Aviation Industry

METRIC GLOBAL MAPPING VALUE GLOBALLY !!

Contents METRIC Global Deals – METRIC Team Recent Aviation Trends Aviation sector outlook Emirates Target companies Valuations Structure Outlook - Synergy MAPPING VALUE GLOBALLY !!

METRIC GLOBAL A fast growing Investment advisory & Boutique Investment Bank based from Paris We specialize in Aviation and Tourism Sector It was started in 2004 by four SPJCM Grads Operates from 6 Locations: Mumbai, Singapore, Dubai, Shanghai, New York, Paris Completed 22 deals in last four years 13 in aviation & 9 in Tourism MAPPING VALUE GLOBALLY !!

Deals Co-advisors to Kingfisher & Air Deccan (India) Co-advisors to Jet & Sahara (India) Co-advisors to British Airways & Iberia (Europe) Sole advisors to SPICE airways (India) Co-advisors to ERK (US) Advisors to Air Armenia Advisors to Cyprus airlines

Management Team………………. MAPPING VALUE GLOBALLY !! Sajeev Rao MBA (IB) 4 yrs with METRIC Global Head (Operations) Founder Partner Involved in all deals Preet Sabharwal MBA (IB) 4 yrs with METRIC Head of Research (Tourism) Founder Partner Involved in all Funds Hardik Doshi MBA (IB) 4 yrs with METRIC Chief Executive Officer Founder Partner Involved in all deals Navin Bafna MBA (IB) 4 yrs with METRIC Head of Research (Aviation) Founder Partner Involved in all Funds

Global aviation industry is expected to grow at a CAGR of 3.6% for the period between 2004 - 2024 The major conventional matured airline markets like US and Europe will see there cumulative market share going down from 61% in 2005 to 42% in 2025 Emerging market like China, India, Middle East poses great opportunity for the civil aviation sector, especially for regional carriers However markets like India & Middle East are highly regulated markets which bar entry of foreign players New models like air taxi, Boutique regional catering to niche travellers are picking up Aviation Sector Outlook

Global RPK is expected to increase at a CAGR of 3.8% for the period 2004 -2024 , however they do not match the increasing costs Growth of World RPKs, Operating Margin of the Aviation Industry, (2000-2024) (1997 - 2007) 6 10000 9497.0 3.7 4 9000 1.9 2 8000 0 7000 6224.2 6000 -2 -1.7 5000 -4 -3.2 4000 3699.7 -6 3378.3 -5.6 3287.3 3274.8 3289.6 3000 -8 -7.6 2000 -10 1000 -12 -11.3 0 -13 -14 2002 2003 2004 2005 2006 2017 2024 2000 2001 2002 2003 2004 2005 2006 2007 Note: RPK stands for Revenue Passenger Kilometer Aviation Sector Outlook

Markets like US and Europe are growing slower than the average world rate, Characterized by a fall in their global share from 61% in 2005 to 42% in 2025 Projected Growth Rate of Aviation Industry, Global Air Traffic Distribution, (2006 - 2025) (2003 - 2025) China 7.5% 3.75 RPK Billion 10.25 RPK Billion 100% 7% 10% Asia Pacific 6.0% 90% 20% 80% 24% Latin America 6.4% 4% 70% 2% 2% 5% 60% 2% Middle East 5.7% 2% 24% 50% 21% Africa 5.4% 40% 4% 5% 30% Russia 5.0% 20% 37% 31% 10% Europe 4.7% 0% 2005 2025 USA, Canada & 4.6% US, Canada and Caribbean Latin America Caribbean Europe Russia Africa Middle East 0% 5% 10% Asia Pacific China Aviation Sector Outlook

