Air Scoop April 2007

Highlights in this Issue

Air Berlin Swallows LTU Analysis of the LCCs’ Slovakian Market SWOT Analysis of European LCCs Industry (R)evolution of Ryanair’s Business Model The Great Carve Up in the Nordic Sky

The Low Cost Carriers Analysis Newsletter

EDITORIAL

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n the coming months, LCCs’ industry will have many opportunities to meet, exchange ideas and do some networking. Indeed, this month some of the most influential people in European low-cost aviation will gather at the French Connect 2007 in La Baule (April 25-27). Then in May, EastEuroLink will bring together key players of Air Transport in the region of Central & Eastern Europe in Bratislava (May 4). In June, we will be back in London thanks to MarketForce and their annual Low Cost Air Transport Summit (June 13-14) presenting current issues facing LCCs market and focusing this year on this question: “Where next for the low-cost carriers?” Finally, after the summer break, we will all be back to the World Low Cost Airlines Congress (September 17-19) with a new formula to improve networking. For instance, attendees will know how the climate change debate does affect LCCs industry and what customers really think through live focus groups… At each event, Air Scoop will be there to discuss with top managers of LCCs, financial analysts, and market journalists. Consolidation of the European LCC market is more than ever ongoing. The Scandinavian LCC FlyMe had to report bankruptcy and cancel its flights (p. 13) due to a lack of money to continue operating flights. Local competitors such as FlyNordic or Norwegian (p. 2) hope to benefit from this collapse and replace some of FlyMe’s flights. On another market, time is also to strong consolidation: in Germany. Air Berlin which already bought its strong partner DBA last summer has simply swallowed its competitor LTU to become the fourth airline in Europe (p. 3). On the UK market, FlyBe has planned a similar growing strategy by acquiring BA Connect, but faces more concrete difficulties (p. 10). To survive in this highly competitive environment, LCCs have different options. One of them is to conquer new markets always farer. Central & Eastern Europe is a dynamic market, full of opportunities for LCCs, so after the Hungarian market (Read Air Scoop March 2007), we have analyzed the Slovakian market, with its strength and weakness (p. 6). One current trend is also to study opportunities of long-haul flights. Many analysts have speculated that Ryanair will offer long-haul flights, possibly in conjunctions with its Aer Lingus bid. However, such strategy will definitely affect Ryanair’s business model (p. 12). Another issue that will certainly alter LCCs business models is climate change. We notice a clear trend of air travelers changing their flying habits because of climate change concerns (p. 14). To get a better vision of European LCCs’ market, we have realized of SWOT analysis of it (p. 8). Each month, we will provide a SWOT analysis of a lowcost carrier, next month we will publish a SWOT of Ryanair).

Air Scoop - April 2007

p. 3 p. 6 p. 8 p. 12 p. 13

AIR SCOOP ANNOUNCEMENTS 2007 Ancillary Revenue Airline Conference (ARAC 2007) November 14 and 15 in Frankfurt Air Scoop is proud to be media partner of the ARAC 2007. The Ancillary Revenue Airline Conference (ARAC) is the first global event in the airline industry to completely define and develop the concept of ancillary revenues. Airline Information has teamed up with the leading research consultancy in airline ancillary revenues, IdeaWorks to produce this groundbreaking event. President of IdeaWorks and chairman of ARAC, Jay Sorensen defines ancillary revenues as “Revenues beyond the sale of tickets that are generated by direct sales to passengers, or indirectly as a part of the travel experience.” This definition includes the commissions earned by many airlines on the sale of hotel accommodations, car rentals and travel insurance.

http://www.airlineinformation.org/conferences/2007_ARAC/arac_intor.html

The Budgie Awards 2007 The Budgie Awards have been created to recognise the leaders, innovators, creative talents, and pioneers in the global Low Cost Airlines industry. Due to take place on the evening of the World Low Cost Airlines Congress, the Budgie Awards promises to be a spectacular event. http://www.terrapinn.com/2007/budgies

