BILLINGS LOGAN AIR SERVICE FORUM INTERNATIONAL Presented by Trina Froehlich, Mead & Hunt, Inc. AIRPORT (BIL) August 24, 2016 TOPICS INDUSTRY TRENDS EXISTING SERVICE PRIORITIZING OPPORTUNITIES AIRLINE INCENTIVES QUESTIONS AND DISCUSSION INDUSTRY TRENDS Industry Trends AIRLINE PROFIT AND LOSS $30 Cumulative profit since 1990 $20 $10 $0 ($10) ($20) ($30) Airline net net (Billions) income Airline ($40) ($50) AIRLINES CONSISTENTLY PROFITABLE SINCE 2010; ~$54 BILLION COMBINED NET INCOME 2010-2015 PROFIT DRIVERS INCLUDE CONSOLIDATION, CAPACITY RESTRAINT, INCREASE IN ANCILLARY REVENUE (E.G., BAG FEES) AND REDUCED FUEL COSTS PROFITS FOSTER GROWTH (E.G., ADDITIONAL CAPACITY, FLIGHTS, ETC.)VERSUS CONTRACTION IN MARKETS LIKE BIL Source: Diio Mi, Form 41 Net Income (All Airlines, Total System) 4 Industry Trends U.S. DOMESTIC OLIGOPOLY 82% of the market is controlled Only 18% of the market is controlled by by 4 airlines all other carriers Spirit 14% United Frontier Southwest 16% 10% 21% JetBlue 23% Hawaiian 8% Other 18% Allegiant Delta 7% 21% Alaska Virgin American 25% 6% 24% All Others 6% Sun Country 1% PRIMARY OPPORTUNITY FOR GROWTH AT BIL IS WITH THE LARGEST AIRLINES, SPECIFICALLY AMERICAN AIRLINES, DELTA AIR LINES AND UNITED AIRLINES Source: Diio Mi Scheduled Seats for YE June 2016 5 Industry Trends INDUSTRY CONSOLIDATION Control approximately 82% of U.S. Domestic Market through M&As Today American Delta Southwest United US American TWA Delta Northwest AirTran ATA Southwest Continental United Airways Pan Am American Reno Air US Airways America West Ozark Delta Pan Am Northwest ValuJet ATA Southwest Morris Air Continental United Pacific People Allegheny Piedmont Western National Republic Muse Air Express Air Cal PSA Frontier Florida Airlines (1982) Eastern Airlines (1991) Vanguard (2002) Skybus (2008) Other Notable Defunct Braniff Airways (1982) Midway Airlines (1991) Independence Air (2005) Aloha (2008) Airlines Air Florida (1984) Western Pacific (1998) Hooters Air (2006) CONSOLIDATION HAS LED TO FEWER OPPORTUNITIES FOR BIL TO PURSUE. 6 Industry Trends LOAD FACTORS HIGH WITH LOWER FUEL PRICES $4.50 86% $4.00 84% $3.50 82% $3.00 80% $2.50 78% $2.00 76% Load Factor Jet A per Gallon per A Jet $1.50 74% $1.00 72% $0.50 70% Fuel Price Per Gallon Load Factor $0.00 68% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 PRICE SPIKE IN 2008 LED TO CAPACITY REDUCTIONS CAUSING LOAD FACTORS TO INCREASE – BIL CAPACITY DROPPED 10% FROM 2010 TO 2011 AND LOAD FACTOR INCREASED ACCORDINGLY CAPACITY REMAINS CONSTRAINED WITH DOMESTIC LOAD FACTORS AT ALL-TIME HIGH OF ~85% DECLINES IN FUEL DRIVING INCREASED PROFITS AND PRESSURE TO REDUCE FARES Source: Diio Mi T-100 rolling average LFs (LF = RPMs/ASMs) Source: US Energy Information Administration for Gulf Coast Jet Fuel Spot Price Per Gallon through April 2016 7 Industry Trends AIRFARES DECREASING IN RECENT QUARTERS Average Domestic One-Way Fare $195 $185 $175 $165 $155 $145 $135 $125 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 2009 2010 2011 2012 2013 2014 2015 2016 AIRFARES UP 24% SINCE YE 4Q 2009 DUE TO ELIMINATION OF UNPROFITABLE ROUTES AND STRICT ADHERENCE TO CAPACITY CONTROL AND INDUSTRY