FUTURE AIR TRANSPORT. An industry dedicated to continuous improvement in global air travel.

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3 FUTURE AIR TRANSPORT An industry dedicated to continuous improvement in global air travel. HIGHLIGHTS OF THE OUTLOOK >>...2 AIRPLANE DELIVERY FORECAST >>...3 New Airplane Markets... 4 More Travel Choices... 6 Demand by Airplane Size...10 Air Cargo Markets...14 TRAVEL DEMAND AND AIRLINE MARKETS >>...15 Air Transport in a Global Economy...16 Airline Strategies...18 THE OUTLOOK BY REGION >> Region Comparison...22 Asia Pacific Overview...24 Middle East...29 North America...30 Europe...32 Latin America...34 Africa...35 USEFUL DATA >>...35 Passenger Traffic...36 Fleet Size and Development...38 New Airplane Deliveries...40 Traffic and Growth...42

4 THE BOEING COMPANY 2006 CURRENT MARKET OUTLOOK THE NEXT 20 YEARS >> HIGHLIGHTS OF THE OUTLOOK PASSENGER AND FREIGHT TOTAL MARKET VALUE >> MOVING TO LARGER JETS REGIONAL JET DELIVERIES >> $2.6T 3,450 HIGH-FREQUENCY MARKETS SINGLE-AISLE DELIVERIES >> 16,540 NEW DIRECT SERVICES TWIN-AISLE DELIVERIES >> 6,230 SERVING HIGH-DENSITY TRAVEL LARGE AIRPLANE DELIVERIES >> 990 IMPROVING AIR TRAVEL FOR EVERYONE TOTAL AIRPLANE DELIVERIES >> 27,210 2

5 TOTAL FLEET END OF YEAR 2005 >> NEW AIRPLANES REPLACING OLD >> 17,330 9,580 AIRPLANE DELIVERY FORECAST >> NEW AIRPLANES FOR GROWTH >> 17,630 AIRPLANES CONVERTED TO FREIGHTERS >> 2,220 TOTAL FLEET END OF YEAR 2025 >> 35,970 For fleet development, see page 5. 3

6 THE BOEING COMPANY 2006 CURRENT MARKET OUTLOOK AIRPLANE DELIVERY FORECAST >> NEW AIRPLANE MARKETS The next 20 years will see an annual world economic growth rate of 3.1 percent, a passenger travel growth rate of 4.9 percent, and a freight growth rate of 6.1 percent. THE GLOBAL MARKET FOR NEW AIRPLANES WILL BE WORTH $2.6 TRILLION The market will require 27,210 new airplanes, and the fleet will grow from 17,330 to 35,970 airplanes by NEW AIRPLANE DELIVERIES AND MARKET VALUE Regional jets 13% 747 and larger 3% Twin aisle 23% DELIVERIES BY SIZE AND REGION >> 27,210 Regional jets 4% Deliveries by size Market value by size Single aisle 61% Single aisle 41% North America 35% Latin America 6% North America 28% Europe 24% Deliveries by region Market value by region Asia Pacific 29% Middle East 4% Africa 2% Asia Pacific 36% 747 and larger 10% Twin aisle 45% Latin America 4% Europe 24% Middle East 6% Africa 2% MARKET VALUE BY SIZE AND REGION >> $2.6 TRILLION, $2005 4

7 HOW THE FLEET GROWS Airplane units 35,970 17,330 Over the next 20 years The growing world economy, world trade, and airline competition in liberalized markets will generate annual passenger traffic growth of 4.9 percent and freight growth of 6.1 percent. 17,630 airplanes will be needed to accommodate the anticipated growth in passenger travel and air freight. 9,580 new airplanes, or 35 percent of the total, will replace less efficient airplanes that will no longer be used in their current roles. While most of the airplanes replaced will be permanently retired, 2,220 passenger airplanes will be converted to freighters and 770 new freighter will be delivered. Removed or converted airplanes 10,790 Airplanes converted to freighters 1,210 17,630 9,580 1,010 Airplanes converted to freighters A diverse global market The global market for new airplanes over the next 20 years will be diverse across regions, travel patterns, and airline business models. Airlines in Asia Pacific will acquire the highest value of new airplanes, with 36 percent of the overall $2.6 trillion market. Airlines in North America will require the largest number of new airplanes, with 35 percent of the overall 27,210 airplanes required, compared to 29 percent for Asia Pacific and 24 percent for Europe. CHANGE IN FLEET 747 and larger Twin aisle Single aisle Regional jets WORLD TOTAL >> ANNUAL GROWTH GDP 3.1% RPKs 4.9% RTKs 6.1% DELIVERIES Value, $B 2,600 New airplanes 27,210 Regional jets 3,450 Single aisle 16,540 Twin aisle 6, and larger 990 TOTAL FLEET , ,970 0 Fleet ,330 New airplane deliveries 27,210 Fleet ,970 Fleet ,330 Fleet ,970 FLEET DEVELOPMENT 2005 TO 2025 >> BY SIZE >> 5

8 THE BOEING COMPANY 2006 CURRENT MARKET OUTLOOK AIRPLANE DELIVERY FORECAST >> MORE TRAVEL CHOICES Global airline markets will grow steadily over time. A RESILIENT PASSENGER TRAVEL MARKET The market for air travel is set to grow at an average of 4.9 percent each year. The resilience that global airline markets have shown over time is reflected in average annual passenger traffic growth of 4.8 percent and air cargo growth of 6.3 percent over the past 20 years. This growth was founded on world economic growth of 2.9 percent and further stimulated by liberalization of market regulations in many countries. Looking ahead over the next 20 years, the world economy is set to grow at 3.1 percent. Because airline passengers will continue to prefer traveling on nonstop flights, growth will be accommodated mainly by an increased number of flights (frequencies) rather than by larger airplanes, as seen in the chart. AIR TRAVEL GROWTH PARAMETERS INDEXED TO 1990 Frequency growth Air travel growth Nonstops Average airplane size End of year 2005 MORE FREQUENT, DIRECT FLIGHTS >> End of year For routes over 3,000 miles.

