Transportation chapter. Global Gambits The Right Moves for Right Now. See jpmorgansavant.com for global sector valuation tools

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1 June 28, 2006 Global Gambits The Right Moves for Right Now Transportation chapter The following is a chapter from, dated June 28, This chapter is presented for convenience, and should be read in conjunction with the full report and its analyst certifications and important disclosures. The full report is available on MorganMarkets.

2 Transportation Taking One s Medicine Global Sector Coordinator (852) peter.g.negline.@jpmorgan.com J.P. Morgan Securities (Asia Pacific) Limited Full sector coverage details on page 6 Key Drivers The global transportation sector is enjoying strong passenger shipment volumes across all regions and product lines. As well, pricing power remains largely in the hands of service providers. The issue is that the sector is divided into groups that are benefiting from these favorable conditions and are delivering improved returns, and those which are suffering deteriorating returns under the weight of high oil prices. The phenomenon driving the recovery of US airlines is largely down to a better understanding about the elasticity of demand. As a rule, the transportation sector has been more focused on market share rather than seeking to preserve margins by passing through higher operating costs to customers. In the past, cost increases were often offset by technology or productivity improvements, but now this is not easily achieved with higher oil prices. Sustained high fuel costs are driving rationalization of the industry. This is best seen in the US, where gratuitous domestic airline capacity is exiting the system far more quickly than expected and ex-fuel margins are setting new highs. Sea freight rates on the Trans-Pacific appear resilient as shipping lines seek to recover rising bunker costs. It is possible that persistent high oil prices lay the groundwork for more rational industry behavior, especially for airlines and shipping lines. If so, this would not really emerge for another year or so. In the meantime, investors will stay largely focused on oil prices, and stock-pick selectively across the sector, in our view. Our Non-Consensus Views Overweight Swift Transportation (SWFT). We believe SWFT s management will be successful in driving margin expansion back towards its historical normal operating margin range (9-11%), driven by a change in the company s focus from growth to cost/efficiency and by focusing its sales force on higher quality revenue through new IT tools. In our view, SWFT can execute its turnaround despite an environment of softer demand for truckload transportation in the near term. Positive on container shipping. We remain cautiously optimistic on container shipping. This is based on the market s pessimism over accelerating capacity growth and the downward pressure this would exert on rates. After a shaky start to the year, early signs from rate negotiations suggest that the outcome could be quite reasonable, especially when considered along with the higher box volumes. Net-net, we expect the better-run container lines to have a reasonable year. Selectively cautious on bulk shipping. We are cautious on the outlook for bulk shipping rates in the Asia-Pacific region. After dramatic surges in rates through 2003 to early 2005, we expect a moderation in demand (i.e., less speculation) in 2006 and Limited scrapping of older vessels should add to capacity, which we forecast will see strong growth this year and next. We remain Underweight on Pacific Basin given its noticeable downward trend in rates. 2

