IberiaIberia 200320032003-2005:--2005:2005: 33 YearYear VisionVision XabierXabier dede IralaIrala ChairmanChairman && CEOCEO Industry Challenges •Market and business model specialisation: Define the service model for each segment •Cost pressures by Low Cost Carriers •Focus on customer: service RedefinitionRedefinition ofof differentiation and customer loyalty traditionaltraditional airlineairline programmes businessbusiness modelmodel •Industry consolidation •Efficient portfolio management and increase specialisation bringing in new partners •Security, environment, infrastructure Challenges and Opportunities for Iberia in 20032003---20052005 Good positioning in costs Expansion potencial compared to other network at Madrid and Barcelona carriers and potential to airports (2004-2005) improve them CompetitiveCompetitive environmentenvironment forfor IberiaIberia 2003-20052003-2005 Leadership in Latin America will allow to take High speed train (AVE) advantage of the growth coming into operation potential in this region at the end of 2004 Expansion Potential in European Airports Passengers growth CAGR 99-04 (%) New runways in 2004 8.5 2 in Madrid 1 in Barcelona 6.5 6.5 5.3 New terminals 5.0 Madrid in 2004 4.0 Barcelona in 2005 3.1 Air Traffic Control 1.5 investments 0.8 Orly El Prat Schipol Barajas Gatwick Gaulle Frankfurt Heathrow Fiumicino CapacityCapacity growthgrowth 2004-20062004-2006 de Charles Madrid Madrid 30-40% BarcelonaBarcelona The Expansion in Madrid and Barcelona Will Allow IberiaIberia’’’ss Growth Madrid expansion in 2005 Barcelona expansion in 2006 Mov./hour Mov./hour 125 100 5% 20 98 +2 5% 100 +3 75 18 70 78 75 52 50 50 25 25 0 0 Capacity Capacity Capacity Capacity Capacity Capacity 2002 growth 2005 2002 growth 2006 2002-2005 2002-2006 Leadership in the EuropeEurope---LatinLatin America Market Iberia´s leadership will allow to benefit from the potencial growth of this region Iberia has a superior product in: Number of destinations Number of non-stop flights Daily frequencies Market share evolution Europe-Latin America 16,0% Iberia 14,0% 12,0% Air France 10,0% KLM 8,0% British Airways Lufthansa 6,0% 1998 1999 2000 2001 2002(1) (1) January-September 2002 Unit Costs Significantly below the Average 11 SAS January-December 2001 10 Lufthansa 9 British Airways Air France Austrian Airlines 8 7 Low Cost Carriers Iberia Euro Cents/ASK** 6 KLM 5 600 800 1.000 1.200 1.400 1.600 1.800 2.000 Average Stage Length (Kms)* Date for period January - December 2001, except Ryanair and Easyjet fiscal year 2001. Variations Jan-Dec 01 with respect to Jan-Dec 00 * Source: AEA **Operating costs (less 33% of Operating Leases) less Other non-airline Revenues Cost Differential Iberia-Low Cost Carriers Areas Identified Action plan under way Gap narrowing 100% 90% 32% Productivity 80% (Plane & Crew) 70% 60% 27% Commercial 50% & Distribution 40% 30% 24% Customer service 20% 9% Maintenance 10% 4% Overheads 4% 0% Others 100% DIFFERENTIAL AVE (high speed train) MadridMadrid---BarcelonaBarcelona 2005 Market distribution Train-Air transport M pax 8 1.9 6.5 3.3 6 4.6 Iberia will carry around 2 million 4 3.2 passengers, a similar level as in 1997/98 2 0 Market Mrket Total Train traffic Air traffic 2005 growth market 2005 2005 without AVE 2005 AVE IberiaIberia willwill redeployredeploy resourcesresources fromfrom thethe airair shuttleshuttle toto otherother routesroutes The new air transport business model needs to be built on three main lines Domestic/Europe DefendDefend point-to-pointpoint-to-point traffictraffic •• BeBe competitivecompetitive inin costscosts (transferring(transferring thethe advantageadvantage toto prices)prices) •• WideWide rangerange ofof destinationsdestinations andand frequenciesfrequencies Domestic/Europe/Long Haul Europe/Long Haul RetainRetain businessbusiness revenuesrevenues ContinueContinue toto efficientlyefficiently provide connecting traffic to •• MinimiseMinimise businessbusiness provide connecting traffic to long haul routes capacitycapacity reductionsreductions long haul routes • Ensure connectivity of •• MaintainMaintain serviceservice andand • Ensure connectivity of Madrid and Barcelona priceprice differentialdifferential Madrid and Barcelona The limits set by the current model require changes in: ✜ Mix ✜ Destinations ✜ Density ✜ In-flight service ✜ Schedule Iberia Will Grow Taking Advantage of the Expansion Capacity of Madrid Hub Domestic +3.6% -1.5% +3.6% 15 10 Capacity 5 MM ASK’s 0 2002 2003 2004 2005 100 7,4% Europe +11.7% +17.3% 1,5% +5.7% 20 +7.7% +6.4% 75 +5.5% 9,2% 15 10 50 5 0 25 2002 2003 2004 2005 Long Haul +12.3% 0 40 +5.3% +8.7% 1998 1999 2000 2001 2002P 2003E 2004E 2005E 30 20 10 0 2002 2003 2004 2005 Although Incorporating a High Level of Flexibility Total Flexibility 170 -19% 145 30 Flexibility 137 27 Long Haul -30% 21 •Non renewal of 17 Operating Leases •Cancel 9 options •Cancel new hiring of Flexibility 118 140 116 7 Wet Leases -17% Short/Medium haul 12/2002 12/2005 12/2005 Base case Flexibility case Efficient Management of the Business Portfolio New Business Model Independent Legal Units Integrated in Holding I Advantages: I Measures the profitability of each different business I Flexibility, faster decision-making process and specialisation Objective Maximise value creation in each of the businesses I Maintain profitable businesses I Keep the strategic businesses at a minimun cost I Ensure competitive costs for the airline I Bring in new partners to enhance value Handling New public bids: 2003 Liberalisation of airports under 1 Mill. Pax/year Renewal in the rest of the Airports Limited impact Possible loss of margin, but possibility of transferring employees to the new entrant 3 Year Vision: Strategic Priorities Consolidate the leadership in profitability among the European airlines Maintain a competitive cost base even with Low Cost Carriers Create value for shareholders Capacity to deliver in changing environment Maintain our leadership position in the Europe-Latin America market Developing the business class and maintaining connecting traffic Develop competitive service and prices in Domestic and European point-to-point routes Redefining the service model to maintain a profitable position in these markets in 2005-2007 Manage the portfolio of airline related businesses efficiently Targets 2005 2005/022005/02 Unit Cost -8%-8% // -10%-10% 20022002 >17% >17% EBITDAR margin 20052005 >19% >19% 20022002 >12% >12% ROE 20052005 >15% >15%.