9 Fundamental importance of liberalized markets Reduced market regulation is a key component of bringing wider availability of affordable air travel, which is so critical to maintaining personal relationships, developing future business, transporting purchased goods, and improving living conditions worldwide. Liberalization typically stimulates immediate market growth of 12 to 35 percent. 1 Furthermore, if markets connecting another 320 country pairs were liberalized, 24 million new jobs would be created, and an additional $490 billion would be added to the world economy (GDP). Airline business models Competition in liberalized markets enables airlines to implement service strategies, or business models, tailored to their target markets. The primary airline business models are short haul, low cost; global and broad network; longhaul network; charter and inclusive tour (leisure); and freight operators. Of these, the global and broad network carriers will need the largest share (59 percent) of new airplanes in the future, with the short-haul, low-cost carriers needing 34 percent. There is further discussion of airline business models on page The Economic Impact of Air Service Liberalization InterVISTAS-ga2 Consulting ACAS. The most efficient travel option Airlines are operating at their most efficient levels ever, as measured by utilization of their airplanes and how full those aircraft are on each revenue flight. This efficiency favors the use of the newest airplanes, which have the highest utilization rates. As airlines seek to build the profitability of their business in an environment of high fuel prices, they will tend to bring forward fleet replacement. NEW AIRPLANE DELIVERIES BY BUSINESS MODEL Short haul, low cost Charter and inclusive tour Airplanes have the highest levels of utilization of any form of transport. The world average singleaisle Freight operators 1% utilization in August 2005 was 8.4 flight-hours Long-haul a day and that for all twin-aisle and large airplanes network 4% was 10.7 flight-hours a day also saw the highest global airline load factors ever (percentage of available seats occupied by fare paying Global and broad network 59% passengers) at over 76 percent. SHARE OF DELIVERIES BY AIRLINE TYPE >> 34% 2% For more on airline business models, see page 20. 7

10 THE BOEING COMPANY 2006 CURRENT MARKET OUTLOOK AIRPLANE DELIVERY FORECAST >> GLOBAL PASSENGER TRAVEL PATTERNS Passenger travel is analyzed by regional traffic flow. As people travel by air from one place to another, they do so either within or between regions. In the Current Market Outlook passenger travel is analyzed according to these flows at a very detailed level (see pages 36 and 37) and is shown here aggregated into the main travel regions of the world. Travel growth rates in each market are affected by factors in the countries or regions at each end of, or within, the flow. PASSENGER TRAFFIC DEVELOPMENT, RPKs (BILLIONS) ANNUAL GROWTH RATE, ,500 2,000 Asia Pacific, including China 6.4% Within North America 3.6% Asia Pacific, excluding China 5.4% Within Europe 3.4% North Atlantic 4.5% 1,500 Within China 8.8% Europe Asia Pacific 5.5% 1,000 Transpacific 5.8% North America Latin America 4.9% 500 Europe Latin America 5.1% Within Latin America 6.9% 0 End of year 2005 End of year 2025 Africa Europe 5.0% Middle East Asia Pacific 6.0% ASIA PACIFIC WILL BECOME THE LARGEST REGION >> WITHIN OR BETWEEN REGIONS >> 8

11 Factors affecting growth in each market The size of each economy and its growth rate have the largest effect on the growth of passenger travel in each market. The rate of change of airfares will affect travel growth (to airlines, this means changing yields, or revenue per passenger kilometer). In many markets, the biggest influence on growth rates is the degree to which governments open market access to airlines based either within their own territory or outside (i.e., the degree of liberalization in each country s markets). Other important factors to consider include the propensity for people of a given culture to travel, especially to distant countries, and the outlook for change in any government-imposed restrictions on travel. AIRLINE CAPACITY BY AIRPLANE SIZE Annual ASKs (billions) 3,500 3,000 2,500 2,000 1,500 1, Asia-Europe Transpacific TWIN-AISLE AIRPLANES FOR LONGER DISTANCE >> The varying relationship between GDP and passenger travel (and also air freight traffic) is clearly shown for each region in the section The Outlook by Region, beginning on page 21. Passenger market growth by region Asia Pacific (including within China) will become the largest internal market over the next 20 years, overtaking the market within North America. Markets in Asia Pacific have powerful combinations of large economies, rapid economic growth, and liberalizing markets. Although the large internal markets of North America and Europe will see lower growth rates than other markets, their size will result in large amounts of additional traffic North Atlantic Asia Pacific Europe North America The Europe Latin America and North America Latin America markets are almost the same size as each other at both the beginning and end of the period because they are both expected to grow at around 5 percent each year. Airplane use on each flow Airline service in markets connecting distant regions generally needs larger airplanes than that within regions, which tend to offer more flights on a given day (i.e., higher frequencies) and often a choice of airports close to the larger cities. The exception is markets within Asia Pacific, which can involve long flights or very high traffic volumes with restricted choice of airports that can be served. This suits the use of larger airplanes. Concentration of single-aisle demand within regions The need for single-aisle airplanes is focused on serving markets where low fares and choice of destination airports are highly essential to travelers. These markets tend to be within regions, particularly where internal market regulations are highly relaxed or there is a free market. 747 and larger Twin aisle Single aisle Regional jets 9

12 THE BOEING COMPANY 2006 CURRENT MARKET OUTLOOK AIRPLANE DELIVERY FORECAST >> DEMAND BY AIRPLANE SIZE Traffic volumes, competition, route distance, and airline strategies shape demand for airplane size in each region. AIRPLANE SIZE BY REGION Demand by region where the airline is based. In contrast to the previous section, which discusses demand for airplanes to serve traffic flows within and between geographic regions, the fleet development discussion here refers to the fleets of airlines according to where they are based. Freight airplanes are included in the charts and numbers in this section. Distinct influences on choice of airplane size Traffic volumes, distances in key markets, competitive strategies, availability of alternative forms of transport, and market access influence the size of airplane used in any given region. In general, if market regulation allows airlines to make their own choices regarding how to compete, they will use smaller aircraft and provide more frequent service. NEW AIRPLANE DELIVERIES BY SIZE AND REGION 747 and larger Twin aisle Single aisle Regional jets 10,000 8,000 6,000 4,000 2,000 0 North America Asia Pacific Europe Latin America Africa and Middle East 27,210 NEW AIRPLANE DELIVERIES >> 10 For new and converted freighters, see page 15.

