REVIEW OF 2008

Each passing month of 2008 saw the light on consumer confidence dim as energy prices spiked, housing

foreclosures climbed, credit tightened, and unemployment surged. This chain of events resulted in less

than expected growth in air travel demand for the year. In 20085 system revenue passenger miles (RPMs)

grew 0.7 percent as enplanements fell 1.0 percent. Commercial air carrier domestic enplanements were

down 1.5 percent while international enplanements grew 3.3 percent to a record 77.8 million. The systemwide

load factor fell 0.4 points from its all-time high in 2007 to be 79.5 percent. Domestic enplanement

market share for low-cost carriers shrank in 2008 while network and regional carrier share increased.

The network carrier share of domestic enplanements grew 1.1 points to 49.2 percent while regional

carrier market share rose 0.5 points to 23.1 percent. The decline in share for low-cost carriers is partially

attributed to the cessation of operations by ATA and Skybus.

Systemwide real yield increased 1.6 percent during 2008, but decelerating demand coupled with

accelerating costs led to operating losses for the commercial air carrier industry after two years of

operating profitably. Industry operating losses mounted in the first part of the year due to costs from

soaring fuel prices and totaled $2.0 billion by year end, compared to a $10.1 billion operating profit posted

for 2007. The network carriers reported operating losses of $5.1 billion, with six of the seven carriers

reporting losses. The remaining passenger carriers reported operating profits of $692.5 million, while the

cargo carriers reported operating profits of $2.4 billion. The net loss for U.S. commercial air carriers in

2008 is $18.5 billion. Much of the loss stems from merger related charges at Delta Air Lines and Northwest

Airlines. These two carriers recorded goodwill impairment charges totaling $10.0 billion during the second

quarter, accounting for over 50 percent of the net loss for the year. Cargo carriers continued to report

strong results with net profits of $1.3 billion.

The market for general aviation products and services showed mixed results in 2008. Worldwide shipments

declined for the first time since 2002 (down 6.7 percent) but billings were up 14.4 percent compared to

2007. Piston aircraft shipments fell 20.7 percent while turbine aircraft shipments increased by 16.7 percent.

The increase in shipments and billings seen in the jet fleet was stimulated by growth in the U.S. and world

economy. Despite the higher shipments and billings, general aviation activity fell 5.6 percent in 2008.

Total operations at FAA and contract tower airports fell 4.3 percent as increases in air carrier operations

were offset by declines in other user categories and were at their lowest levels since 1985. Although the

number of flights fell, the combination of fleet mix changes with more regional and business jets in the

nation’s skies and carriers consolidate their operations in their large hubs, resulting in increased workload

due to the continued growth in the complexity of the airspace FAA must manage.

8

U.S. Economic Activity

The U.S. economy slowed in FY 2008, in a year that was marked by large contrasts. After growing 2.1

percent in FY 2007, growth in U.S. Gross Domestic Product (GDP) was 1.9 percent in fiscal year 2008.

However, there were wide variations in the seasonally adjusted quarterly growth rates as they ranged from

a high of 2.8 percent in the third quarter to a low of -0.5 percent in the fourth quarter. The first part of the

year was dominated by the unprecedented rise in the price of oil that led to dampened consumer spending.

Partly due to the slowdown in consumer spending, growth in the economy was tepid in the early part of

the year, prompting Congress to pass a stimulus plan that included individual tax rebates. The rebates and

subsequent jump in spending by consumers was the primary cause of the 2.8 percent growth recorded in

the third quarter. By the fourth quarter, the impact of the rebates had waned and consumers retrenched,

leading to the fall in output.

According to the consumer price index (CPI), prices rose 4.4 percent in FY 2008, as surging oil prices made

all items in the economy more expensive. The 4.4 percent rise in the CPI in FY 2008 was the highest since

1991, and was 2.1 percentage points higher than in FY 2007.

Oil prices, as measured by the U.S. Refiners’ Acquisition Cost, rose 67.6 percent in FY 2008 to $101.53.

Higher prices were spurred by strong global demand for oil, concerns about potential supply disruptions,

and also the actions of speculators in the oil market. However, the rise in the average price for the year

fails to tell the whole story. Oil prices, which averaged $73.54 in September 2007, rose rapidly to peak at

$129.03 in July 2008, dropped to $98.91 by September, and continued to fall through the first quarter of FY

2009 to $39.82 in December.

U.S. GROSS DOMESTIC PRODUCT

SEASONAL LY ADJ UST ED ANNUAL GROWTH

FY 2007 AND 2008 BY QUARTE R

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

2006-04 2007-01 2007-02 2007-03 2007-04 2008-01 2008-02 2008-03

F iscal Year 2007 Fiscal Yea r 2008

ANNUAL PERCENT GROWTH

9

World Economic Activity

As the world’s largest economy, the U.S continues to have a prominent role in world economic growth. In

recent years much had been written about the “decoupling” of the world economy from the U.S. economy.

