at-one-of-the-worlds-oldest-cross-roads-133780 12 Source: http://www.routesonline.com/news/37/momberger-airport-information/168563/istanbuls-ataturk-airport-to-get-4th-runway/ 13 Source: http://english.alarabiya.net/en/business/aviation-and-transport/2014/02/11/Turkey-defies-court-order-vows-to-build-new-airport.html 14 Source: http://www.dailysabah.com/money/2014/10/17/turkeys-aviation-sector-to-carry-170-million-passengers-by-end2014 15 Source: http://ec.europa.eu/transport/modes/air/international_aviation/country_index/turkey_en.htm 3D Insight - Issue 2119 Page 24

Statistics Executive Summary Statistics Source: AACO Executive Summary StatisticsNote: Includes scheduled operations for AT, EK, Source: AACO EY, GF, KU, ME, MS, QR, RJ, SV, TU, WY, XY Note: Includes scheduled operations for AT, EK, EY, GF, KU, ME, MS, QR, RJ, SV, TU, WY, XY

Q1 Year-on- Q1 Year-on- Q1 Year-on- Total International Domestic Year Change Year Change Year Change

No. of Pax 37,209,752 11.6% 31,978,248 11.8% 5,231,504 10.6%

Tonnes Cgo 1,169,845 8.9% 1,141,252 9.4% 28,592 -10.2%

RPKs (000) 126,772,626 12.0% 122,475,341 12.0% 4,297,285 12.2%

ASKs (000) 161,696,187 11.7% 156,556,400 11.6% 5,139,787 12.4%

Pax Load Factor 78.40% 0.25% 78.23% 0.26% 83.6% -0.15%

RTKs (000) 16,048,776 11.8% 15,701,152 12.0% 338,475 3.80%

ATKs (000) 23,878,679 9.2% 23,329,155 9.3% 525,968 0.5%

Weight Load 67.21% 1.61% 67.30% 1.59% 64.35% 2.05% Factor

AACO members passenger size and growth Fig 1 - Year-on-year revenue passenger kilometers (RPKs) growth versus passenger load AACO members passenger sizefactor and (PLF). growth Bubble size indicates carrier size Fig 1 - Year-on-year revenue passenger kilometers (RPKs) growth versus passenger load factor (PLF). measured as available seat kilometers (ASKs) Bubble size indicates carrier size measuredConfidential – as not for available third party distribution seat © Seabury kilometers Group 2010 (ASKs) 0

Source: AACO Source: AACO

RPK Growth Q1’14 (% YOY) 30 1 billion ASKs SV 20 EY QR TU EK 10 XY AT RJ KU GF WY 0 PLF (%) 50 52 54 56 58 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 -10 ME MS

-20

-30

AACO members cargo size and growth Fig 2 - Year-on-year revenue tonne kilometers AACO members cargo size and growth(RTKs) growth versus weight load factor (WLF). Fig 2 - Year-on-year revenue tonne kilometers (RTKs) growthBubble versus size weight indicates load factorcarrier (WLF). size Bubblemeasured as size indicates carrier size measured as available tonnes availablekilometers tonnes(ATKs) kilometers (ATKs) Source AACO Source: AACO

RTK Growth Q1’14 (% YOY) 40 500 million ATKs 30 EY

20 QR AT SV TU 10 EK WY KU RJ 0 45 50 MS 55 60 65 70 75 GF ME -10 WLF (%) Arab passenger growth Arab Figpassenger 3 - Historical growth trend of fourth quarter passenger transitFig volume 3 - Historical in most Arab trend airports of first quarter passenger Source: AACO, ACI transit volume in most Arab airports Source: AACO, ACI

Pax (million) 80 +10.2% Confidential – not for third party distribution © Seabury Group 2010 2 70 68.5 62.1 60 55.2 50 48.0 46.4

20 Passengers 10

0 Q1 - 2010 Q1 - 2011 Q1- 2012 Q1 - 2013 Q1 - 2014

ArabArab cargo cargogrowth growth Fig 4 - Historical trend of first quarter cargo Fig 4 - Historical trend of fourth quarter cargo transportedtransported in most Arab inairports most Arab airports Source: AACO, ACI Source: AACO, ACI

Confidential – not for third party distribution © Seabury Group 2010 3 Tonnes (thousand) 2,000 +4.9% 1,526 1,455 1,500 1,394 1,349 1,329

1,000

500 Cargo

0 Q1 - 2010 Q1 - 2011 Q1- 2012 Q1 - 2013 Q1 - 2014

Arab departure growth Fig 5 - Historical trend of first quarter traffic volume in most Arab airports Arab departure growth Fig 5 - Historical trend of fourth quarter traffic volume in most Arab airports Source: AACO, ACI Source: AACO, ACI