CONSOLIDATION 2015/2016 DROP IN AIRFARES ATTRIBUTABLE TO LOWER FUEL PRICES › FROM YE 4Q 2014 TO YE 4Q 2015, FARES DROPPED 3%; MEDIUM/LARGE HUB AIRPORTS DROPPED 4% WHILE NON-HUB/SMALL-HUB AIRPORTS ACTUALLY INCREASED 1% › LARGEST FARE REDUCTIONS IN LARGER MARKETS WHERE AIRLINES MUST COMPETE WITH LOW-COST AND ULTRA-LOW COST CARRIERS Source: Diio Mi 8 Industry Trends FREQUENCY & CAPACITY CHANGES DOMESTIC DEPARTURES DOWN ~5% SINCE JULY 2011, WHILE JUL 2016 SEATS ARE UP ~7% AS INDUSTRY SHIFTS TO LARGER VS JUL 2011 GAUGE AIRCRAFT WHICH HELPS OFFSET THE CARRIER FLIGHTS SEATS Domestic Schedule Comparison DROP IN FLIGHT DEPARTURES American Airlines (2.9%) 4.0% Delta Air Lines (8.8%) 6.6% LCC/ULCCS ARE EXPERIENCING MOST GROWTH BUT Southwest Airlines (8.4%) 1.0% TYPICALLY DON’T OPERATE IN SMALLER MARKETS United Airlines (19.6%) (6.3%) Alaska Airlines 31.0% 38.4% AIRLINES GREW INTERNATIONAL SEATS FASTER THAN JetBlue Airways 27.5% 28.5% DOMESTIC SEATS OVER THE PAST 5 YEARS Spirit Airlines 138.6% 167.8% Frontier Airlines (42.3%) (7.4%) EXCLUDING EAS, BIL FLIGHTS DECREASED 20% Allegiant Air 82.5% 105.1% WHILE SEATS DECREASED 2% - AVERAGE Total All Domestic (5.4%) 7.1% AIRCRAFT SIZE INCREASED FROM 79 SEATS International Schedule Comparison TO 96 SEATS Total All International 18.7% 28.0% Source: Diio Mi Schedule (July 2016 versus July 2011); Ranked by July 2016 seats 9 Industry Trends FLEET CHANGES IN THE PAST 5 YEARS, TYPE OF AIRCRAFT (E.G. AIRCRAFT DEPARTURES TURBOPROP, REGIONAL JET, ETC.) HAS CHANGED TYPE JUL '16 JUL '11 CHANGE SIGNIFICANTLY Turboprop (< 30) 47,149 65,287 (28%) › TURBOPROP AIRCRAFT-OPERATED FLIGHTS ARE Turboprop (30-50) 19,610 43,099 (55%) DOWN 39% Turboprop (50+) 12,324 21,828 (44%) › REGIONAL JET-OPERATED FLIGHTS ARE DOWN 21% Regional jet (30-50) 117,572 191,163 (38%) Regional jet (51-70) 40,473 37,423 8% - LARGEST DECREASE IN THE 30-50 SEAT RANGE Regional jet (71-100) 38,286 20,934 83% - LARGEST INCREASE IN THE 71-100 SEAT RANGE Narrow-body (70-125) 79,037 100,013 (21%) › USE OF LARGER NARROW-BODY JETS ARE UP 17% - Narrow-body (126-160) 259,311 257,914 1% MOST GROWTH IN THE NEW LARGER NARROW-BODY Narrow-body (> 160) 151,921 59,838 154% CATEGORY All Turboprops 79,083 130,214 (39%) › AT BIL, EXCLUDING EAS, ALL SIZE All Regional Jets 196,331 249,520 (21%) REGIONAL JETS AND TURBOPROPS All Narrow-body Jets 490,269 417,765 17% DECLINING WITH GROWTH IN NARROW- BODY JETS Source: Diio Mi 10 Industry Trends PILOT SHORTAGE FALLOUT FROM THE FAR PART 117 CHANGES AS A RESULT OF THE COLGAN ACCIDENT IN 2009 › PILOT FATIGUE DETERMINED TO BE CONTRIBUTING FACTOR IN THE CRASH › ADJUSTED PILOT REQUIREMENTS FOR PART 121 CARRIERS AND MINIMUM CREW REST REQUIREMENTS EFFECTIVE AUG 2014 › WILL LIKELY CONTINUE TO BE A PROBLEM FOR 3-5 YEARS INTO THE FUTURE HAS SPED THE RETIREMENTS OF 50-SEAT REGIONAL JETS AND GROWTH IN SMALLER MAINLINE AIRCRAFT IMPACTING SOME REGIONAL AIRLINES SIGNIFICANTLY MORE THAN OTHERS WILL CONTINUE TO IMPACT BIL › AIRCRAFT OPERATED BY REGIONAL AIRLINES, LIKE SKYWEST AND CAPE AIR, IMPACTED THE MOST › BIL SERVICE BEEN IMPACTED WITH REDUCED FREQUENCY IN SOME MONTHS 11 EXISTING SERVICE Existing Service EXISTING AIR SERVICE Aug 