However, events in 2008 showed that the world and U.S. economies were very much linked together. What

started out to be a U.S. slowdown in the beginning of 2008, turned into a full-fledged global slowdown by

the end of the year. In calendar year 2008, as has been the case since 2000, U.S. GDP growth lagged that

of the rest of the world, with U.S. and world economic growth reaching 1.3 and 2.3 percent, respectively.

GDP growth in the rest of the world was driven by the growth in Asian and Latin American markets.

On a calendar year basis, Canadian GDP growth lagged that of the U.S. in 2008, with growth of 0.7 percent.

The combined economies of the Asian and Far East nations grew by 3.6 percent in 2008, down from 5.9

U.S. AND WORLD GDP

CALENDAR YEARS 2002 - 2008

0.0

1.0

2.0

3.0

4.0

5.0

2002 2003 2004 2005 2006 2007 2008

ANNUAL PERCENT GROWTH

U.S. REFINERS ’ ACQUISITION COST

$0

$20

$40

$60

$80

$100

$120

$140

2002-01 2003-01 2004-01 2005-01 2006-01 2007-01 2008-01

$ PER BARREL

10

percent a year earlier. This region includes the world’s second largest economy, Japan (down 0.1 percent),

and the world’s most vibrant economy, China (up 9.2 percent). The combined economies of the Europe/

Middle East/Africa nations rose just 1.7 percent in 2008, as solid growth in Eastern Europe (up 4.7 percent)

offset slow growth in Eurozone6 countries (up 0.9 percent). GDP in Latin America grew by 3.7 percent

with Brazil up 5.1 percent while Mexico grew only 1.3 percent as the U.S. economic slowdown resulted in

slower economic growth in Mexico.

Comercial Aviation

Commercial aviation hit a slippery slope during 2008. Unpredictable jet fuel prices and a softening global

economy hurt the industry. After posting its first net profit since the 9/11 terror attacks in 2007, the U.S.

industry posted a net loss in 2008, with a similar outcome predicted for foreign carriers. With the U.S.,

Europe and Japan reportedly in a recession, global industry net losses for calendar year 2008 are expected

to be $5.0 billion, with a vast majority ($3.9 billion, excluding “fresh-start” accounting items) absorbed

by the U.S. carriers.7 U.S. airlines were able to implement moderate fare increases during 2008 through

successful capacity management despite increasing uncertainty in their operating environment, tempering

the impact of the downturn.

Based on data compiled by the International Civil Aviation Organization (ICAO), world air carriers

transported 2.26 billion passengers (up 6.4 percent) a total of 4.2 trillion revenue passenger kilometers

(RPKs) (up 6.7 percent) in CY 2007. Although worldwide traffic results are not available for full year 2008,

ICAO estimates that worldwide RPKs and passengers increased 1.8 and 0.8 percent, respectively.8

WORLD PASSENGER DEMAND

CALENDAR YEARS 2002 - 2008

-4.0

0.0

4.0

8.0

12.0

16.0

2002 2003 2004 2005 2006 2007 2008E

Source: 2008 World Estimate – ICAO, December 2008

ANNUAL PERCENT GROWTH

11

Statistics from the Association of European Airlines (AEA) show that passengers decreased 1.5 percent and

RPKs increased 1.2 percent in CY 2008. Capacity, as measured by available seat kilometers (ASKs), was

up 3.0 percent during the same time period. For the year, AEA carrier traffic was strongest in the Middle-

East (8.2 percent), followed by the South Atlantic (7.5 percent), and North Africa regions (6.6 percent).

Traffic growth in the North Atlantic region was minimal, up 0.2 percent.

The Association of Asia Pacific Airlines (AAPA) reported a decrease of 1.0 percent in RPKs on a 1.7 percent

increase in ASKs for 2008. Passengers were down 1.8 percent during the same period.

In CY 2008, U.S. and foreign flag carriers will transport an estimated 153.9 million passengers between the

United States and the rest of the world, a 2.7 percent increase over 2007. Growth in the Atlantic market

was solid (up 7.0 percent) and weak in both the Latin America market (up 1.4 percent) and the Canadian

transborder market (up 0.7 percent). Passenger growth fell in the Asia/Pacific market (down 1.7 percent) as

declines in Japan and Australia offset gains elsewhere.

ASIA PACIFIC CARRIERS CAPACITY AND TRAFFIC

CALENDAR YEAR 2008

-9.0

-6.0

-3.0

0.0

3.0

6.0

9.0

J F M A M J J A S O N D

Sour ce: Association of Asia Pacific Air lines (AAPA)

% CHANGE FROM PREVIOUS YEAR

EUROPEAN CARRIERS CAPACITY AND TRAFFIC

CALENDAR YEAR 2008

-6.0

-3.0

0.0

3.0

6.0

9.0

J F M A M J J A S O N D

Sour ce: Associa tion of European Air lines (AEA)

% CHANGE FROM PREVIOUS YEAR