Departures (thousand) 700 +4.1% 600 534 513 500 469 436 456 400

300

200 Departures 100

0 Q1 - 2010 Q1 - 2011 Q1- 2012 Q1 - 2013 Q1 - 2014

Intra-regionalIntra-regional Arab market Arab market Fig 6 – First quarter international Arab market Fig 6 – First quarter international Arab market passenger numberspassenger within the Arab numbers World within the Arab World Source: AACO, IATA Source: AACO, IATA

Confidential – not for third party distribution © Seabury Group 2010 Pax (thousand) 5 5,000 Q1-2011 +11% 4,000 +12% Q1-2012 Q1-2013 Q1-2014 3,000

2,000

+28% 1,000 +30% +11% +31%

0 Within Arabian Near East North Africa Within Near East - Within Near Peninsula - Arabian - Arabian North Africa North Africa East Peninsula Peninsula

Inter-regionalIntra-regional Arab market Arab market Fig 7 - First quarter Arab market passenger Fig 7 - Fourth quarter Arab market passenger numbers to/from numbersthe Arab world to/from the Arab world Source: AACO, IATA Source: AACO, IATA

Pax (thousand)

12,000 +7% Q1-2011 +12% Q1-2012 10,000 Q1-2013 8,000 Q1-2014

6,000 +15% 4,000

+8% +10% 2,000

0 With Europe With Mid Asia With Australasia With Sub- With the Americas Saharan Africa

Airport passenger volume Fig 8 - 2014 first quarter passenger volume in most Arab airports by port Source: AACO, ACI Airport passenger volume Fig 8 – 2013 first quarter passenger volume in most Arab airports by port Source: AACO, ACI Pax (thousand) 0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 18,000 19,000

DXB JED DOH RUH AUH CAI KWI SHJ MCT DMM BAH CAS AMM ALG SSH HRG BEY TUN RAK AGA LXR RBA MIR ASW RKT FJR

Airport cargo volume Confidential – not for third partyFig distribution 9 – ©2014 Seabury Groupfirst 2010 quarter cargo volume in most 8 Arab airports by port Airport cargo volume Source: AACO, ACI Fig 9 – 2013 first quarter cargo volume in most Arab airports by port Source: AACO, ACI Tonnes (thousand) 0 40 80 120 160 200 240 600 640

DXB DOH AUH RUH CAI BAH SHJ KWI JED MCT DMM BEY AMM CAS ALG TUN FJR RBA RKT RAK LXR AGA MIR

Domestic and international Fig 10 - First quarter AACO members’ domestic/ regional and international passenger volume Domestic and international historical trend Fig 10 – First quarter AACO members’ domestic/regional and internationalNote: Includes passenger scheduled volume operations for AT, EK, historical trend EY, GF, KU, ME, MS, QR, RJ, SV, TU, WY, XY Note: Includes scheduled operations for AT, EK, EY, GF, KU, ME,Source: MS, QR, AACORJ, SV, TU, WY, XY Source: AACO

Pax (million) 40 37.2 Dom. 35 33.3 5.2 Passengers 30.2 30 4.7 4.4 24.8 25 23.4 3.6 3.6 20 Int’l 32.0 15 28.6 Passengers 25.8 10 19.8 21.1

0 Q1 - 2010 Q1 - 2011 Q1 - 2012 Q1 - 2013 Q1 - 2014 Fleet growth Fleet growthFig 11 - AACO members combined fleet growth by aircraft typeFig 11 - AACO members combined fleet growth Source: AACO, ASCEND by aircraft type Source: AACO, ASCEND

Aircraft Confidential – not for third party distribution © Seabury Group 2010 10 1,200 1,065 1,060 987 3% 4% Freighter 1,000 960 900 3% 8% 8% Regional 5% 10% 4% 9% 800 10% 44% 43% Narrow Body 44% 600 43% 44%

400

45% 45% Wide Body 200 43% 43% 44%

0 2010 2011 2012 2013 Q1 - 2014

Avg Seats 210 211 217 225 227 Avg Age (Yr) 7.1 7.1 7.0 7.0 7.2

Note: 3 AACO Members has been removed (9P, MXU. N2) Fleet changes this quarter FleetFig changes 12 – First quarterthis quarter changes to the AACO fleet by carrier Fig 12 – First quarter changes to the AACO fleet Source: AACO, ASCEND Confidential – not for third party distribution © Seaburyby carrierGroup 2010 11 Source: AACO, ASCEND

Aircraft 1,100 1,065 20 25 1,060 1,050

TU 4 1,000 EY 7 AT 4 EK 4 G9 2 G9 2 950 QR 2 QR 2 XY 2 FZ 1 900 BJ 2 IY 1 IA 2 ME 1 RJ 2 850 TU 1 SV 2 XY 1 EY 1 800 EK 1 ME 1 750

700 Q4-2013 Additions Parked/Retired Q1-2014

Note: 3 AACO Members has been removed (9P, MXU. N2)

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