3 Transportation: Top Picks Company Key Financials Rationale and Catalysts US Airways Group, Inc. Rating: Overweight Fiscal EPS (Local): Year-end Dec. Ticker: LCC US / LCC E 2007E (7.58) Exchange: NYSE P/E (Calendar) Price (Local): US$ E 2007E Mkt Cap (US$): 3.9 bn Analyst: Jamie Baker EV/EBITDAR (Calendar) Phone: (1-212) E 2007E jamie.baker@jpmorgan.com Teekay LNG Partners Rating: Overweight Fiscal EPS (Local): Year-end Dec. Ticker: TGP US / TGP E 2007E Exchange: NYSE P/E (Calendar) Price (Local): US$ E 2007E Mkt Cap (US$): 1.0 bn Analyst: Jonathan B. Chappell, CFA EV/EBITDA (Calendar) Phone: (1-212) E 2007E jonathan.chappell@jpmorgan.com Swift Transportation Rating: Overweight Fiscal EPS (Local): Year-end Dec. Ticker: SWFT US / SWFT E 2007E Exchange: NASDAQ P/E (Calendar) Price (Local): US$ E 2007E Mkt Cap (US$): 2.2 bn Analyst: Thomas R. Wadewitz EV/EBITDA (Calendar) Phone: (1-212) E 2007E thomas.r.wadewitz@jpmorgan.com Source: Company data, Bloomberg, JPMorgan estimates, JPMorgan SaVanT. Prices as of June 15, Relative to its peers, US Airways costs are lower and its RASM improvement is among the most impressive; and we expect its margins to be higher. US Airways generates more revenue (as a % of its total) in LUV-strength markets than any other US carrier, making LCC the chief beneficiary of LUV s full-court press for higher fares (a well-documented phenomenon by this point). LCC s exposure to LUV is, in fact, between two and three times that of the industry s. With a sector-low valuation, an earnings model far more difficult to push into the red than any other (save for LUV s), and surging RASM tailwinds at its back, it should come as no surprise that the Overweight-rated US Airways remains far and away our top pick in the sector. Based on a probability-weighted average of our various scenarios, we believe US Airways shares could trade between US$84 and US$118 off 2007 results. US Airways is on the JPMorgan Analysts Focus List. Our June 2007 price target of US$100 is based on 6.5x our 2007 EV/EBITDAR, discounted back 30% to mid-year. Risks to target price are spike in oil prices or a return to irrational competitor pricing. We believe TGP s current unit price does not accurately account for our forecast of strong (CAGR of 10%+) and visible distributable cash flow growth from Moreover, the fact that the company s future earnings and cash distributions are fully backed by long-term contracts in excess of 10 years (with an average exceeding 15 years) renders its long-term distributable cash flows more visible and sustainable than those of many MLPs. Also, we believe that TGP is at the doorstep of a strong, sustainable growth strategy, supported by two new contracts for a total of six new LNG carriers awarded to TK in late July and early August 2005, and we believe that the company will continue to be a leading participant in several future LNG projects going forward. SWFT is a turnaround story where we see the opportunity for strong EPS growth driven by a focus on costs/operational efficiency and the use of new IT tools to improve the quality of its revenue (pricing and asset utilization). Strong 4Q05 and 1Q06 margin and EPS performance show that the new SWFT management team is capable of executing its improvement strategies. By reducing its average tractor fleet roughly by 6.5% in 2H05, management has shown an ability to adjust the company s near-term focus from growth to efficiency and cost. We believe SWFT s margin expansion and EPS growth story is likely to be much less sensitive to demand and pricing trends in the truckload market relative to other major truckload companies. SWFT is on the JPMorgan Analysts Focus List and our December 2006 price target of US$41 is based on applying a 15x P/E multiple to our 2007 EPS estimate of US$2.75/share. Risks to target price include a spike in oil prices or a deterioration in industry pricing. 3