Increasing costs put a huge pressure on the aviation industry • Restructuring can provide scope for increased Cost cuttings Opportunities - Companies like United Airlines has been negotiating with unions on wage and labour concessions since it filed for Chapter 11 protection in 2002 and has asked a judge to throw out contracts if cost-saving agreements cannot be reached - Delta is working on restructuring deals in hopes of avoiding a bankruptcy filing All these will help in bringing up the efficiency of the airline industry • Airlines Liquidating assets - a blessing in Disguise - In case any airlines goes for liquidation, it would help in reducing the excess capacity that had been created • Large airlines face increased competition from low-cost carriers while they continue to address labour costs Challenges • High fuel prices have squeezed the entire industry • Over capacity in the industry • Consolidation among legacy carriers can create an anti competitive environment, that can have detrimental impact in industry growth , as it may lead to cartelization o the industry Aviation Sector Outlook

Recent Deals Swicorp, a diversified financial services firm based in Saudi Arabia has bought a 20 percent stake in Jordan Aviation for a total $180 million British Airways Plc agreed to buy Paris-based L'Avion for 54 million pounds ($108 million) to enlarge its new Open Skies unit, expanding flights between France and the U.S. Japanese leasing firm Orix Corp. and Bahrain-based Manara Consortium have each bought a 10 percent stake in Malaysian budget long-haul airline Air Asia X for a total of 250 million ringgit ($77.26 million) Japan Airlines Corporation announced that the Company has decided to issue 614,000,000 shares of its common stock worth JPY 250 per share through a private placement on March 17, 2008. Goldman Sachs and WL Ross agreed to invest $100 million in Spicejet. WL Ross will invest $80 million, while the remaining $20 million will be brought in by Goldman Sachs. Aviation Sector Outlook

Global aviation industry will see the trends such as, liberalization in Asia Pacific region and increased competition in developed markets USA, Canada & Caribbean Europe • Increased competition • Increased competition Russia • Expansion of LCC Carriers • Expansion of LCC Carriers • Recovering Economic Environment • Accelerated Scope clause relaxation • Competition from High Speed Trains • Tax Barriers to western Aircrafts • Right sizing of fleet size • Trend towards usage of 70 to 110-seat Jets • Ageing Fleet • Trend towards usage of 70 to 110-seat • Replacement and rightsizing of aircraft fleet Jets Middle East • Regional Network under Development •Slow Liberalization Trends Asia Pacific • High Comfort Standards in Airlines • Industry Consolidation to take place • Trends towards Liberalization • Increased Competition from Start-ups • Pilot Shortage (in India and Japan) Latin America • Travel Demand growing above world level • Increased Competition • Expansion of LCC Carriers •Ageing Fleet (Used aircraft) Africa • Lack of Financing Resources • Travel Demand growing above world level • Regulatory Policy (Mostly Government owned Flag Carriers) • Ageing Fleet • Industry Consolidation would take place Aviation Sector Outlook

Unexpected increase in ATF Major cost driver Over Capacity High competition on routes FCC vs. LCC Lack of Infrastructure Sinking Margins Decrease in Number of Passengers (factors) Aviation Sector Outlook

Consolidation Backward and forward Integration Newer Opportunities Efficiency in Operations Investment in infrastructure Diversification in services Need of the Hour !! Aviation Sector Outlook

Revenue 2007-08 2006-07 AED million % AED million % Passenger 28,118 77.2 21,677 75.7 Cargo 6,012 16.5 5,047 17.6 Courier 299 0.8 264 0.9 Excess baggage 256 0.7 217 0.8 Mail 138 0.4 66 0.2 Transport revenue 34,823 95.6 27,271 95.2 Sale of goods 1,232 3.4 1,019 3.6 Destination and leisure (see below) 196 0.5 183 0.6 Other 190 0.5 170 0.6 Total operating revenue 36,441 100.0 28,643 100.0 Aircraft In operation On firm order On option B777-200 9 - - B777-300 12 - - B777-300ER 32 34 20 A310-300F 3 - - A330-200 29 - - A340-300 8 - - A340-500 10 - - A350-900/1000XWB - 70 50 A380-800 - 58 - B777-200LR 4 6 - B747-400ERF 2 - - Total 109 168 70

