1. Large RJs, Premium Passengers, and the 717
Richard A. Wynne Boeing Commercial Airplanes

2. Agenda Current State of the Industry and Boeing Views of Large RJs
Alternative Premium Travel Options and Implications
717 Update

3. World Air Traffic Growth Has Fallen
RPKs (billions)
5.0%
-10.7%
World airline-traffic growth has fallen below the near-term projection due to weak economic growth and the traveling public’s lack of confidence.
Traffic levels should return to pre-Sept. 11 levels by yearend Total airline revenues remain weak and yields remain under pressure. Airlines continue to curtail capacity.
June world data shows a slight short fall to the recovery trend. U.S. and European recovery has slowed, especially domestic U.S. and the North Atlantic. Asia continues to grow faster than expected.
1998
1999
2000
2001
2002
2003

4. Evidence Suggests Disconnect From Cyclical Factors Historically > 0
Evidence Suggests Disconnect From Cyclical Factors Historically > 0.90% of GDP, Passenger Revenue May Stabilize Below 0.85%

5. U.S. Airlines’ Financial Risk Keeps Increasing

6. Timeline for Industry Recovery
Based on the current business environment, I’d like to offer a projected timeline for industry recovery.
2003 – Year of world air travel recovery Regional air travel in Europe and in Asia, as well as travel between Asia and Europe appear to be recovering to pre Sept 11 levels by the end of Recovery in the U.S. and over the Atlantic and the Pacific will take longer so we’ve projected 2003 as the year for recovery in world air travel.
Late 2003/2004 – Year of airline profitability recovery Over the past several months, airlines increased schedules in anticipation of stronger traffic growth that did not materialize. This led to greater losses for all but a few U.S. airlines. Several airlines have announced significant cutbacks in capacity in an effort to bring supply back in line with demand. We expect airlines to maintain this level of reduced capacity and, as traffic recovers, allow the deeply discounted air fares to expire. This should lead to a gradual increase in revenues and to profitability.
2004 – Year of airplane order recovery Increased orders for new airplanes will not take place until airlines are profitable. As the airlines restore their bottom lines in late 2003 and into 2004, they will begin to order new airplanes.
2005 – Year of delivery recovery If air travel, airline profitability and airplane orders recover in 2004, we should see airplane deliveries recover in The key to this chain of events is airline profitability and aging airplane retirements. We are closely monitoring individual airlines as they restructure their operations by dropping unprofitable routes, standardize fleets to fewer types, and incorporating benefits from cost savings programs.

7. In the U.S. Market, Frequency Growth Has Accommodated Passenger Demands
(Only Includes Jet A/C > 85 Seats)
Index
1980=100
ASKs
Frequencies
1978-U.S. Domestic Market Deregulated
Airport Pairs
Average Airplane Size
In the U. S. Domestic Market, a trend emerged around 1980 where the frequencies of airline departures was growing due to the recent deregulation of the airline industry. From 1980 to 2001 we observed that airport pairs were stable (the mix of airport pairs undoubtedly changed from 1980 to 2001) and the average airplane size remained fairly constant if not slightly decreased. After deregulation, airlines created sophisticated connect hubs. These hubs were a response to passenger demands for schedule flexibility.
Did these hubs lead to larger airplanes? No, in fact, hub airlines stressed building frequencies and adding new nonstop markets.

8. With the Introduction of the Regional Jets, Frequencies and Non-Stops Increased Significantly
Index
1980=100
ASKs
Frequencies
Airport Pairs
Average Airplane Size
Today, a second wave of market fragmentation is happening in the U.S. domestic market. New regional jet services and 737 Next Generation airplanes are expanding hub reach and opening new markets. Another airplane driven trend today is the introduction of new nonstop services in less dense and/or more competitive U.S. trans-continental markets. These new flights are in markets where passenger choice has historically been limited to connecting services.

9. Regional Airline Growth Continues Unabated
Reinstated Service (0.8%)
RJs as % Major Airlines’ Networks*
Turboprop Upgrade (18.9%)
% Mainline Fleet % Single-aisle Fleet
Delta 64 87
Continental 62 71
United 39 54
American 24 30
USAirways 22 24
First Nonstop Service (51.2%)
RJ Growth (13.4%)
Mainline Supplement (17.1%)
* Estimated at Year-end 2003
Source: Salomon Smith Barney Fleet Handbook
Mainline Replacement (8.7%)
New U.S. RJ Services Announced Since 1/1/02
(Source: RASI)

10. …But Regional Manufacturers Are Feeling the Squeeze
Fairchild Dornier
Bombardier
Embraer
Odds for recovery are exceedingly slim.
Earnings guidance for FY03 reduced from 89¢ per share to 70¢
Q series turboprop production will be interrupted for six-eight weeks beginning late November
2003 will be “bad” for regional aircraft sales - Fred Curado, Executive VP – Airline Market
“The 50-seater bubble is coming down…”