13 Already common in developed markets, this approach is also the prevalent trend in market development foreseen in the most rapidly growing regions. The result will be more frequent service on existing routes and more pairs of cities connected for the first time. Reduced size of airplanes for most long-range markets Medium- and long-range markets are primarily served with twin-aisle and large airplanes. The shifting balance toward smaller twin-aisle airplanes in the future is driven by passengers who prefer to travel directly between their points of origin and destination. Airlines are able to provide more economical service on an increasing number of these routes through the improvement in operating economics of each new generation of airplane. Some markets need larger airplanes Scheduling constraints and market regulations in a few of the world s intercontinental markets limit the number of possible flights any one airline can offer. On these routes and those with particularly high demand, airplanes of 747 size and larger will be required. Good examples of such routes would be Singapore or Hong Kong to London Heathrow. HOW THE FLEET WILL DEVELOP OVER THE NEXT 20 YEARS Fleet end of the year 2005 Region Regional jets Single aisle Twin aisle 747 and larger Regional total North America 1,890 4,300 1, ,420 Asia Pacific 170 1, ,270 Europe 560 2, ,190 Latin America Africa and Middle East ,350 WORLD TOTAL >> 2,710 10,580 3, ,330 Fleet end of the year 2025 Region Regional jets Single aisle Twin aisle 747 and larger Regional total North America 3,200 7,820 2, ,590 Asia Pacific 670 5,340 2, ,610 Europe 550 5,270 1, ,720 Latin America 440 1, ,720 Africa and Middle East 180 1, ,330 WORLD TOTAL >> 5,040 21,470 8,070 1,390 35,970 For deliveries by airplane size and region, see pages 40 and

14 THE BOEING COMPANY 2006 CURRENT MARKET OUTLOOK AIRPLANE DELIVERY FORECAST >> THE AIRPLANE MARKET LIFE CYCLE A systematic view of the airplane life cycle. As airplanes age, some of the oldest ones are removed from the system and new ones are acquired for replacement or growth. In an environment of high fuel prices, replacement of older airplanes is accelerated. Airplanes that are retired are those that are no longer in service at the end of the forecast period passenger fleet 15,540 >> PASSENGER FLEET IN SERVICE New passenger airplane deliveries 26,440 Movement within the fleet There is also considerable movement within the overall fleet; most of the 2,220 airplanes that will be converted from passenger to freight roles will be acquired by different operators. Over the past decade, the majority of airplanes converted have been between 15 and 19 years old, although the optimum conversion age varies by airplane type and condition. Some of the fleet will change operators through sale, lease, or other forms of exchange. Aircraft become less productive with age Newer airplanes are used more intensively than older ones: around 9 flight-hours a day for a current generation single-aisle airplane in passenger service compared to 7 to 8 hours a day for a 15-year-old airplane and as low as 2 to 3 hours a day for a 25-year-old converted freighter. PARKED USED 2025 passenger fleet 32,400 Converted to freighter 2,220 7,360 retired passenger airplanes 2005 TOTAL PASSENGER AND FREIGHTER FLEET >> 17,330 12

15 New freighter airplane deliveries 770 Converted from passenger 2,220 1,210 retired freighter airplanes 2005 freighter fleet 1,790 FREIGHTER FLEET << IN SERVICE PARKED USED 2025 freighter fleet 3,570 Newer airplanes favored as the fleet ages The passenger fleet is getting older at a slowing rate, with its average age now stabilizing at around 12 years. New airplanes added to the fleet have much better performance, economic, and environmental characteristics than those that are removed. The cost of periodic maintenance increases as aircraft age, although each new generation of airplanes has a longer period of lower initial maintenance costs. As operating expenses such as fuel, crew, and online engine and airframe maintenance increase for older airplanes compared to newer ones, older airplanes are more likely to be retired and replaced with newer types. Regulations governing aircraft noise and emissions or aircraft age limits may also prompt airplane retirement. Airplanes parked for a variety of reasons An airplane may be parked for a few weeks or months during maintenance, modification, conversion, or transfer between owners. In these cases, the airplane may be in a hangar or parking area at an airport or maintenance facility. When an airplane is no longer economically viable to operate, it may be stored for longer periods at a dedicated facility, perhaps with its engines removed, doors and windows sealed, and in dry desert conditions. The age and condition of the airplane, its model type, and overall market conditions will affect the length of time it is parked. Larger numbers of airplanes are becoming economically obsolete and are being scrapped. Efforts to appropriately dispose of airplanes include disassembling them to salvage parts and components and separating valuable materials for reclamation. These actions increase aircraft scrap values, enable reuse of their structural materials, and reduce the environmental impact of recycling airplanes TOTAL PASSENGER AND FREIGHTER FLEET >> 35,970 13