Vision to enter LCC operations Diversification of operations (Base) Newer opportunities in other sectors Using its Position to grow Playing on advantage in adverse situation Rationale: Emirates as a buyer

Expansion Strategy Acquisition Global Reach

Headquartered in Rome, it operates services to 24 domestic and 66 international destinations World's 19th largest passenger airline by fleet size – 181 aircrafts, carrying 25 million passengers annually throughout the 1990’s Set up a regional subsidiary Alitalia Express and in 2001 became a member of the Sky Team Alliance Operating fleet on 31st March 2008 consisted of 181aircrafts of which 145 for short/medium-haul and 28 for long-haul The average fleet age of Alitalia is 12.7 years as of March 2008.

The Italian government is seeking to get out and to sell 39.99% of the airline, even though it could sell up to 49.9% or completely sell out Dual base in Rome & Milan Ownership of Slots in premium European airports Positives

XL Leisure Group (XLLG) - a major tour operating company in the UK and is third-largest holiday company. Big player in the UK holiday market. Consists of charter and scheduled airlines, holiday companies and flight-only tour operators. XL Air-ways, its airline, flies to more than 50 destinations. It sells holidays under a diverse range of brands including Kosmar, XL.com, Freedom Flights and Travel City Direct. Operations in France, Germany, Ireland, Australia and Cyprus. Sept 2008 - Group entered into Administration having suffered as a result of volatile fuel prices, the economic downturn, and were unable to obtain further funding .

International Tourism supports the UK aviation industry, which is now hampered by the recent Terrorist attacks • Tourism makes a major contribution to the UK Economy Opportunities - In 2005 the sector generated an estimated 46.8 billion Pounds (3.9% of GDP) -3/4 th of the international visitors to the UK arrive by air • Increased trade from countries outside EU provides immense opportunity -55% of the UK’s exports of manufactured goods to countries outside the EU are transported by air -60% of imports of machinery, mechanical appliances and electric equipments from outside the EU are carried by air • Poor Infrastructure to support the Aviation Industry Challenges - Passengers travelling through air have risen faster then the capacity of air transport system to handle them - Congestion cost to passengers and airlines is estimated to be 1.7 billion pounds in 2005 and expected to exceed 5 billion pounds by 2015 • Increasing Global terrorism has impacted the UK aviation industry negatively - It has increased cost of security for the airlines, adding to the increasing operational costs - Reduced demand and cancellation of flights have added another blow Aviation Sector Outlook

China Eastern, one of three Chinese state-owned large key aviation enterprise groups. China Yunnan Airlines and China Northwest Airlines merged into China Eastern Airlines in 2003. Registered capital of RMB2.558 billion, total asset of about RMB51.699 billion. 168 large and middle modern transport aircrafts, 22 general-purpose aircrafts, and 450 international and domestic airlines. The group is also widely engaged in import and export, finance, in-flight foodstuffs, real estate, advertising media, machinery production and other fields with holding over 20 branch companies. China Eastern Airlines is owned by the Chinese government (61.64%), publicly held H shares (32.19%) and publicly held A shares (6.17%), and has 35,000 employees. China's first airline company to be listed on the Hong Kong, New York and Shanghai stock markets.

Incomes and travel are certainly rising in China – a 10.8% GDP expansion stimulating a 16% rise in air passenger numbers, to 185 million. Investments continue to pour into the sector - CAAC expecting capital assets investment to increase this year to US$5 billion, led by investment in airline fleets and airport upgrades. Key focus for the industry this year is consolidation . Positives……

Chinese air passenger traffic is increasing vigorously and will be the third largest only behind that of the US and Europe in the future Growth of Chinese Passenger Traffic , (2000 - 2005) 160 Growth Analysis 138 140 • China will be the fourth largest international market for leisure travellers by 2020, with about 117.7 100 million outbound Chinese tourists 120 102.4 • A s per IATA, the region's current 23 percent 100 89 share of the world's air traffic will grow to 50 percent by 2006 77.4 80 67.3 • Route Analysis 60 - Total routes served by Chinese airline companies -1,200 40 • Domestic - 975 (reaching 136 cities) • International - 225 (reaching 38 countries) 20 0 2000 2001 2002 2003 2004 2005 Aviation Sector Outlook

