Cost savings through operational excellence in the environment of volatile fuel prices

Singapore, March 05th 2009

Contents

1. Introduction 2. Oil Price Development 3. General and Airline Specific Impacts of the ETS 4. Reduction of Fuel Burn in Flight Operations
4.1 Pre - Flight 4.2 In - Flight 4.3 Post Flight

5. Touchdown 6. Lufthansa Consulting

Singapore - JET FUEL Asia Summit 2009

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Contents

1. Introduction 2. Oil Price Development 3. General and Airline Specific Impacts of the ETS 4. Reduction of Fuel Burn in Flight Operations
4.1 Pre - Flight 4.2 In - Flight 4.3 Post Flight

5. Touchdown 6. Lufthansa Consulting

Singapore - JET FUEL Asia Summit 2009

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Introduction

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Contents

1. Introduction 2. Oil Price Development 3. General and Airline Specific Impacts of the ETS 4. Reduction of Fuel Burn in Flight Operations
4.1 Pre - Flight 4.2 In - Flight 4.3 Post Flight

5. Touchdown 6. Lufthansa Consulting

Singapore - JET FUEL Asia Summit 2009

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Several micro- and macroeconomic factors drive the fuel price development, but the related risks and uncertainties make fuel prices quite unpredictable

Themain maininfluencing influencingfactors factors The World jet fuel demand Jet fuel supply situation OPEC policy
US - $

Supply from non OPEC countries Political situation External factors, e.g. weather, strike, etc.

Source: Lufthansa

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Hedging was the way out for large network airlines until the fuel prices eroded and also put these airlines at peril

Development of crude oil lt. sweet pit 2008

US - $

Average price caps of hedged fuel

When crude oil prices soared last summer, airlines around the world entered into hedge agreements aimed at insulating them from even higher jet fuel cots.

Recent Aviation & Airline headlines*

SIA's third-quarter profit falls 43% on hedges SIA's third-quarter profit falls 43% on hedges Fuel hedge adjustments and merger costs trigger massive quarterly losses for Delta Fuel hedge adjustments and merger costs trigger massive quarterly losses for Delta Fuel hedging crimps Southwests profits Fuel hedging crimps Southwests profits Southwest may pledge up to 20 737s as hedge collateral Southwest may pledge up to 20 737s as hedge collateral Huge fuel hedge loss, falling demand to hurt Cathay Huge fuel hedge loss, falling demand to hurt Cathay Source: ATW , RATI

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Efficient cost control remains number one priority in operational airline management the target is to control fuel cost
Fuelimpact impacton onoperating operatingcost cost Fuel
35 30 25
$120,0 $100,0 $80,0 $60,0

[% ]

20 15 10 5 0 2003 2004 2005 2006 2007 2008F

$40,0 $20,0 $0,0

% of operating costs

Average price per barrel of crude

Fuel Impact Operating Costs

The percentage of cost for jet fuel (portion of DOC) has increased by 22 % since 2002, forcing carriers to cut down on operating expenses and to focus on operational efficiency. The aim for sustainability can only be met by adequate measures to cut the operational cost base.

Source: IATA, Platts, ATA, Lufthansa Consulting Analysis

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Profitability can be a matter of one extra seat sold with the volatility of jet fuel prices the profitability is at jeopardy for all airlines

AirlineOperating OperatingExpenses Expenses(2008) (2008) Airline

FUEL 100 %
Maintenance

75%
Catering

33 %
Depreciation Crews

50%

Pax Handling Charges Landing, Enroute Ground Handling Procurement Marketing Admin

100 %

25%

10%

Source: Selected annual reports, Lufthansa Consulting analysis

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Contents

1. Introduction 2. Oil Price Development 3. General and Airline Specific Impacts of the ETS 4. Reduction of Fuel Burn in Flight Operations
4.1 Pre - Flight 4.2 In - Flight 4.3 Post Flight

5. Touchdown 6. Lufthansa Consulting

Singapore - JET FUEL Asia Summit 2009

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The European Emission Trading Scheme will implicate additional challenges for the airlines

EuropeanEmission EmissionTrading TradingScheme Scheme(ETS) (ETS) European

EU parliament has decided to include airline activities in the scheme for greenhouse gas emission allowance trading within the community starting from 2012 Applicable for all flights to or from EU airports Goal shall be the reduction of CO2 emissions by 20% in 2020 in comparison to 1990 European Emission Trading Scheme (ETS) will have major financial impacts on the aviation industry Airlines are obliged to take action according to the EU commission guidelines (Directive 2008/101/EG) High time pressure since the first deadline is in June 2009