16 THE BOEING COMPANY 2006 CURRENT MARKET OUTLOOK AIRPLANE DELIVERY FORECAST >> AIR CARGO MARKETS A shift toward highly capable new widebody freighters. CONTINUOUS STRONG GROWTH IN AIR FREIGHT 7.3 percent annual growth in world trade value will help drive a 6.1 percent average yearly increase in air cargo (ATKs). 580 billion revenue tonne-kilometers by 2025 The world's total annual air cargo market will grow from its current 180 billion RTKs to more than 580 billion RTKs per year by There will be a slight shift away from carrying freight in the belly (under-floor) holds of passenger airplanes to more use of dedicated freighters, which will provide more than half the world's total air cargo capacity. Since 1994, the widebody freighter fleet has grown from less than 250 to nearly 900 today and will continue to grow. Widebody freighters will increase in share from 50 percent of the current fleet to 64 percent of the fleet in Of the freighter airplanes retiring, most are older standard-body freighters, many of which will be replaced with medium-widebody airplanes. HOW THE FLEET GROWS CHANGE IN FLEET 3,570 Airplane units 1,790 Removed or retired freighter airplanes 1, ,220 0 Fleet ,790 Added freighters 2,990 Fleet ,970 Fleet ,570 Fleet ,790 FREIGHT FLEET DEVELOPMENT 2005 TO 2025 >> BY SIZE >> Fleet ,570 14

17 Dedicated freighter fleet will shift toward widebodies The freighter fleet will just about double over the next 20 years, from 1,790 to 3,570 airplanes. There will be 1,210 retirements and 2,990 airplanes added to the freighter fleet by Three-quarters (2,220) of the airplanes added to the freighter fleet will come from converted passenger or combi airplanes. 1 The remaining 770 airplanes added will be new production freighters, with a market value of $169 billion. Many airlines prefer the advanced technical features, improved reliability, and better fuel efficiency of new airplanes. Nearly 62 percent of all additions to the fleet will be widebody airplanes because of airline needs for long-range, low-unit-cost service. Operators in Asia Pacific will account for more than 37 percent of world freight capacity and 38 percent of the freighters added. Airlines in North America will account for 32 percent of world capacity but will require 48 percent of all deliveries, taking a higher proportion of standard-body freighter airplanes. TRAVEL DEMAND AND AIRLINE MARKETS >> NEW AND CONVERTED FREIGHTERS 2,000 1,000 Large (more than 75 tonnes) Medium-widebody (40 to 75 tonnes) Standard-body (less than 45 tonnes) 0 North America Asia Pacific Europe Latin America Africa and Middle East BY SIZE AND REGION >> 1 Mixed passenger and freight configuration, such as the Combi. 15

18 THE BOEING COMPANY 2006 CURRENT MARKET OUTLOOK TRAVEL DEMAND AND AIRLINE MARKETS >> AIR TRANSPORT IN A GLOBAL ECONOMY Air transport is crucial to personal relationships, to future business, to transporting purchased goods, and to improving living conditions around the world. BUSINESS TRAVEL >> JASMINE Takes a break from studying by going on a long weekend in Spain twice a year, thanks to low-cost airlines. FAMILY TRAVEL >> LEISURE TRAVEL >> ALFREDO Works near Miami, likes to visit family back home in Brazil once in a while with wife and two kids. SAKAMOTO SAN Developing international business that supports the livelihood of 14,800 employees. Often undertakes long, multistop trips such as from Tokyo to London via Dubai, returning back home after three weeks of meetings with customers. URGENT FREIGHT >> PUNITA A research biologist who urgently needs samples for her study to assist humanitarian aid programs. Expensive, heavily packed samples that will degrade beyond use if they aren't delivered in time are dispatched from New York. Fortunately, they are sent on the air freight service that stops in Delhi on its way around the world. 16

19 Flights Kilometers 28 million 34 billion LOWEST FARE Distance 1700 km Passengers 1 Airfare $155 Yield 9 per km TXL > PMI > TXL AIR TRANSPORT Of the world economy, air transport contributes 8% Leisure travel contributes 3% Global air transport ECONOMY Distance 6600 km Passengers 4 Airfare $1,124 Yield 17 per km MIA > GRU > MIA Visiting family and friends contributes 2% SPENDING The additional spending by all travelers on these trips contributes a further 2%. World trade: Exported goods and services contribute 34% GROWTH RATES Measure Historic Future GDP 2.9% 3.1% Passenger traffic 4.8% 4.9% Air cargo 6.3% 6.1% PERIOD >> World aggregate gross domestic product (GDP) BUSINESS Distance km Passengers 1 Airfare $10,866 Yield 47 per km NRT > DXB > LHR > NRT Business travel contributes 2% FREIGHT Distance km Weight 20 kg Airfare $434 Yield 3 per km JFK > DEL Air transportation of cargo contributes 1% 17

20 THE BOEING COMPANY 2006 CURRENT MARKET OUTLOOK TRAVEL DEMAND AND AIRLINE MARKETS >> GROWING IN COMPETITIVE MARKETS Airlines match service levels to demand to maximize their return on investment. AIRLINE STRATEGIES Well over 500 scheduled airlines compete in worldwide passenger travel markets. Airline investment in capital facilities, equipment, highly skilled personnel, and building market presence demands high utilization of these assets to maintain a viable business. Growth brings economies of scale but often brings them into more competitive markets. Competitive pressure and this need for growth has driven a high rate of new technology adoption and innovation in the airline business. Driven to high load factors Because an airline s product is the service it provides, once the airline product is delivered, it cannot be recovered and used again. If a seat on Tuesday s flight from Delhi to Kuala Lumpur is empty once the flight has left, it cannot be sold at a later date. This generally drives airlines to maintain as high a proportion of seats filled as possible (i.e., to achieve high load factors). To do this, airlines offer a product as close as possible to anticipated passenger demands. The main criteria they strive to meet are cost, time, place, and service quality. Europe Asia Pacific Within Europe Transpacific Within Asia Pacific North Atlantic World Within North America 18