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BIRD’S EYE VIEW Exclusive Interview of Daniel Skjeldam (Director Network and Revenue of Norwegian) Could you please present Norwegian to our readers? What are your specificities compared to other European LCCs? What do you do better than your competitors? Norwegian is Scandinavia’s largest LCC with 5,2 million customers in 2006 and 22 aircrafts. It is the largest carrier on international flights from Norway. We fly a many high frequency routes on the domestic network with up to 14 daily roundtrips. To achieve this, we have built a product with emphasis on an effective airport product. For instance, you can go directly to the gate with your creditcard or barcoded traveldocument on any domestic airport if you only have a hand-luggage. On the international network, we mainly focus on primary airports, but we fly to secondary airports where it’s suitable for our customers. We have a very effective flight-program, with 20 minutes turnaround and up to 12 daily sectors per aircraft. You already cover many routes between Norway and European main cities. Do you plan to develop new routes within the Scandinavian market; are there sufficient population catchment areas to open new routes in Scandinavia? If not, towards which market do you tend to? Most of our network originates out of Norway, but we’ve also built a base with two aircrafts in Warsaw, and we also fly 4 routes out of Stockholm. The catchment area in Scandinavia is smaller than in other European regions, but population flies more due to both topography of the area and distance from the rest of Europe. Though, by having a smaller catchment area you have to adapt the

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Daniel Skjeldam Director Network and Revenue of Norwegian

product to it. For instance, we codeshare with other Scandinavian LCC’s on the intra-Scandinavian routes. Which are the low cost carriers serving the Scandinavian market? Who are your most dangerous competitors: local LCCs or “Islanders” (Ryanair and easyJet)? The largest LCCs in Scandinavia apart from ourselves are Sterling and FlyNordic who are Scandinvian-based, and Ryanair with a base in Stockholm and a number of routes from Norway and Denmark. Air Berlin, easyJet, WizzAir, Sky Europe and Germanwings also operate to Scandinavia – but on a smaller scale. On the domestic and intra-scandinavian network, we compete a lot with the SAS, whereas on the leisure-routes we compete with a number of carriers. Though, having a very strong brand in Norway, and operating almost 90 routes from this market, puts us in a very comfortable position as opposed to airlines having a smaller position in the market. The European Low cost carriers market has reached a certain maturity which leads to its consolidation. During this transition, what are, for you, the greatest threats to European Low cost carriers? Fuel rising? Overcapacity? Evolution of airports? Regulation?... In my opinion the greatest threat towards LCCs in Europe are stupid ideas and regulations from EU that could limit further traffic growth. Of course the Environmental side is an issue we need to follow closely, but LCC’s in general should have a huge advantage over traditional airlines, with LCC’s having newer fleets, higher seating-density, avoiding traffic-

jams at hubs like LHR and FRA and not the least flying with much higher load factors. Traditional airlines with business cabins and low density seating focus on business-yield Vs filling and standing in line at LHR for hours are the worst threat to the Environment. Many LCCs look after extra-revenues to offset the low price of their tickets. What are the projects of Norwegian in terms of Extra-revenues? As most LCC’s we sell hotels, rental cars, insurances and other things on our website. In addition we have implemented assigned seating for a fee of EUR 3,5 as well as a luggage fee. On domestic flights we also take cargo on the last flight of the day, where we have a little more generosity in the schedule. Do you believe that consolidation of the market will lead to 2-3 main LCCs in Europe, or do you think there will always be many LCCs on niche markets? I believe it’s quite difficult to achieve a low cost level with a small number of aircrafts. For ourselves, we didn’t make profits until we reached 15 aircraft. I believe there is room for more than 2-3 LCCs in Europe, but not for the around 50 LCCs flying in Europe today. During last World Low Cost Airlines Congress, you expressed your worries about the shortage of pilots and crew hitting LCC market? Could you explain us your point

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BIRD’S EYE VIEW of view on this situation and what Norwegian does to face such problem? I believe the airline industry will face the challenge of very low rates of new pilots trained in the period after 2001, but that supply and demand will take care of this in the longer run. I don’t think the industry faces a problem regarding cabin crews. For ourselves, we have a lot ex-pat pilots wanting to return to the region, and

we don’t face any significant challenges at the moment. What are the options for Norwegian to transform its business model in order to make more costs savings? We have a continuous focus on cost savings in all areas. Recently we have implemented a new reservation-system that gives us a very competitive distribution-cost. We have also just implemented a new DCS-system on

our main-airports, with huge cost-savings over the old one we used. Operationally we have hedged part of the fuel-purchases for the upcoming period and are striving towards the 900 limit for our pilots and cabin-crews. Aircraft utilization is now 12 hours plus in the Summer Program by implementing more red-eye flights to offset the challenge that many short sectors flights poses to the utilization.