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Only airlines which are able to manage and predict fuel consumption and the correlated CO2 production will lead the industry
Example calculation Conclusion
At a certificate price of 12 EUR and a

Per consumed tone of fuel 3,15 tones of CO2 are emitted EUR/tone of fuel (as of Jan 2009) = 370 EUR EUR/Certificate (as of Jan 2009) = 12 EUR EUR/tone of CO2 = 12 x 3,15 = 37,8 EUR CO2 costs/fuel costs(%) = 37,8/370

fuel price of 370 EUR per tone the costs for CO2 emissions equal 10% of the fuel costs
It is assumed that a big network

carrier is facing additional emission costs in three-digit Mio. EUR amount in 2012
If airlines do not have the necessary

amount of certificates the penalty fee of 100 EUR per tones CO2 will apply

= 10%

Emission factor 3,15 tones of CO2 per tone of fuel burned Assumption: 100% of CO2 emissions have to be paid for

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By managing fuel consumption data, airlines can manage the emission cost scenarios and make a major cost block predictable

Emission cost scenarios

Today's price is 12 EUR, but prices of 30-50 EUR could be realistic in future Prices will rise due to higher demand for emission rights and the inclusion of other industries Expansion since 2004-2006 has to be bought as well as growth from 2012 At a certificate price of 12 EUR with an auction rate of 15% the costs for emission certificates already sum up to 140 Mio. EUR p.a. EU goal: Auction rate of 100%

Best case Allocation rate Auction rate1 Certificate price Costs

2012 97% 15% 12 120 Mio.

2013 95% 15% 12 128 Mio.

2014 95% 15% 20 222 Mio.

Worst case Allocation rate Auction rate Certificate price Costs

2012 97% 15% 30 291 Mio.

2013 95% 30% 40 517 Mio.

2014 60% 40% 50 940 Mio.

Note 1: Auction rate is the percentage of emission certificates which have to be bought by the airlines
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However airlines need to push for a global approach, because isolated EU measures might cause a distortion of competition and detours

Increase of CO2 due to detours

Impact on climate

NYC-FRA-MUM: 336 tones of CO2 (emission certificates needed) NYC-DXB-MUM: 460 tones of CO2 (no emission certificates needed)

Example 1:

FRA-HKG: 251 tones of CO2 (emission certificates needed) FRA-DXB-HKG: 296 tones of CO2 (emission certificates only needed for section)

Impact on climate

Example 2:

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The implementation of ETS will have a major financial impact, only the airlines who will prepare will stay ahead

Conclusion
With the implementation of EU ETS all airlines with EU traffic will face additional emission

costs, the total cost is not exactly assessable today

Data monitoring, reporting and verification will cause additional administration costs Demand will be affected negatively Growth of the airline and aviation sector will be more difficult Distortion of competition Financial means spent for certificates are not available for investments in modern and

efficient technologies
Insecure application of emission funds - emission revenues should inure to the

environmental benefit and the reduction of emissions in the aviation industry

International ETS agreement as a global solution is necessary

Singapore - JET FUEL Asia Summit 2009

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Contents

1. Introduction 2. Oil Price Development 3. General and Airline Specific Impacts of the ETS 4. Reduction of Fuel Burn in Flight Operations
4.1 Pre - Flight 4.2 In - Flight 4.3 Post Flight

5. Touchdown 6. Lufthansa Consulting

Singapore - JET FUEL Asia Summit 2009

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A reduction of CO2 and fuel cost can be achieved in Flight Operations on a daily basis
Pre- -Flight Flight Pre In- -Flight Flight In Post- -Flight Flight Post

Includes all fuel saving measures in terms of planning and preparation for the in-flight phase. Usually this area involves Ground Handling, Operational Control functions and administrative bodies.

The In Flight phase has the major fuel savings potential. The flight crews are actively implementing the prepared measures from the Pre Flight phase and are executing in flight fuel saving procedures.

During this stage data from the In Flight phase are collected, consolidated and validated to realize strategies and measures for further fuel saving activities.