21 Providing direct services Most passengers like to get to their intended destination as quickly as possible, taking a nonstop flight whenever they can. While a hubbing strategy enables a high number of cities to be reached from smaller cities through a central transfer point, if providing direct service in a given market is viable, this is typically preferred. NUMBER OF AIRPORT PAIRS CONNECTED INDEXED TO WORLD: 1.7 TIMES MORE AIRPORTS CONNECTED IN 2005 THAN IN 1985 >> Generally, minimal market regulation gives rise to more competition and service more directly tailored to passenger needs, rather than tailored to meet government-imposed regulations regarding price, frequency, and identity of service provider. It is for this reason that the anticipated continual liberalization of markets around the world will bring a 50 percent increase in the number of airport pairs connected every 15 years About 3 million routes would exist if all viable points of origin and destination around the world were connected with direct service. Only around half a percent of these possible routes are actually served today around 15,500 airport pairs. Looking back over the past 20 years, the chart shows the rate at which routes have been added in each of the world s major markets. Strong potential for new routes The fastest rate of adding new airport pairs was seen in Europe Asia Pacific markets, with more than three times the number of routes served in 2005 as 20 years ago. The extension of Europe s internal free market to additional countries and the completion of deregulation there generated continual growth in new market opportunities. Markets within Asia Pacific, within Europe, or connecting Europe and Asia Pacific were hardly affected immediately after Those regions that did suffer a reduction in airport pairs connected are seeing more connections added and approaching their pre-2001 levels of network spread. Within the North American market, the most developed in the world, there has been continual long-term growth in the number of routes served. 19

22 THE BOEING COMPANY 2006 CURRENT MARKET OUTLOOK TRAVEL DEMAND AND AIRLINE MARKETS >> AIRLINE FINANCIAL PERFORMANCE Strong airline financial performance is not limited to particular regions or business models. LARGEST PROFITS Top 30 airlines with the largest reported operating profits. 1 BY REGION >> HIGHEST MARGIN Top 30 airlines with the highest reported operating margin. 1 IN 2005 >> Airlines purchase new airplanes largely to improve their financial performance, replacing older airplanes with more efficient types and acquiring the capacity to address growth markets. A review of the most profitable airlines worldwide shows that, by this measure, there is no dominant region or business model. The rankings shown are compiled by Airline Business each year and change considerably between reporting periods so should be considered only as illustrative. NUMBER OF AIRLINES Africa 1 Asia Pacific 10 Europe and CIS 7 Latin America 3 Middle East 1 North America 8 NUMBER OF AIRLINES Africa 4 Asia Pacific 7 Europe and CIS 6 Latin America 2 Middle East 2 North America 9 While Airline Business top 30 airlines by each profitability measure are shown here, the analysis behind the Current Market Outlook considers about 1,000 operators from around the world, of all sizes and operating across the complete variety of business models. TOTAL 30 TOTAL 30 Larger airlines generally deliver higher absolute profits The top 10 airlines in terms of absolute operating profit are largely carriers with global networks. They are led by a freight airline and include a U.S. low-cost operator and originate from four of the six world regions (see pages 22 and 23). Perhaps surprisingly, four U.S. regional airlines also appear in this top 30. Some of the world s largest airlines by revenue were not in the 2005 list but can be expected to reappear in the near term. A third of the most profitable airlines do not appear on the list of those with the highest operating margin, indicating that their relative size generates a larger scale of income. The lowest operating margin of any airline in the operating result list is around 2 percent. BUSINESS MODEL >> NUMBER OF AIRLINES Broad network 8 Charter, inclusive tour 0 Freight operators 2 Global network 12 Low cost 4 Regional 4 TOTAL 30 IN 2005 >> NUMBER OF AIRLINES Broad network 11 Charter, inclusive tour 1 Freight operators 3 Global network 5 Low cost 4 Regional 6 TOTAL 30 1 Airline Business, August

23 Operating margin ignores airline size and business model Operating margin is the ratio of operating profit to operating revenues. This indicates how profitable airlines are regarding their own business operations, rather than in relation to how large they or their competitors are. This measure shows an even greater spread of the top performers in 2005 across regions and business models. The operating margins reported by airlines represented in the right-hand table range from 43 percent to 7 percent. Most are below 23 percent, and about half are below 10 percent. The highest profit margins are widely spread The operating margin ranking is particularly interesting as it reflects an even greater spread across airline size, business model, and region. All six world regions are represented by the top seven airlines, and six of the top 30 are from Africa or Latin America. The five main types of business model are also represented in the top 10, with only one being a global network carrier. Future strategies In a global sense, there will not be a dominance of one particular region or business model in defining the profitable airlines of the future. We are likely to see a mixture of specialist airlines addressing their area of strength and multiple strategies being executed within single airline groupings. Some midsized airlines can also clearly demonstrate strong profitability. THE OUTLOOK BY REGION >> 21

24 THE BOEING COMPANY 2006 CURRENT MARKET OUTLOOK THE OUTLOOK BY REGION >> REGION COMPARISON ASIA PACIFIC China, Oceania, Northeast Asia, Southeast Asia, Southwest Asia % VALUE >> 22 $740 BILLION 9,490 new airplanes 2025 $930 BILLION EUROPE 21% Delivery units 4,190 7,720 airplanes airplanes 6,600 new airplanes % 7% 100% 75% 75% 50% 50% 25% 25% 62% Share of fleet Share of fleet % 15% 0% 54% 25% VALUE >> % 50% a unique significance. 100% 7% 32% 75% of the world compared here has 7,420 13,590 airplanes airplanes % Every one of the six major regions NORTH AMERICA 7,900 new airplanes 3,270 9,610 airplanes airplanes 22% 68% 0% Delivery units VALUE >> $620 BILLION Share of fleet Delivery units

25 AIRPLANE MARKET BY REGION 747 and larger Twin aisle Single aisle Regional jets MIDDLE EAST Highlights Asia Pacific has the highest value market, while North America will take the most airplane deliveries. 1,110 new airplanes 630 1,300 airplanes airplanes 2005 Demand for air travel on the world s major traffic flows is translated into a requirement for passenger and freight airplanes for the airlines of each region % Europe is second of the six regions in each of the single-aisle, twin-aisle, and large-airplane sectors. 5% 100% 39% 75% 50% In Latin America, regional jets and single-aisle airplanes account for 86 percent of airplane deliveries. 49% 25% 0% VALUE >> $160 BILLION LATIN AMERICA Central America, South America Africa has the largest shift in fleet share toward twin-aisle airplanes. Share of fleet Delivery units 1,100 2,720 airplanes airplanes 1,680 new airplanes % $110 BILLION AFRICA % % 15% 100% 75% 75% 50% 50% 25% 25% 73% Share of fleet 430 new airplanes 720 1,030 airplanes airplanes 1% 11% 0% VALUE >> The average new Middle Eastern airplane will be worth 50 percent more than the world average. 26% 58% 0% Delivery units VALUE >> $40 BILLION Share of fleet Delivery units 23