Air Berlin Swallows LTU to Grow Worldwide Where exactly is Air Berlin flying to? In May 2006, Germany’s first LCC was introduced on the stock exchange to finance its expansion plans. Less than one year later, it swallowed two of its challengers in the German air transport business. First, it was DBA, in august 2006. And now, at the end of March 2007, the fifty-years-old charter airline LTU, paid cash 140 million Euros. Air Berlin will soon issue 250 million Euros in new shares and convertible bonds to finance this operation. The company also plans to buy 49% of the small Swiss airline Belair.

very competitive European air transport market, growing quick and big is the best way to survive. This is particularly true in Germany, where the market entered a phase of consolidation. By buying LTU, Hunold not only makes his company the fourth airline in Europe, behind Air France-KLM, Lufthansa and Ryanair. He also expects to make important savings - between 70 and 100 million Euros - and to settle down in Düsseldorf (West of Germany), where LTU is based, « the second most important catchment area in Europe after London », Hunold said.

Last summer, Air Berlin was operating less than 60 aircrafts. They are now more than 100, and at least as many are on the order form.

The takeover of LTU by Air Berlin was a coup de theatre in the German sky. At the beginning of March, LTU’s former main shareholder, the businessman Hans Rudolf Wöhrl, had rather talked about negotiations with Condor, the other long-haul German charter airline. But a merger between those two companies would have been complicated, since one of Condor shareholders is the national airline Lufthansa (more than 300 aircrafts, 53.4 million passengers in 2006), which would certainly have tried to block the deal.

By buying DBA, a company it had already a strong partnership with, Air Berlin’s goal was to grow and strengthen its position on the German market, make savings and pick up DBA’s strong business customers - Air Berlin was more tourist-oriented. The purchase of LTU is far more daring. This charter airline, which carried in 2006 5.75 million passengers on its 26 airplanes, is mainly operating longdistance flights to North American, the Caribbean, Africa, Southern Asia, Southern Europe... That is to say, worldwide. No European LCC is currently flying worldwide. Longhaul flights are said to be more profitable, but also harder and riskier to manage. And the existing LCC model (quick turnaround, minimal level of service, no first class...) fits more short-haul flights. However, Air Berlin apparently prepares to be the first to grow on the intercontinental level. Its close European route network will help the company to feed long-haul flights. If this strategy succeeds, the competitive advantage for Air Berlin could be significant.

But for Lufthansa, the Air Berlin – LTU merger may not be a better solution: after this new purchase, Air Berlin may really become a threat for the national leader. All the more that Air Berlin concluded a code-sharing agreement with Condor, even if in return it stopped its code-sharing with TUIfly. The funny thing about all this is that Hans Rudolf Wöhrl, who is a friend of Joachim Hunold, was already the man who sold him DBA last summer. Each time, the scenario was the same: Wöhrl bought the airline, improved its financial situation – even if LTU is still unprofitable – and sold it to Air Berlin. So, next time Mr. Wöhrl gets interested in an airline, be careful...

Joachim Hunold, Air Berlin’s CEO, knows that on the

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DOWN TO EARTH JetStar Clicks its Way to Ancillary Revenues

Airline marketing innovation in Australia seems to be as prolific as kangaroos in the Outback. Independent airline Virgin Blue, which now claims a 30% domestic market share, has introduced many innovations such as its Blue Zone premium seating, the Velocity frequent flier program, and a network of fee-based lounges to serve Australia’s budget-conscious travelers. Not to be outdone in this race, to delight consumers with amenities and choices, is the low cost airline started by Qantas Airways. JetStar started flying domestically within Australia during May 2004 and six months later added medium haul international flights to Asia. The company promises its customers “a simple and fresh travel experience, with a vibrant approach toward low cost travel.” JetStar recently introduced its low fare strategy for long haul international operations during November 2006. It is among the first to apply the low cost model to longer flights. Supported by its existing domestic network, JetStar began flights to Bangkok, Phuket, Ho Chi Minh City, Osaka, Bali, and Honolulu. These six international destinations are served from the following key Australian gateways: Sydney, Melbourne and Brisbane. Concurrent with this expansion, the airline adapted its low fare model to better serve the needs of long-distance travelers.

‘‘IDEAWORKS AISLE’’

by Jay Sorensen (President of IdeaWorks)

www.IdeaWorksCompany.com

ple travel experience as the consumer moves through the booking process. Prior to requesting payment, JetStar offers its customers the option to pre-purchase various services for delivery on board the flight. This is not an uncommon practice among a growing number of airlines seeking to boost ancillary revenues. However, JetStar is unique because of the imaginative branding it has applied to its online sales process. The result encourages travelers to click and buy onboard amenities through the use of whimsical language, thorough descriptions, and pre-purchase discounts. The following offer is displayed after a consumer has selected their flights:

JetStar’s innovations focus on three marketing areas: premium class, passenger fares, and ancillary revenues. The airline acknowledges the importance of premium class services by including a new StarClass on its international long-haul flights. This business class style service encourages higher income consumers to upgrade to greater comfort and amenities. StarClass is promoted on the airline’s web site and is included as a fare option, along with its JetSaver and JetFlex coach fares. Consumers seeking maximum savings are prompted to choose between JetSaver and JetFlex fares during the reservation process. The airline’s web site allows easy comparison between the benefits and restrictions of each with a pop-up page that displays terms and conditions in a matrix format. As the branding suggests, JetFlex is priced higher and offers greater flexibility for refunds and reservation changes; JetSaver fares sacrifice flexibility for maximum savings and do not accrue points in the Qantas Frequent Flyer Program. JetStar delivers on its promise to deliver a fresh and sim-

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The above prices listed are in U.S. dollars and apply to flights operated between Honolulu and Sydney. The origin point of the itinerary determines the currency displayed; Australian dollars are listed for passengers that begin their travel in Australia. “Feed me! Comfort me! Entertain me!” instantly conveys the consumer benefits of these

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BIRD’S EYE VIEW services and focuses attention on a consumer’s natural desire for self-gratification. Clicking on the “What’s Available?” links displays the following information: Feed me! Include this option, and you’ll be served meals twice on your flight. Your choice from an international menu designed to appeal to all tastes. With a choice of freshly prepared Australian and local cuisine to keep your hunger satisfied through your journey. A drink will also be included to enjoy with your meals. Comfort me! On board comfort, that you can take away and use again and again. Packed with a stylish amenity kit, blanket and inflatable neck support, it also includes an eyeshade and socks for when you just choose to ‘switch off’. Entertain me! To stay entertained during your flight, select this option and we’ll add the latest video on demand unit to your inflight experience. With a range of new release movies, TV shows, music videos and kids programmes. Headsets are also included in the price. Stop, start, rewind, fast forward. The choice is yours. The JetStar web site also displays a copy of its Inflight Menu. Consumers realize savings when they pre-purchase items at the time of booking. Pre-purchase savings are nearly US$2 for each of the Comfort me! and Entertain me! offers; the Feed me! option yields even greater savings. And of course, pre-purchase ensures the delivery of services, regardless of demand on the flight. All economy class passengers are provided a complimentary bottle of water at the time of departure. In addition, a water fountain and disposable cups are provided on board for these passengers. All other items, to include a children’s activity kit, are available for sale during the flight. The online click and buy process continues with the presentation of checked baggage options. JetStar provides a free baggage allowance of 2 pieces per passenger on its Hawaii services. Travelers may increase their allowance by one piece and save 20% on the fee assessed at the airport through the pre-purchase option. The following offer is displayed below the Inflight Extras section:

Pre-purchase extra luggage While making your booking, you can pre-purchase additional baggage. You can pre-purchase excess checked baggage (in addition to your checked baggage allowance) at up to a 20% discount. Pre-purchased excess baggage is for checked baggage only. For more information, regarding cabin, checked and excess baggage, please click here. Purchase of Excess Baggage is non-refundable and non-transferable. Add an additional 1 item (+$60) to my booking. JetStar may have developed the ideal long-haul experience that appeals to a wide variety of passenger expectations and levels of affluence. Higher-income passengers seeking maximum comfort can choose a fully bundled premium product with more personal space and better dining and beverages included in the ticket price. Budgetminded travelers can choose the convenience of a JetFlex fare and pre-purchase their food, beverages and entertainment at the time of booking. Ultra-budget travelers can lock in their travel dates with a JetSaver fare and bring their own snacks on board. The airline delivers these choices through a tasteful and efficient online process. Simple and uncluttered branding seems to be part of the airline’s DNA. However, JetStar might consider adding more depth to its branding with images to convey the attractiveness of its service offers. But the airline has clearly designed a click and buy process that likely delivers substantial ancillary revenues and provides consumers with the freedom to design their own travel experience. Sources used in this article: Unless otherwise noted, the information described in this analysis were gathered at JetStar.com during February and March 2007. IdeaWorks cannot guarantee, and assumes no legal liability or responsibility for the accuracy, currency or completeness of the information.

EVENTS

Ancillary Revenue Airline Conference 2007. Ideaworks co-organizes the event with Airline Information. ARAC 2007 will be held November 14 and 15 in Frankfurt.