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CO2 reductions and cost savings go hand in hand with Operational Excellence

Pre- -Flight Flight Pre Flight Planning & Preparation

Advanced IT tools for route calculations Route selection (time vs. cost vs. fuel) Extra fuel calculations Establishment of a corporate Fuel Management Ground Handling procedures Usage of APU vs. GPU Turn-around processes

In- -Flight Flight In

Post- -Flight Flight Post Fuel Performance Monitoring Maintenance Actions

Cost Index
Weight Reduction
Paperless cockpit Flight procedures Idle power descends Reduced take-off thrust Flap setting Tankering / fuel uplift Taxi procedures Briefing & communication Flight level selection

Engine wash
Cost monitoring Fuel database Planning & budgeting Controlling Fuel supply management Purchasing & contracting Interface communication

Singapore - JET FUEL Asia Summit 2009

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Contents

1. Introduction 2. Oil Price Development 3. General and Airline Specific Impacts of the ETS 4. Reduction of Fuel Burn in Flight Operations
4.1 Pre - Flight 4.2 In - Flight 4.3 Post Flight

5. Touchdown 6. Lufthansa Consulting

Singapore - JET FUEL Asia Summit 2009

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Flight Planning Provision of realistic parameters to reduce fuel costs and CO2 emissions
Idealflight flightpaths paths Ideal
Optimum Altitude

Vertical profile

Horizontal profile

Realisticflight flightpaths paths Realistic

Optimum Altitude

A A B

Vertical profile
Restricted Airspaces

Horizontal profile
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Singapore - JET FUEL Asia Summit 2009

The challenge of flight planning is to determine the exact fuel consumption but SAFETY remains first priority

BasicObjectives Objectives Basic

Safety

Profitability

Punctuality

Route & Altitude structure

InfluencingFactors Factors Influencing

Schedule constraints Operational constraints Company specific procedures

Weather phenomena Aircraft performance

Required Required FuelAmount Amount Fuel

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Singapore - JET FUEL Asia Summit 2009

CO2 and fuel cost efficient flight planning needs state of the art training and high sophisticated tools

Actual Weather Data

Company related requirements

Navigation Data, e.g. NOTAMs

Financial Data

FlightPlanning Planning Flight ITTool Tool IT

Individual& &Optimized Optimized Individual OperationalFlight FlightPlans Plans Operational

Actual Weather Data

Operational Data

Individual Aircraft Data

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State of the art flight planning takes into account real time wind conditions and estimates the saving potential

Assumption: Aircraft Type: Cruise Procedure: Routing: GC distance: ATR 72 Long Range Speed SIN CGK 474 NM

Optimized calculation
If the Operational Flight Plan is calculated by considering actual weather/wind effects as well as aircraft performance data the result & recommendation will be different: Specific range: FL180 0.39 NM/kg FL230 0.37 NM/kg

Headwind at FL18: 20 kts Headwind at FL230: 50 kts

Standard calculation
According to the books and without considering weather conditions the recommendation for the Operational Flight Plan would be: Cruising Level FL230

Underthis thisconditions conditionsflying flyingat atlower loweraltitudes altitudes Under leadsto toaahigher higherspecific specificrange rangeresulting resultingin inless less leads fuelburn. burn. fuel Fuelsavings savingson onthis thisrouting: routing: Fuel % 55%

Source: ATR Manual

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Extra Fuel needs to be addressed with the cockpit, because tomorrows cockpits manage emissions and fuel cost
Because of the best guess principle the question for the pilot is every time the same: What is the right amount of extra fuel to carry.
Trip Fuel + Contingency Fuel + Alternate Fuel + Final Reserve Fuel + ExtraFuel Fuel Extra
Fuel amount to fly holding patterns at the alternate aerodrome Fuel for flight to the alternate aerodrome Fuel for unforeseen flight incidents Fuel for the flight from A to B incl. climbing phase and descent phase

Planned Planned Take-OffFuel Fuel Take-Off

=
Legalminimum minimum Legal requirements requirements

Fuelthat thatis iscarried carriedat atthe thediscretion discretionof ofthe thecommander commander Fuel

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With the help of the Analyzed Extra Fuel the fuel consumption due to the carriage of too much additional fuel can be reduced

ExtraFuel Fuel Extra

Fuel that is carried at the discretion of the commander

TheFlight FlightCrew Crewdecides decidesabout aboutthe theamount amountof ofExtra ExtraFuel Fuelcarried. carried. The Thisdecision decisionis isbased basedon onestimations, estimations,experience, experience,safety safetyand andcomfort. comfort. This Thechallenge challengeis isto tofind findthe thebalance balancebetween betweensafety safetyand andeconomic economicefficiency. efficiency. The

Onan anaverage averageB747 B747routing routing25 2530 30% %of ofthe theExtra ExtraFuel Fueluplift upliftwill willbe be On burnedjust justto tocarry carryitit! ! burned Onparticularly particularlystretched stretchedlong longhaul haulflights flightsthis thisadditional additional On consumptionmay mayeven evenincrease increaseto to60 60%. %. consumption Anexample: example: An onaaflight flightfrom fromFRA FRAto toEZE EZEthe theamount amountof ofExtra ExtraFuel Fuelis is5.000 5.000kg, kg, IfIfon tonsof offuel fuelwill willbe beburned burnedjust justdue dueto tothe thehigher higherweight weightof ofthe the 33tons aircraft!!! !!! aircraft
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Relation between Extra Fuel ordered and the amount of Extra Fuel actually needed before introducing AEF