11. Large RJ Sales Are Slow Only 15% of RJs ordered since 1997 have been 70-105-seaters

12. “Self-interest makes some people blind, and others sharp-sighted
“Self-interest makes some people blind, and others sharp-sighted.” – Francois La Rochefoucauld

13. Scope Clause Politics

14. Scope Clause Resolution?
Seats
Cash Aircraft Related Operating Cost
Theoretical Common Pay Scale
US Regionals
US Majors
717 Economics Improve
Small RJ Economics Deteriorate

15. Agenda Current State of the Industry and Boeing Views of Large RJs
Alternative Premium Travel Options and Implications
717 Update

16. Is the Industry an Hourglass or a Pyramid?
Is the undifferentiated mixed-class model dead?
Just how big is the premium sector?

17. Airline Pricing Realities and Challenges
Business Rack rate leisure Leisure below rack rate Free
Airfare discounting is a problem…
Traffic Mix
“The problem for American is that only one in 12 passengers is paying the full-coach fare.”
– Don Carty, AMR Corporation
(Aviation Daily, September 30,2002)
100%
Business
90%
80%
Rack Rate Leisure
70%
60%
% RPMs
50%
70% of passengers pay less than the rack rate leisure fare
40%
30%
20%
10% 0%

18. Not for the ‘hoi polloi’ (or the merely rich?)…
Economics of Fractional*
Airline Economics
Example: 1/16 Share in Hawker 800XP (50 hrs.)
Acquisition Cost: = $ 813, % RV = ,362 Net Capital Cost = ,013 Cost of Capital = ,344 Total Capital Cost: = $ 447,357
Monthly Management: Fees: $ 452,897
Occupied Hourly: Fees: $ 466,802
Excise Tax on: Hourly fee: $ 35,010
Total 5 yr. Expense: $1,402,066
= $ ,608/hr. = $ ,400/hr. (4 pax) = $ 700/hr. (8 pax)
Some examples of typical walkup fares:
SEA-MSO (unrestricted Y): = $ one-way ($318/hr.) at 1.3 bh
SEA-BOS (unrestricted F): = $2,289 r/t ($199/hr.) at 11.5 bh
PIT-DEN (unrestricted F): = $2, r/t ($406/hr.) at 6.3 bh
JFK-SFO (unrestricted F): = $3, r/t ($335 (hr.) at 11.7 bh
Based on this unscientific (but representative) sampling…
Fractional option is anywhere from times as expensive as full-fare, unrestricted F/Y with total fractional occupancy.
3-5 – 7.0 times as expensive with a typical passenger load.
*5% cost of capital, 2% annual OHF escalation and 3.5% annual management fee escalation, 7.5% excise tax, tax benefits of ownership not included.

19. Relative Market Sizes 1560 116 15 3 Airline cost & service
strategies
Premium traffic: seeking value & avoiding hassle
116
RPKs (Billions)
Fractional ownership:
a new business model 15 3
CAGR
(’96-’01) % % % %

20. Market Gap: Airlines vs. Corporate Aviation
Private
Owners
Corporate
Owners
Corporate
Shuttles
1.3M
Estimated
US Domestic
FO Passengers
Per Annum
Fractional
Owners
Price
$/trip
Market Gap
Business Jet Charters
First Class
538M
Total
US Domestic
Passengers
Per Annum
Business
Number of FO passengers: US 750 airplane FO fleet x 850 passengers per year (per NBAA survey data) x 2 (FO gets twice the annual pax production as FO and regular biz jet production combined)
$746 first class fare is RT quote for Delta airlines, from Newark to Atlanta (block time RT is approximately 4.6 hrs)
Breakdown for Net Jets ($19,772) is as follows
$6840 is prorated acquisition cost for 1/16 Citation Ultra share
$5178 is prorated management fee for 1/16 Citation Ultra share
$6010 is per hour flight cost for occupied flight hours (app. 4.6)
$1204 is standard 0.1 hour surcharge for each takeoff and landing
Economy
50M
Total Estimated US Domestic
Premium Passengers
Per Annum
Service Quality

21. Lower Price Point Premium Travel Solutions?
Citation Mustang

22. Agenda Current State of the Industry and Boeing Views of Large RJs
Alternative Premium Travel Options and Implications
717 Update

24. Still the Market Leader

25. Compelling Replacement Airplane Value
Purchase Case
$28.2M
$24.1M
$24.4M
$22.4M
Versus

26. Significant Risk Elements Not Included in Analysis
Wiring-related inspections and projects
Cabin-related (flammability, insulation, air quality)
Fatigue damage inspections
Corrosion control programs
SFAR
Chapter 4
FANS/GPS and TAWS/RVSM

27. Midwest Express Final Assembly

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