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BIRD’S EYE VIEW Analysis of the Slovakian Low-Cost Air Transport Market The break-up of former Czechoslovakia in 1993 left Slovakia without a single national air transport company. This gap was meant to be filled by Slovak Airlines, established in 1998. However, one of the most successful Central European low-cost air carriers, Sky Europe has claimed the right for this title. Since 2002, when Sky Europe began its operation, the company has been gradually growing and nowadays is dominating the Slovakian air transport market. In this respect, Sky Europe has become the Ryanair of Slovakia. This is the reason why the analysis of the Slovakian low-cost market is inseparable from the discussion of this low-cost carrier. Currently, there are three international airports in the country that are served by a low-cost carrier: Bratislava, Košice and Poprad-Tatry. Bratislava is by far the most significant of these, since the bulk of the traffic is concentrated at this airport. Košice is served only by Sky Europe, daily domestic flights connect the city with Bratislava. Similarly, Poprad-Tatry, which is a popular tourist resort, is served solely by Sky Europe, regular flights are offered to LondonStansted.

As a consequence, the capital of Slovakia with approximately 430 thousand inhabitants almost exclusively attracts the whole air traffic to the country. The annual number of total passengers at Bratislava airport shows a dynamic growth and as Figure 1 suggests, the multiplication of passenger turnover after 2002 is mainly due to the entry of the low-cost carriers (1). In 2006, 1.93 million passengers landed or departed from Bratislava, 94% of them travelled on international routes. The share of low-cost carriers from the passengers is very high, Sky Europe carried 48% of total passengers, Ryanair took 24% and lastly, easyJet reached a mere 3.28%. The low-cost carriers, therefore, are dominating the Slovakian market, and especially Sky Europe has taken the lead. However, in spite of the dynamic growth, the size of the market is still small and its potentials are not particularly

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ANALYST PORTHOLE

convincing, too. Given the relatively small population of Slovakia (5.44 million), domestic demand for international flights is limited while international demand may also be relatively restricted. It is not a coincidence therefore, that Sky Europe, which gained first-mover advantage and has established reputation for being a low-cost carrier, is able to be a quasi- monopol player in this market. Based on the winter timetable of 2006 and the summer timetable of 2007, 26 destinations are served from Bratislava by lowcost carriers, and Sky Europe is not present on only two of them (Frankfurt-Hahn and Nottingham, served just by Ryanair)! Moreover, there are only three routes on which Sky Europe has to face competition from its single rival in Slovakia, Ryanair (Milan, Dublin and London-Stansted). A look at the passenger numbers of the top destinations in 2006 (Figure 2) clearly shows that there is not much opportunities left for new entrants on already established routes (2).

London proved to be the most popular destination with almost 400 thousand passengers, however, on October 1st, 2006, easyjet had to withdraw its flight on the London-Luton route, as it was financially not viable, according to the spokesperson of the company. In other words, easyJet was not able to bear the fierce competition on this route posed by Sky Europe and Ryanair even though the 9 months of serving this route in 2006 were enough for the 8th position in terms of passenger turnover. In this list of top 15 destinations, Prague and Munich are those cities which are not served by low-cost carriers, although they show quite substantial traffic. These routes might be potentially viable for low-cost carriers to serve in the future but only if they are able to undercut the prices of the incumbents. Nevertheless, entry to new routes or expansion by the already present low-cost carriers is still possible. Only 13 European countries are served from Bratislava (25 destinations in total) by the two low-cost carriers and out of these

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BIRD’S EYE VIEW some are surprisingly underrepresented (Figure 3), while the number of connections to Central and Eastern Europe are also very limited. Especially Germany, the Scandinavian states and Poland are those markets which could be considered as possible new destinations.

All in all, the relatively small potentials of the Slovakian market in terms of domestic and international demand pose a limit to all planned expansions. It is enough to compare the passenger turnover data with nearby Budapest: concerning all flights, the airport of the Hungarian capital served 8.27 million passengers last year, while, as already mentioned, Bratislava served only 1.93 million passengers. However, regarding passengers flying with low-cost carriers, the difference is not so enormous. This figure for Bratislava in 2006 was approximately 1.46 million passengers, while for Budapest it was 2.2 million. This also clearly demonstrates how significant role the low-cost carriers play in the Slovakian market. In spite of this, even for Sky Europe, which is truly the dominant player in Slovakia, the home market would not be large enough to grow. The airline carried roughly 2.74 million passengers in 2006 and out of these only about every third passenger flew to or from Slovakia (based on market share data). This suggests that the home market may not be the major source of growth for Sky Europe in the long run. This is underpinned by the fact that Sky Europe tries