2016 – Weekly Airline Dest. Flights Seats GDV 14 126 GGW 14 126 9K HVR 13 117 OLF 14 126 SDY 28 252 PDX 7 532 AS SEA 21 1,596 MSP 21 2,908 DL SEA 7 532 SLC 27 2,211 AZA 2 332 G4 LAS 2 332 LAX 2 312 DEN 28 2,666 UA ORD 7 350 Total 207 12,518 AUGUST IS PEAK MONTH FOR FLIGHTS WHILE JULY WAS PEAK MONTH FOR S EATS AUGUST 2016 FLIGHTS UP 3% WITH SEATS UP 2% OVER 2015 BZN HAS ONE ADDITIONAL AIRLINE (FRONTIER AIRLINES) AND SEASONAL SERVICE BY DELTA AIR LINES AND UNITED AIRLINES NOT AVAILABLE AT BIL Source: Diio Mi as of 8/4/16 13 Existing Service ONE-STOP CONNECTIONS TO THE WORLD ON 29 DAILY DEPARTURES, BIL CREATES 366 CONNECTIONS TO THE US AND BEYOND 171 UNIQUE DOMESTIC CONNECTIONS 15 UNIQUE INTERNATIONAL CONNECTIONS Source: Diio Mi schedule snapshot for Where do you want to go? Thursday, August 4, 2016; Note: Cnx. based on low circuity and online cnx. between 30-240 mins. 14 Existing Service BENCHMARKING BIL WITH REGIONAL AIRPORTS 7.00 6.34 Seats per capita Flights per 100 people 5.81 6.00 5.00 4.17 4.40 Average Seats per 3.86 4.00 Capita = 2.84 3.16 3.24 2.78 3.00 5.97 1.99 2.05 2.00 2.00 Seats per Capita 3.41 3.55 2.85 2.88 2.88 3.08 1.00 2.39 1.28 1.55 1.67 0.00 BIL’S SEAT PER CAPITA IS ABOVE THE REGIONAL COMPARE MARKET AVERAGE AND ABOVE ALL OTHER MARKETS EXCEPT SPOKANE, MISSOULA AND BOZEMAN (2.8 WITHOUT EAS) ANNUALIZED, BIL PRODUCED MORE FLIGHTS PER 100 PEOPLE THAN COMPARE MARKETS EXCEPT BOZEMAN (3.2 WITHOUT EAS) BIL SERVES MORE NONSTOP DESTINATIONS THAN COMPARE MARKETS EXCEPT BOISE; SIMILAR TO KALISPELL, BELLINGHAM AND PASCO WHEN EAS MARKETS ARE REMOVED Source: Diio Mi – YE 1Q 2016 T-100 flown seats (non-directional averaged, one-way); Woods & Poole Economics, Inc. 2015 MSA Population; *Note: HLN, FCA and BZN are using Micro Statistical Area Population 15 Existing Service BIL TRAFFIC/CAPACITY TRENDS Capacity Passengers Load Factor 600,000 90 550,000 83 500,000 75 450,000 68 Load factor % 400,000 60 Capacity/passengers 350,000 53 300,000 45 2010 2011 2012 2013 2014 2015 2016 Year Ended CAPACITY AND PASSENGER TRENDS ARE POSITIVE WITH CONSISTENT LOAD FACTORS DECLINE FROM 2013 TO 2014 DUE TO FRONTIER’S EXIT – CAPACITY HAS REBOUNDED WITH ADDITIONAL SEATS IN NEARLY EVERY OTHER HUB MARKET (F9 CUT BZN CAPACITY BY 65% FROM YE MAR 2013 TO YE MAR 2016) Source: Diio Mi T-100 Seats/Onboards 12-month non-directional, one-way rolling average 16 Existing Service FARE COMPARISONS U.S. Avg Fare BIL Avg Fare BZN Avg Fare $245 $225 $205 $185 Way Domestic Fare Domestic Way - $165 $145 Average One Average $125 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 2010 2011 2012 2013 2014 2015 2016 Year Ended BIL FARES TRENDING UP OVER LAST 5 YEARS BUT DOWN 2% FOR YE 1Q 2016 BIL FARES CONSISTENTLY BELOW THE AVERAGE ONE-WAY FARE AT BZN BUT HIGHER THAN US AVERAGE Source: Diio Mi 17 Existing Service AIRPORT USE Origin YE 3Q 2014 Rank Airport Pax PDEW % GTF MSO Other Domestic BZN 2% 1% 3% 1 BIL 779,812 1,068 90% 4% 2 BZN 34,047 47 4% 3 GTF 13,815 19 2% 4 MSO 8,493 12 1% 5 Other 26,581 36 3% Subtotal 862,748 1,182 100% International BIL 1 BIL 33,030 45 93% 2 BZN 1,210 2 3% 90% 3 GTF 377 1 1% 4 MSO 277 0 1% 5 Other 664 1 2% Subtotal 35,558 49 100% Domestic