26 THE BOEING COMPANY 2006 CURRENT MARKET OUTLOOK THE OUTLOOK BY REGION >> ASIA PACIFIC The only region with more than half its traffic in internal markets. ASIA PACIFIC OVERVIEW Growing faster than other parts of the world, with high economic growth rates and many developing markets, to become the largest region in terms of passenger traffic by The Asia-Pacific region is so extensive and fast growing that it is analyzed in five distinct areas that are presented on pages 25 to 28. These regions are China Northeast Asia Southeast Asia Oceania (Australasia) Southwest Asia (including India) The rates of growth for both passenger and freight traffic are the fastest of any major world region. The highest value market $930 billion worth of new airplanes will be delivered, a higher market value than for any other region. The focus on widebody airplanes (39 percent of deliveries) is stronger than in any region except the Middle East, although the widebody market in Asia Pacific is five times the size of that in the Middle East. Single-aisle and regional jets will account for 61 percent of deliveries. ASIA PACIFIC >> ANNUAL GROWTH GDP 3.8% RPKs 6.2% RTKs 7.0% DELIVERIES Value, $B 930 New airplanes 7,900 Regional jets 580 Single aisle 4,230 Twin aisle 2, and larger 570 TOTAL FLEET , ,610 1 China National Bureau of Statistics. 2 Chinese Academy of Social Sciences. 3 World Tourism Organization. 24

27 CHINA China is the largest commercial aviation market outside the United States. Rapid economic growth China s economy currently benefits from annual growth rates in excess of 9 percent and is expected to average 6.6 percent growth over the next 20 years. New airplane deliveries to China will account for more than 35 percent of demand in the Asia-Pacific region. As China s wealth increases, the proportion of the population classified as middle class is expected to rise from 13 percent in to around 40 percent in By 2020, China is forecast to rise to the world s top most popular tourist destination, with 180 million tourists each year, from fourth place today. Also by that time, more than 100 million outbound travelers will make China the fourth largest source of outbound travel in the world. 3 AVERAGE AIRPLANE SIZE IS ABOUT THE SAME AS 15 YEARS AGO Average seats per airplane per trip < Golden Triangle < Trunk routes ,000 1, DOMESTIC CHINESE AIRPLANE SIZE >> 2000 Weekly ASKs, million 2,000 2,500 August OAG, including Hong Kong and Macau. < All Chinese domestic markets > 3,000 3, ,000 4,500 CHINA >> ANNUAL RANK GROWTH 1 10 GDP 6.6% 1 RPKs 7.9% 1 RTKs 7.1% 3 DELIVERIES Value, $B New airplanes 2,880 3 Regional jets Single aisle 1,840 3 Twin aisle and larger 90 5 TOTAL FLEET , ,900 3 Ranked by the 10 regions discussed in detail in this section. Potential for domestic growth Liberalization of all Chinese markets will continue, as will the formation of partnerships and alliances with foreign airlines intent on benefiting from the growth in China. More than 700 domestic airport pairs serve 1.3 billion Chinese people today, compared to 2,550 airport pairs and a population of around 300 million in the United States. The number of flights and airline capacity within China are both forecast to grow fivefold over 20 years. The decline in domestic average airplane size since 2000 will continue, reflecting passenger demand for more frequent service and more nonstop flights. The Golden Triangle shown in the chart (Beijing, Shanghai, Guangzhou) represents around 10 percent of domestic capacity and the trunk routes a further 40 percent. Balanced demand by airplane size As the highly varied Chinese market continues to develop, the mix of airplane requirements by size will be very close to the world average. 25

28 THE BOEING COMPANY 2006 CURRENT MARKET OUTLOOK THE OUTLOOK BY REGION >> International routes Within Northeast Asia NORTHEAST ASIA A large market with a unique emphasis on widebody airplanes. Northeast Asia has a unique emphasis on twinaisle airplanes, with more than half (51 percent) of its future demand for new airplanes being of this size, the largest proportion for any world region. This will drive up the average value of each new airplane delivered to $150 million. The region s overall economy ranks third after North America and Europe, with South Korea to join Japan in the top 10 economies by MORE THAN HALF THE NEW DELIVERIES WILL BE TWIN-AISLE AIRPLANES New airplane deliveries 2006 to Regional Single aisle Twin aisle Large MAINLY FOR INTERNATIONAL ROUTES >> Northeast Asia is highly urbanized with many densely populated cities. The economy relies heavily on imported resources and its people have a significantly higher propensity to travel than the world average. Recently expanded air service agreements will draw new airlines to enter the increasingly fragmented China-Japan-Korea market, where competition will generate more frequent flights. Air travel within Northeast Asia is expected to grow by 5.4 percent each year, with 5.7 percent annual traffic growth to and from Northeast Asia. A strong 6.9 percent freight traffic growth rate will lead to many of the new large airplanes being delivered as freighters. Investment in new airport infrastructure Investment in airport capacity will help expand market access and stimulate air travel growth. Capacity is being added at Korea s Incheon airport (Seoul), Japan s Narita and Haneda (both serving Tokyo), Kobe, Kansai (Osaka), and at new regional airports such as at Nagoya. About a third (540) of the 1,570 new airplanes needed will be added to serve markets within Northeast Asia, with the remaining two-thirds (1,030) for routes to North America, Europe, and other Asia-Pacific markets. In particular, many new intermediate twin aisles will be used to provide a greater choice of nonstop destinations. NORTHEAST ASIA >> ANNUAL RANK GROWTH 1 10 GDP 1.8% 10 RPKs 5.6% 5 RTKs 6.9% 5 DELIVERIES Value, $B New airplanes 1,570 6 Regional jets 40 9 Single aisle Twin aisle and larger TOTAL FLEET ,