to increase the catchment area of Bratislava airport and the domestic flights from Košice to Bratislava are scheduled in a way that all destinations from Bratislava are possible to reach from Košice as well. Another issue is the proximity of Vienna airport (Austria) to Bratislava, which induces rivalry between the two airports. In this respect, it is a remarkable development that on 19th December, 2006, Sky Europe opened its fifth operation base in Vienna. The company will soon offer 16 destinations from the new base. The big overlap between these destinations and those served from Bratislava suggests that a „division of labour” might be introduced and certain destinations may be served only from one of the airports in the future. At first sight, it seems that Sky Europe is cannibalising its business by serving the same destinations from rival airports, thus posing a potential threat of competing away passengers. However, it is also a sensible business decision since with this strategic movement, the company will be able to control traffic from Vienna thereby securing the home market, and at the same time with the shuttle bus service already operating between the airports, the catchment area of both airports can be increased or even joined. What seems to be a conclusion from this analyis is that given the highly concentrated nature and limited demand of the Slovakian air transport market, the first-mover Sky Europe may be the dominant player in the long run and new low-cost carriers may not find the country attractive enough to enter unless they open up new routes and serve new destinations. 1. Source: www.airportbratislava.sk/flashContent/default3.html 2. Source: www.letiskobratislava.sk/flashContent/prilozene_subory/2007-18-01_Prev_vykony_rok-2006.doc

Read our analysis of the Hungarian Market in Air Scoop March 2007 and Tcheck Republic LCCs market : Air Scoop May 2007.

Low-Cost Carriers and Websites Awards

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Wanderlust Magazine has honored FlyBe with its 2007 Travel Awards. The award is based on both readers’ votes and customer satisfaction, and places FlyBe above other carriers making it the best airline website in the UK. Mike Rutter, CCO of FlyBe, commented: «For FlyBe.com to be recognized as the best airline website is a great honor for us, especially as the awards take customer satisfaction into account. (…) We look forward to building on this success and hopefully featuring again in next years awards.» However, according to Hitwise, a market research firm, easyJet.com website is the most popular travel website in the UK. Hitwise has gathered data from more than 8 million British Internet users and found easyJet.com to be the 5th most searched-for brand online. In 2006, more than 98 per cent of total sales of easyJet came through its website. Andrew Berks, Band communication manager, pointed out that “easyJet is committed to further developing its online products in the future.”

Air Scoop - April 2007

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BIRD’S EYE VIEW SWOT TEAM

SWOT Analysis of Low Cost Carrier Industry

Air Scoop launches a new range of articles called ‘SWOT Team’. Each month, we will publish a SWOT analysis of an European low-cost carrier. In this issue, we start with a global SWOT of the market.

Air travel in the 21st century is becoming an economic necessity and not a luxury. It has been predicted that by 2010, business and leisure passengers will increase to 2.3 billion worldwide (from 1.6 billion today) of which a major share will be enjoyed by the Low Cost Carriers. LCCs had a share of 17% of the total number of scheduled seats on offer worldwide in 2006. It was 24% within Europe. The low-cost model, based on Southwest Airlines’ successful formula in the US, has been adopted by leading LCC players in Europe. The key components of their model are ticket-less travel, Internet booking, usage of secondary airports, no commission for travel agents, no seat allocation or connecting flights, and «no frills» such as in-flight catering (customers pay extra for what they require), no business class and lounges. The most profitable routes for LCCs are less than two hours in duration, allowing maximum utilization of aircrafts. They started by flying cityto-city routes but are now increasingly targeting resorts, although many tend to ignore routes of three hours or longer. They often out perform the legacy airlines in operating performance. Overview of the European LCC market: Growth: Demand for low cost air services was up 9% in the last quarter of 2006 and the number of LCC flights increased by 18%. In a single decade, low-cost carriers (LCCs) have transformed the European aviation scene beyond recognition. The UK is the largest and most mature market for low cost carriers in Europe, followed by Germany and Spain, which is now seeing the fastest growth. The enlargement of the EU to include more nations has given LCCs renewed impetus, with many new services starting in Central and Eastern Europe as a result of the deregulation that EU membership brings. Central and Eastern Europe is a key growth area. Impact: LCCs have opened up direct services between EU cities that were not available through the legacy airlines and popularized regional airports by breathing life into the otherwise under utilized airports.

change their business models. The most significant achievement for the LCCs, especially in the EU, is that they have brought air travel within easy reach of everyone across Europe and changed people’s leisure and travel habits. Issues: But the story has not been of continued success. Some LCCs suffer from low employee morale. This in turn leads to poor customer service. LCCs are often accused of misleading advertisements, resulting in low credibility & image. The distinction between LCC and charter services is also becoming blurred. Some of them have copied the low cost airlines by making accommodation, car hire and other ground services available online through their website, and effectively unpackaging their own product.