Absence of a regional airline network and no proper coverage of western Chinese territory are some of the opportunities present (2/2) • Weak Aircraft Component supply Challenges - The key weaknesses in the Chinese aviation sector are engines and avionics, and it is in these areas that China will need foreign assistance - For engines, while China can produce components, they are still some way from effectively producing their own products - Avionics is also similarly primitive • Lack of Skilled Labour - There is plentiful supply of cheap labour in China, but a dearth of well trained specialists - though this is improving • Structural Weakness of Chinese airline Industry - China's air transport industry is still regarded as having structural weaknesses. The total fleet of the three main carriers, for instance, is still less than that of an airline like British Airways or Lufthansa • Highly Competitive Landscape - With opening up of skies, keener competition, something that will bring its own set of challenges • Over sea technology transfer in this domain also suffer with the problem of autonomy Aviation Sector Outlook

Absence of a regional airline network and no proper coverage of western Chinese territory are some of the opportunities present (1/2) • Absence of regional airline network Opportunities - The concept of regional airline have just picked up with only one Airlines Company focusing on regional routes started operation in September 2006 • Governmental Focus on Regional Aviation - China will give top priority to the development of small aircraft with 50 to 70 seats for regional flights • Western China - an opportunity waiting to be tapped - Western china (Tibet, inner Mongolia etc.) poses a great opportunity for regional players as it not covered properly by present Chinese airlines - The western region cover as much as 71% of the total Chinese territory • High demand for regional Jets - China still needs more than 400 small jetliners for regional flights, which will account for more than 26 percent of the total flights in 2019 • Chinese Developmental Goals - However the developing of the West Programme and the Olympic Games in 2008 will accelerate the need for regional jets Aviation Sector Outlook

Chinese policy on civil aviation helps the flow of FDI in the sector indicating a huge opportunity for foreign entities Chinese Aviation & FDI FDI Policy - Highlights • Foreign investment or management on the air traffic control Impact on Chinese Aviation system is prohibited. • According to CAAC, between 1980 and the • FDI on the existing public and general air transportation end of 2003, more than US$ 30 billion in enterprises are encouraged, which includes following foreign investment was pooled into China's - General aviation enterprises related to agriculture, forestry, civil aviation sector in projects including plane and fishery and engine maintenance, ground services and air catering. - General aviation enterprises related to business flight, aerial sightseeing, or serving for industries - Any projects related to State Security are prohibited • In 2004, 4 joint ventures were approved, 2 foreign loan projects were used, and the total • Forms of the foreign investment include foreign investment was US$ 784 million - Joint investment - co-operative management (Joint Co-operation for short) - Shareholding • Any foreign company invests in a public air transport enterprise - its maximum stake is not permitted to exceed 49% - If foreign investment is from more than one company, each company can own a maximum stake of 25% Aviation Sector Outlook

Presence of major airports with huge traffic potentials and small catchments areas is a risk for growth of regional carriers Catchments Population of Main Gulf Airports Passenger Traffic in Main Gulf Airports Catchments population in a radius of a 2.5 Km Drive Size of bubble represent number of passengers Aviation Sector Outlook

Options EASTERN CHINA XL AIRITALIA Government Problems Biggest market Ambiguity on Policies Huge Potential Tourist sector Huge Growth Potential European market Synergy Value Government backed 100 % possible European market entry Lowest exposure

Synergy Direct entry to European markets Positioning base in Europe (Italy) Inheriting slots in premium European Airports Acquiring one of the major brands in the sector Use of Emirates Premium service to target the executive segment Alitalia cargo service add a new segment to the business Positioning itself in the form of Subsidiary as the LCC (EUR & MENA) Saving of Opportunity cost starting a LCC Service Huge Pipe line of Aircrafts can now be used as per usability