4 Transportation: Stocks to Underweight Company Key Financials Rationale and Catalysts Pacific Basin Shipping Rating: Underweight Fiscal EPS (Local): Year-end Dec. Ticker: 2343 HK / 2343.HK E 2007E Exchange: Hong Kong Stock Exchange P/E (Calendar) Price (Local): HK$ E 2007E Mkt Cap (US$): 0.6 bn Analyst: EV/EBITDA (Calendar) Phone: (852) E 2007E peter.g.negline@jpmorgan.com Pacific Basin currently has its 2006 revenue days 61% covered (booked) at a rate of around US$14,400 per day. This is 16% below the average rate of US$17,100 achieved in 2005, but in fact it is not a fair like-for-like comparison. Previously, the company only reported the front-haul basis, which added at least a further US$1,000 to the final total. On an adjusted basis, rates have fallen 21% Y/Y. The company books most of its revenue days on a forward basis with coverage stretching as far as Year-todate, the Baltic Dry Index is down 50% and we believe this should put pressure on the remaining uncovered revenues for Costs, especially bunker charges, have risen substantially for the shipping sector. Changes in bunker prices lag crude oil prices by around six months. In our view, the impact of rising bunker prices is likely to remain high throughout 2006 and possibly into Our Dec-06 price target of HK$2.50 is based on a mid-cycle price-to-book value of 1.2x in Risks to price target are possibility of a spike in freight rates like those seen towards the end of 2004, and a substantial drop in costs either due to bunker price declines or a phenomenal minimizing of ballast days. Korean Air Rating: Underweight Fiscal EPS (Local): Year-end Dec. Ticker: KS / KS E 2007E 2,757 1, Exchange: South Korea Exchange P/E (Calendar) Price (Local): W34, E 2007E Mkt Cap (US$): 2.6 bn Analyst: EV/EBITDA (Calendar) Phone: (852) E 2007E peter.g.negline@jpmorgan.com Korean Air has been one of the best performing airline stocks in the Asia-Pacific region over the last 12 months. Strong local stock indices over this time partly explain its strong share price, but local investor perception over the stock s leverage to Won appreciation has been the other driving factor. The share price strength is despite high oil prices and rising competition which have held back most other airline stocks in the region. We strongly disagree with perceptions over the benefit for Korean Air from Won appreciation. It is true that the airline has large foreign currency debts, which derive a translation gain from Won appreciation. But we believe that the company is likely to come under pressure from its auditors to reverse an equally large W2.8 trillion asset revaluation gain booked in 1999 when the Won depreciated. In our view, it is entirely inconsistent to value the stock assuming the gains from the revaluation of liabilities are booked without the risk of a reversal of the 1999 gains. We have not included any forex gain in our estimates, which is why our forecasts are the lowest on the Street. We believe Korean Air is at risk of being de-rated in due course. Our Dec-06 target price of W18,000 is based on 1.5x adjusted book value. Risk to target price is a sharp fall in global oil prices without a contraction in global growth. Source: Company data, Bloomberg, JPMorgan estimates, JPMorgan SaVanT. Prices as of June 15,

5 Transportation: Stocks to Underweight (cont d) Company Key Financials Rationale and Catalysts JetBlue Airways Corp Rating: Underweight Fiscal EPS (Local): Year-end Dec. Ticker: JBLU US / JBLU E 2007E Ticker ADR: (0.06) (0.19) (0.10) Exchange: NASDAQ P/E (Calendar) Price (Local): US$ E 2007E Mkt Cap (US$): 2.0 bn NM Analyst: Jamie Baker EV/EBITDAR (Calendar) Phone: (1-212) E 2007E jamie.baker@jpmorgan.com Source: Company data, Bloomberg, JPMorgan estimates, JPMorgan SaVanT. Prices as of June 15, JetBlue s shares should wane as RASM reality sinks in. Management expects RASM to increase 17% in 3Q06 and a further 22% 4Q06. This is not likely, given the unrelenting legacy competition. We doubt if JetBlue s move into shorter-haul, high-yielding markets will be embraced by business travellers, who are otherwise wed to corporate contracts, upgrades, and frequent flyer accounts. By any measure, JetBlue s shares are the most expensive among US operators, yet the company is expected to be the least profitable among US operators. Given the current valuation levels, JetBlue s profitability would need to significantly exceed that of the industry to warrant upside equity potential, in our view. We maintain our Underweight rating on JetBlue. 5

6 JPMorgan Global Transportation Research Equity Research Credit Research Airfreight, Surface and Maritime Airlines and Airports Global Sector Coordinator Americas Americas Americas United States Jonathan B. Chappell, CFA Glenn Muller Tom Wadewitz Brannon Cook Kirill Kazanli United States Jamie Baker Pakhi Eder United States Mark Streeter, CFA (HG/HY-Airlines, EETCs, Rails/Shipping) Tarek Hamid (HG/HY-Airlines, EETCs, Rails) Joel Hawkins(HG/HY-Airlines, EETCs, Rails) EMEA EMEA EMEA Pan Europe Damian Brewer James Solomon Pan Europe Chris Avery Nachu Nachiappan (HG/HY) Alex Ayoub (HG/HY) South Africa Gavin Butcher Asia Pacific Asia Pacific Asia Pacific Pan Asia Pacific Wai-Shin Chan Pan Asia Pacific Wai-Shin Chan Australia, New Zealand Allison Bellows Tiernan Australia Matthew Crowe Australasia Matthew Crowe Ex-Japan Asia Allison Bellows Tiernan Jessica Smith Olivia Cartwright Olivia Cartwright Jessica Smith China Japan Rie Kajiyama Wai-Shin Chan Sharon Lu Hong Kong, India, South Korea, Taiwan Malaysia Lucius Chong Philippines Kelly Lim Singapore Winnifred Heap Chris Gee Thailand Maria Lapiz 6