SWOT Analysis: The SWOT analysis given below will help LCCs to achieve their goals by capitalizing on potential opportunities using their strengths and eliminating their weaknesses & threats. The goals of a low cost airline can be: � Expansion and diversification � Long-term growth planning � Competitive combats � Development of the most suited business model Target audiences for this analysis are members of the aviation industry, such as: � boards of airlines � airports � aviation suppliers � air navigation providers � investment companies, and � government agencies

They have forced established airlines and tour operators to

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BIRD’S EYE VIEW

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BIRD’S EYE VIEW Some of the factors mentioned above may not be applicable to all members of the LCC industry. The relevance of these factors will depend on the business models and goals of the players. Recommendations for Low Cost Carriers: 1. Some innovative schemes should be adopted to attract the increasing number of small & medium business travelers. This would definitely enhance the market share and build brand image. 2. The LCCs should expand into medium haul routes, with the same “no-frills” formula, thus adopting an offensive strategy rather than a defensive one. This will keep the traditional players busy protecting their turf and restrict their encroachment into the LCC market. 3. The European markets are expected to saturate after

a decade, as it has happened in the US & UK. Hence, the LCC players should plan to enter the fast growing markets of Middle-East and Asia, at the earliest. 4. High employee morale is key to customer retention. The business philosophy of LCCs should be ‘smile, charge and serve’. Employee satisfaction and customer loyalty are invaluable for any business to succeed in the long term. 5. Cost cutting may be further achieved by applying lean operating techniques and standardized processes. It seems inevitable that the growth rates of recent years will slow down, except in Central and Eastern Europe where there is still untapped potential. The larger LCCs have an opportunity to expand into new markets and eat into the market share of legacy airlines and tour operators. Some consolidation is likely to happen in the LCC market, at the expense of smaller operators.

How to Get to Go from Edinburgh Now? When BA Connect is finally disconnected from BA and is acquired by FlyBe fellow, Scots are really puzzled with the future of air travel in their home town, Edinburgh. So are the townsfolk of Glasgow, Manchester, Birmingham, and Bristol. The acquisition project was announced first in November 2006 but due to certain legal difficulties and preparation and legalization of all documentation needed it was completed in the beginning of March this year. Difficulties meant not only legal process and money issue but future of personnel affected as well as passengers. That’s why the final date for the acquisition was moved several times. Initiated as a measure of cutting losses on regional routes, BA Connect appeared to be a greater loss itself. BA reported to lose approximately £100,000 a day. Offloading the subsidiary to FlyBe has both positive and negative impact on BA. Undoubtedly, such a deal is just a weight off BA’s mind and pocket. On the other hand, BA is now withdrawn from regional market and is likely to evolve into a pure business/first-class long-haul airline. Though expressing aggressive expansion strategy, FlyBe decided not reopen some of the routes to smaller UK airports cancelled by BA Connect which means not only passengers affected by also huge job losses, especially amongst managers and ground handling personnel. Staff members are offered reemployment with BA or FlyBe but there is no guarantee that everyone will get a job. The merge affected about 700 positions which found a critical respond from Trade Unions. There is a real threat of strike during the Easter.

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Passengers on the cancelled flights were offered alternative flights (some of which will take much longer now) or full refund. Anyhow there will be certain destinations affected a lot, like Birmingham – Barcelona or Manchester – Madrid, as well as some domestic flights such as from/to Edinburgh, for example. BA had cancelled more than 1000 flights before the actual acquisition was completed to reduce severe losses as soon as possible. However, FlyBe estimates the economic capacity of the newly merged airline rather high looking forward to taking over the regional market in two years. With the acquisition FlyBe got in toto 152 routes which brings the airline on the top of the list of European regional airlines. The future would be really bright save for two things: Ryanair and easyJet. Those are the biggest and triumphant LCCs operating in the region that serve about 200 destinations all over Europe. Needless to say it makes really hard for FlyBe to be “original” in this case and open a competitive route for a competitive price. BA Connect is not the first regional project that was terminated. GO once shared the same fate and was sold off by BA to 3i company in June 2001.

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DOWN TO EARTH Airports Growth with LCCs? Airports roll out no-frills red carpets to lure low-cost carriers. What can LCCs do for them? European aviation sector was struck by yet another European Union queries over suggested illegal state aid. Irish Independent reported British and Derry governments would be questioned over its deals with Ryanair concerning an agreement inked in 1999 guaranteed Ryanair GBP250,000 a year from a consortium of four state-funded authorities on both sides of the Irish border to promote its Derry to London route. A range of other taxpayer-subsidiesed benefits included free landing, navigation, air control, security, baggage and passenger charges. All legal issues aside, what ushers in the scene is to what extent LCC is important to an airport’s operation, status and finances that European airports are striving to meet the hard-line low-cost tactics. September 11 changed the equation in civil aviation landscape even in Europe. Many airports lose a significant amount of traffic since then. Since traditional aviation segment of full services for major airlines was under pressure, airports started to shift their attention to grow revenues from no-frills segment. In 2003 which was merely two years after the trauma, it was estimated LCC represented a 12% year-on-year increase to 20% of the European air travel market. To be LCC friendly is not only desirable and, in many ways, necessary for airports’ survival. Since the trend of traveling with LCC is growing among domestic travelers in Europe, LCC do not only fly on the wings of operational profit and retail revenue to the airports but also tourism to the city and the neighboring region. Sweden’s Stockholm Skavsta Airport is one of the early bloomers capturing the growth of LCC on the continent. According to Invest in Sweden Agency, Ryanair’s se-