6000 5000 4000 3000

kg

Example: Extra Fuel for FRA-HAM with A300-600

Extra Fuel ordered Extra Fuel needed

2000 1000 0 -1000 -2000

01.01.03 30.09.04

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Statistical information on the Operational Flight Plan help the Flight Crew to make a reasonable decision about the desired amount of Extra Fuel
Taxi Fuel + Trip Fuel + Contingency Fuel + Alternate Fuel + Final Reserve Fuel + Extra Fuel

Planned Take-Off Fuel

----------------------------------------------------------------------------------------------------------------ANALYZED EXTRA FUEL SUMMARY MEAN VALUE MS 2000 EF90 MS 860 EF99 PS 1774 CONSIDERED FLIGHTS 936 -----------------------------------------------------------------------------------------------------------------

MEAN VALUE MS 2000: Describes the averagely consumed additional (plus - PS) or less (minus MS) fuel amount in relation to the Planned Take-Off Fuel. EF90 MS 860: On 936 considered legs 90% of all flights on this city pair reached their destination with a fuel consumption less than 860 kg of the Trip + Contingency Fuel. 99 % of all considered flight reached their destination without using Alternate and Final Reserve Fuel and had to use a maximum Extra Fuel amount of 1774 kg.
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EF99 PS 1774:

Singapore - JET FUEL Asia Summit 2009

Potential savings due to minimized carriage of Extra Fuel

Flights not requiring Extra Fuel

936 flights of the flights

Weight reduction 1000 kg:

Fuel savings in kg of Airbus A340 (route length 3000 NM):

Example: Example: LHRJFK JFK LHR Yearlyfuel fuelsavings savingsfor for Yearly oneflight flightaaday: day: one

180 kg 88 kg

500 kg:

65.700kg kg 65.700

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Contents

1. Introduction 2. Oil Price Development 3. General and Airline Specific Impacts of the ETS 4. Reduction of Fuel Burn in Flight Operations
4.1 Pre - Flight 4.2 In - Flight 4.3 Post Flight

5. Touchdown 6. Lufthansa Consulting

Singapore - JET FUEL Asia Summit 2009

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The most innovative project certainly is the introduction of the cost index concept in flight operations

CTime CI = CFuel
The cost index is defined as the ratio of incremental time dependant costs and the costs of fuel. An optimum flight speed can be calculated, using the time costs like an additional fuel flow. This enables the operator to achieve a trade-off between incremental fuel burn and operating costs per time unit. The cost index concept requires a comprehensive evaluation of all airline specific direct operating costs to identify those of relevance for the cost index. It is very important to know, that not all time dependant costs are also cost index relevant.

CI optimization of planned speeds will yield savings from 2 to 3% and in some cases as much as 10% when a flight is restricted to a low altitude or in unusually strong winds
(IATA Fuel Action Plan Guidance material and best practices for fuel and environmental management)
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Many airlines have sophisticated planning tools, however fuel savings during flight or flight tactics are still in its infancy

Strategic Planning

Tactical Planning

Provision of CI performance data for climb, cruise and descent for improved OFPs

Support of tactical economic decisions on board following OFP deviations of any kind

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Instead of having fixed cruising speeds a variable speed adjustment in-flight would save up to 3% of fuel for this flight

Min. Cost CRJ 100/200

410 400 390 380 370 360 350 340 330 320 310 300 290 280 270 260 0,50 0,54 0,58 0,62 0,66 Mach
0,4%-0,6% 1,4%-1,6% 2,4%-2,6% 3,4%-3,6% 4,4%-4,6%

Wind Component
410 400 390 380 370 360 350
Flight Level
Flight Level

340 330 320 310 300 290 280 270 260 250 -150 -100 -50 +0 +50 WC [kt] +100 +150

0,70

0,74
0,6%-0,8% 1,6%-1,8% 2,6%-2,8% 3,6%-3,8% 4,6%-4,8%

0,78

250 0,82

0,0%-0,2% 1,0%-1,2% 2,0%-2,2% 3,0%-3,2% 4,0%-4,2%

0,2%-0,4% 1,2%-1,4% 2,2%-2,4% 3,2%-3,4% 4,2%-4,4%

0,8%-1,0% 1,8%-2,0% 2,8%-3,0% 3,8%-4,0% 4,8%-5,0%

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