7 Companies Recommended in This Report (prices as of COB 19 June 2006 except where noted) JetBlue Airways Corp. (JBLU/$11.53/Underweight), Korean Air ( KS/W34,350 [20-June-2006]/Underweight), Pacific Basin Shipping (2343.HK/HK$3.18 [20-June-2006]/Underweight), Swift Transportation (SWFT/$29.71/Overweight), Teekay LNG Partners L.P. (TGP/$30.00/Overweight), US Airways Group, Inc. (LCC/$46.47/Overweight) Analyst Certification: The research analyst who is primarily responsible for this research and whose name is listed first on the front cover certifies (or in a case where multiple research analysts are primarily responsible for this research, the research analyst named first in each group on the front cover or named within the document individually certifies, with respect to each security or issuer that the research analyst covered in this research) that: (1) all of the views expressed in this research accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the research analyst s compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst in this research. Important Disclosures Market Maker: JPMSI makes a market in the stock of JetBlue Airways Corp., Swift Transportation. Beneficial Ownership (1% or more): JPMSI or its affiliates beneficially own 1% or more of a class of common equity securities of US Airways Group, Inc. Client of the Firm: JetBlue Airways Corp. is or was in the past 12 months a client of JPMSI. Korean Air is or was in the past 12 months a client of JPMSI. Pacific Basin Shipping is or was in the past 12 months a client of JPMSI. Swift Transportation is or was in the past 12 months a client of JPMSI. Teekay LNG Partners L.P. is or was in the past 12 months a client of JPMSI. US Airways Group, Inc. is or was in the past 12 months a client of JPMSI. Investment Banking (next 3 months): JPMSI or its affiliates expect to receive, or intend to seek, compensation for investment banking services in the next three months from JetBlue Airways Corp., Pacific Basin Shipping. Non-Investment Banking Compensation: An affiliate of JPMSI has received compensation in the past 12 months for products or services other than investment banking from Korean Air, Swift Transportation, US Airways Group, Inc. Price Charts for Compendium Reports: Price charts are available for all companies under coverage for at least one year through the search function on JPMorgan's website or by calling this toll free number ( ). Explanation of Equity Research Ratings and Analyst(s) Coverage Universe: JPMorgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the average total return of the stocks in the analyst s (or the analyst s team s) coverage universe.] Neutral [Over the next six to twelve months, we expect this stock will perform in line with the average total return of the stocks in the analyst s (or the analyst s team s) coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of the stocks in the analyst s (or the analyst s team s) coverage universe.] The analyst or analyst s team s coverage universe is the sector and/or country shown on the cover of each publication. See below for the specific stocks in the certifying analyst(s) coverage universe. Coverage Universe: : AirAsia Bhd (AIRA.KL), Asiana Airlines ( KQ), Cathay Pacific (0293.HK), China Airlines (2610.TW), China Eastern Airlines - H (0670.HK), China Southern Airlines (1055.HK), EVA Airways (2618.TW), Evergreen Marine Corporation (2603.TW), HK Aircraft Eng. (HAECO) (0044.HK), Jet Airways (India) Ltd (JET.BO), Korean Air ( KS), Pacific Basin Shipping (2343.HK), SIA (Singapore Airlines) (SIAL.SI), Thai Airways (THAI.BK), Wan Hai Lines (2615.TW), Yang Ming Marine (2609.TW) 7

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