29 SOUTHEAST ASIA OCEANIA (AUSTRALASIA) Important local and long-haul markets driving airplane requirements. Strong strategic response to domestic and international competition. SOUTHEAST ASIA >> ANNUAL RANK GROWTH 1 10 GDP 4.4% 4 RPKs 5.5% 6 RTKs 6.6% 6 DELIVERIES Value, $B New airplanes 1,990 4 Regional jets Single aisle Twin aisle and larger TOTAL FLEET ,250 5 Southeast Asia will take delivery of more airplanes of 747 size or larger than any other region. A third of the 240 new large airplanes will be freighters. At the same time, growth in local markets in Taiwan, Indonesia, and Malaysia in particular will require the most single-aisle airplanes (910) of any Asian region outside China. Endorsement of the low-cost airline business model has been accompanied by dedicated facilities such as low-cost terminals at major airports, leading to some of the fastest growth rates for such markets anywhere in the world. In contrast, some of the more established carriers have recently been forced to restructure to address poor financial performance. Travel within Asia accounts for 63 percent of airline capacity. Extending international networks The region is rooted in international trade and finance, and larger airlines have capitalized on its strategic location to develop extensive, profitable global networks. Longer range twin-engine airplanes will enable the region s airlines to serve a wider selection of important North American markets with direct service. OCEANIA >> ANNUAL RANK GROWTH 1 10 GDP 2.5% 8 RPKs 3.7% 10 RTKs 7.6% 2 DELIVERIES Value, $B 60 9 New airplanes Regional jets Single aisle Twin aisle and larger 30 7 TOTAL FLEET Oceania has highly competitive markets, pioneering airlines and the second highest freight traffic growth (7.6 percent) of any region. Further liberalization of international air service agreements will increase competition as additional carriers enter the market. Inbound tourism is a major source of travel demand. Flights to Europe are mostly routed through Asia or the Middle East, but nonstop flights are likely as the capabilities of longer range twin-engine aircraft are proven. Competitive strategies Within Oceania, the influence of international carriers is strong. It has the largest share of service within the region accounted for by airlines from outside, at around 5 percent compared to less than 1 percent in most other regions. Local airlines have established strategies to reduce cost complexity and maintain profitability through service innovation, separate lower cost business units, and investment in overseas markets. 27

30 THE BOEING COMPANY 2006 CURRENT MARKET OUTLOOK THE OUTLOOK BY REGION >> SOUTHWEST ASIA (INCLUDING INDIA) Global interest in liberalized markets are stimulating rapid air transport growth. The largest air transport market in Southwest Asia is that of India, where government policy toward market liberalization has produced strong growth. Air travel in the Indian domestic market has grown rapidly as a result of fare dilution of 35 to 50 percent. Almost three-quarters of the requirement in the region will be for single-aisle aircraft, much of which is simply catching up from a decade of limited growth. The current order backlog for 370 jets is larger than the entire fleet in any of the past 20 years. 1 PASSENGER JETS IN INDIA Current growth trend > 1990s growth trend > Transfer from rail services In 2005, domestic Indian air travel amounted to 22 billion RPKs. The 49,000-mile Indian rail network has for a long time been the only practical mode of intercity travel. Around 40 percent of the nearly 5 billion rail passengers each year travel on intercity services. If all premium class rail travelers (around 3 percent of total rail passengers) flew instead, this would represent a gain of around 5 to 10 billion RPKs in any year. Investment in growth Global companies are particularly encouraged to outsource to the region, advancing the case for investment in the infrastructure necessary to support growing air services. NUMBER OF AIRLINES IN INDIA Liberalized market > SOUTHWEST ASIA >> ANNUAL RANK GROWTH 1 10 GDP 5.4% 2 RPKs 7.1% 2 RTKs 9.1% 1 DELIVERIES Value, $B 90 8 New airplanes 1,030 8 Regional jets 70 6 Single aisle Twin aisle and larger 10 8 TOTAL FLEET , Airclaims, August GROWTH CATCHING UP >> MARKET LIBERALIZATION >> 28

31 MIDDLE EAST Carefully planned economic development in concert with far-reaching global airline networks. Emphasis on long-haul services The Middle East region stretches from Egypt to Iran and includes the Arabian Gulf. Most countries are well developed and their airlines have grown rapidly through use of a business model that could be described as providing independent global connectivity. As there are no internal markets in countries such as the UAE nations, Qatar, and Bahrain, highly effective liberal air service agreements have been used to gain access to international markets. Other airlines rely more on local service or to the neighboring continents of Africa, Europe, and Asia. Services to Europe accounted for 36 percent of traffic in 2005, but a focus on growing longer haul routes will lead to a shift in share to Asia and North America, which will respectively grow to 38 percent and 14 percent of the market over 20 years. Demand for these services is reflected in an emphasis on long-range, twin-aisle airplanes in the current order backlog, as shown in the chart. MIDDLE EAST >> ANNUAL RANK GROWTH 1 10 GDP 4.1% 5 RPKs 5.5% 6 RTKs 6.9% 4 DELIVERIES Value, $B New airplanes 1,110 7 Regional jets 60 8 Single aisle Twin aisle and larger 80 6 TOTAL FLEET ,300 7 Ambitious growth plans The ambitious development of centers of commerce and tourism, along with a modern air transport infrastructure, has been carefully coordinated to ensure sustainable growth. Much of the required labor originates from outside the region, particularly Southwest and Southeast Asia. The competitive success of individual airlines has forced a refocusing of traditional state airline enterprises on specific hub operations or diversification to include independently branded lower cost shortor medium-haul products. FLEET AND ORDER BACKLOG % 40% 49% 9% 2005 fleet: 630 airplanes Backlog: 200 airplanes 4% 9% 62% 25% 747 and larger Twin aisle Single aisle Regional jets TWIN AISLES DOMINANT >> 29