Synergy Rome to be used as a commercial base Milan to be used as a Cargo base Establishing AL WAHD as the LCC operator Tourist base for other Emirates divisions Establishing two brands FCC – Emirates ALITALIA LCC – AL WAHD

Synergy…… Using XL to enter the European tourism market XL airways to be Spun off ALWAHD to be used for all services More acquisitions in this sector Leveraging the Middle-east & Asia-Pac market to Increase the XL business

Synergy ALWAHD & EMIRATES AIRTALIA to be used for XL services No outsourcing of Carriers More services such as Chartered plane, Pick & Carry, Point to Point service would be introduced

Valuations -: ALITALIA EV = € 640 mn Industry EV / EBIDTAR = 5 EBIDTAR is Negative

Valuations -: XL Valuations on Demand

Structure EMIRATES Subsidiary 1 Subsidiary 2 XLLG Alitalia

Structure EMIRATES Subsidiary 1 Subsidiary 2 XLLG Alitalia XL Airways XL Tourism

Structure EMIRATES Subsidiary 1 Subsidiary 2 XLLG Alitalia XL Tourism XL airways

Structure EMIRATES Subsidiary 1 Subsidiary 2 XLLG - Toursim Alitalia + XL airways Emirates - ALITALIA (FCC) EAXL (LCC)

Structure EMIRATES Subsidiary 1 Subsidiary 2 XLLG - Toursim Alitalia + XL airways Emirates - ALITALIA (FCC) AL WAHD LCC Operator – AL WAHD

Thank You !!! EMIRATES buys ALITALIA & XL EMIRATES: We will continue to grow

Why not others? Air China Made A bid for 30% at $5HKD Already have holding of 12% in China Eastern Has Support of Cathay Pacific as partner. Seat occupancy ratio and passenger volume decreased over 10% in August compared with the corresponding period last year, of which passenger volume amounted to 2.77 million, representing a sharp loss of 16.6% year on year, while seat occupancy ratio was down 13% year-on-year to 71.1%. Rejected by Management of China Eastern Started Talks with Shanghai Airlines having 15% of shanghai market and Air China has 12% Singapore Airlines Made a bid for 24% at 6 times the book value at $3.8HKD Disapproved by shareholders reason being cheap offer while approved by management as they will get cash and international expertise. Air China which has 12% stake in China Eastern doesn’t want to allow foreign player to enter in growing Chinese market at time of Olympics and create rival. Singapore airlines not ready to revise bid but wants entry into Chinese market. Chinese government want to restructure aviation industry

Why not others? Union didn’t agree to job cut and restructuring. British Airways First quarter profit dropped by 90% to 27 million pounds from 274 million pounds a year earlier. Cut in revenue forecast due to rising fuel cost and slumping demand. British Airways plans to raise fares, reduce passenger capacity, stop hiring and merge with Madrid-based Iberia to lower spending on planes, maintenance and staffing. CAI consortium Made a bid of €1bn (£791m) Rejected by union as plan involved 3000 job cuts and more stringent working conditions for remaining staff. Lufthansa Made a bid initially for Alitalia(49.9%) and Australian Airlines for 100% stake. But Australian Airline investors of state owned holding company OEIAG hold 25% and other competitors Siberian S7, Air-France KLM. Backed out of Alitalia deal due to risk of credit rating downgrade. Air-France KLM Made a bid for Alitalia once Lufthansa backed out at of €138 million, or $217.6 million valuing at less than 10 cents one fifth of market value. Alitalia is a strong brand and Italy is a very interesting market but financial situation and union acceptance is problem. Alitalia currently loses about €1 million, or $1.46 million, per day and has roughly €1.2 million of outstanding debt. 30 percent market share in one of Europe's biggest economies makes Alitalia an attractive proposition

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