32 THE BOEING COMPANY 2006 CURRENT MARKET OUTLOOK THE OUTLOOK BY REGION >> NORTH AMERICA Structural shifts continue in the world s largest air travel market. World leader in passenger traffic The sheer size of the North American market means that it will absorb the largest share of global demand for new airplanes, with 9,490 new deliveries forecast, or 35 percent of the world total. 62 percent of these will be single-aisle airplanes, and 17 percent will be twin aisles and large airplanes. Fundamental shifts are under way in the North American market. Low-cost airlines continue to increase their market share. Regional airlines are expanding with larger aircraft and network carriers are both using their assets more efficiently and shifting capacity from domestic to international routes to optimize earnings and margins. Increasing use of airplane assets Low-cost airlines produced a 20 percent share of domestic airline capacity (ASKs) in 2005, and hold nearly 60 percent of the firm order backlog for single-aisle airplanes. This demonstrates the strong growth in the low-cost airline sector. At the same time, network carriers with large fleets of singleaisle airplanes to be replaced and expanded have focused on making the most of their existing airplane assets by increasing utilization through better scheduling and reduced turntimes. INCREASE IN DOMESTIC NONSTOP MARKETS WITH SMALLER AIRPLANES NORTH AMERICA >> ANNUAL RANK GROWTH 1 10 GDP 2.9% 7 RPKs 4.1% 9 RTKs 5.7% 8 DELIVERIES Value, $B New airplanes 9,490 1 Regional jets 2,040 1 Single aisle 5,880 1 Twin aisle 1, and larger TOTAL FLEET , , NUMBER OF NONSTOP MARKETS >> AVERAGE AIRPLANE SEATS >> 30

33 Network carriers will require large numbers of new airplane deliveries during the next 20 years. Driven by the preference of many passengers for direct service, the lowest fares, and a distinctive travel experience, U.S. low-cost airlines have innovated in areas such as focusing on internetbased ticket sales, one-way pricing without restrictions, leather seats with free live television, buy-on-board meals, and other services. Shifting capacity to international routes Network carriers will continue the redeployment of airplanes to international routes where the revenue environment has continued to be strong. They take advantage of liberalized air service agreements to make use of the intercontinental range capability of airplanes formerly used for domestic service, such as the 757 (550 airplanes in fleet) and 767 (345 airplanes). Current expansion is focused on Europe and South America. Growth to Asia Pacific and Latin America Routes to Asia Pacific and Latin America will grow the fastest, at 4.9 percent and 5.8 percent, respectively. As seen in the chart, these two regions will grow from 23 percent to 28 percent of total capacity on North American traffic flows. CAPACITY SHARE BY REGIONS 100% 80% 60% 40% 20% 0% SHIFT TO INTERNATIONAL MARKETS >> The new generation of long-range, twin-aisle airplanes will allow airlines to satisfy passenger demand for direct service in the many smaller long-distance markets that are not flown today. Cost challenges well managed As airlines feel the effect of high fuel prices, they have taken tactical measures to conserve fuel, such as starting engines during taxi and cruising at more economical speeds. Beyond parking older aircraft and implementing fuel hedges, there is little more that airlines can do to mitigate rising fuel costs until they take delivery of newer, more efficient airplanes. Just replacing older types will require more than 4,500 new airplane deliveries in North America. At some airlines, the distressed financial environment has driven revised labor agreements and successful renegotiation of pilot pay and contract clauses (scope clause). This has created the improved operating economics necessary for network carriers to acquire increased numbers of 90- to 100-seat airplanes for operation in the mainline network, stimulating a likely concentration on orders for these airplanes in place of more 50- or 70-seat regional jets. Other To Latin America To Asia Pacific North Atlantic Within North America 31

34 THE BOEING COMPANY 2006 CURRENT MARKET OUTLOOK THE OUTLOOK BY REGION >> Members prior to nations joined in 2004 Joining in 2007 Official candidate countries Potential candidate countries EUROPE Expansion moderating as new European Union member countries are consolidated. Europe is home to the largest airline group in the world by revenues, the most profitable passenger airline in 2005 by absolute earnings, and the airline with the fourth highest operating margin. 1 Both network and low-cost airline business models have been consistently profitable for larger airlines in European markets. EXPANDING THE EUROPEAN UNION POTENTIAL EUROPEAN UNION BY 2025 >> This is largely due to continual innovation in service development, pioneering use of technology to lower costs, and a focus on labor productivity driven by relatively high employment costs in much of Europe. Airline capacity growth has been cautious, with traffic growing faster than capacity in every market. Record high load factors averaged 76 percent over the year 2005 for all markets. The largest economic area Influence of the expanding European Union on the wider European region is profound as countries joining the Union have gained full access to the world s largest single economic area. Economic growth will be stimulated as the less well off gain the opportunity to earn higher incomes elsewhere in the Union. The size of the EU population is two-thirds higher than that of the United States, and its share of world trade is disproportionately large at 44 to 52 percent depending on the class of trade measured. The 2004 enlargement added 10 nations, 19 percent more people, and 10 percent more economic activity (GDP). If Turkey joins the European Union, which is possible by 2015, this will add a further 74 million people (15 percent) and $660 billion GDP (5 percent). 2 It will also substantially change the ethnic mix and bring closer cultural ties to the Middle East. EUROPE >> ANNUAL RANK GROWTH 1 10 GDP 2.1% 9 RPKs 4.3% 8 RTKs 5.4% 9 DELIVERIES Value, $B New airplanes 6,600 2 Regional jets Single aisle 4,530 2 Twin aisle 1, and larger TOTAL FLEET , , Airline Business. 2 CIA/Wikipedia, at 2005 levels. 3 AEA, 1st half

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