lection of Skavsta as its ninth Scandinavian base has benefited the airport to share the growth of LCC. When civil aviation was still overshadowed in 2003 by September 11, Skavsta already reported positive growth: “it is expected that passenger numbers would jump from 300,000 to 1.5 million in 2003. The airport handled 96,000 passengers in May, up from 86,000 the month before, and expected the number to rise to 106,000 in June.” Tourism was the first to feel the difference from Skavsta receiving Ryanair. The nearby city of Nyköping began to reap the economic benefits of Ryanair’s expansion. This is further confirmed by a report released by Jones LaSalle Hotels in November last year. The report said that since the introduction of budget airlines in Stockholm in 1997, figures have shown an upsurge in overnight stays from 5.8 million in 1997 to 7.4 million in 2005. Growth in tourism was especially strong after the announcement by Ryanair to open Skavsta airport as their Scandinavian base. Since then, international over night stays have shown an average growth of almost 10% per annum. Although the emergence of LCC does usher in strong growth in revenues and tourism to the airport and respective city, it should be noted that LCC’s blatant cost controls can also threaten airport’s growth. Dispute broke between Ryanair and Skavsta when the airport planned to levy a new safety charge in 2005. The Jones LaSalle report also detailed the Swedish Government’s proposal to introduce a new airport tax could possibly slow growth in tourist numbers and affect the hotel industry which already has several new hotels currently in the pipeline and expected to open in the next 3 years, as new airport tax means higher cost for the passenger but less profit for LCC.

The 4th French Connect takes place on 25-27th April 2007 in La Baule. This unique event offers you the opportunity to network with some of the most influential people in European Low Cost aviation. French airports, the legislators and Europe’s low cost operators all in one place with first-class conference facilities, superb hotels and dining and a relaxed, entertaining business environment : book your place today! For further information, please check www.frenchconnect.net

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Air Scoop - April 2007

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BIRD’S EYE VIEW Exclusive Analysis for Air Scoop www.airlinebulletin.com

(R)evolution of Ryanair’s Business Model (part 1) Ryanair has projected ambitious growth targets for the next five years. By 2012, the airline plans to carry 85 million passengers a year, up from 42.5 million in 2006. However, in order to meet this target, Ryanair will have to change its business model to meet the needs of more travelers. Some have speculated that Ryanair will offer long-haul flights, possibly in conjunction with its Aer Lingus bid, as well as flights to larger airports closer to city centers. While Ryanair will probably not fly transatlantic flights, it will need to target longer routes, as well as flights to larger airports closer to city centers if it wants to meet those growth targets.

lacked nonstop service to Western Europe. If Ryanair expanded service in Western Russia, it would likely have a similar effect on many smaller airports in the country. Ryanair has already adopted some medium-haul routes. For example, Ryanair started service to Morocco last year, where it committed to serving up to 20 routes within five years. While flights between Marseille and Morocco weren’t successful, flights between the UK and Morocco have been. Ryanair also has medium-haul opportunities in North and West Africa, the Middle East, including Israel, and other former Russian non-EU states, such as Ukraine or Georgia.

Many observers believe that Ryanair’s bid for Aer Lingus is a maneuver to get the company into the long-haul aviation market. However, Ryanair CEO Michael O’Leary recently said in the German newspaper Sueddeutsche Zeitung that the bid is “rather unlikely” to succeed. Ryanair is unlikely to deviate from its no-frills business model in the coming years, because that enables the carrier to maintain the lowest costs of any airline in Europe. Expansion into long-haul markets complicates Ryanair’s simple business model, and it would almost certainly increase costs. Ryanair’s available seat mile costs would increase because it would have to add a new aircraft type to its fleet, it would likely have to increase seat pitch on longhaul planes, it might have to facilitate connections at bases such as London Stansted, and it would run into more competition, particularly if it opened routes already operated by charter carriers such as Monarch or First Choice.

But, while medium-haul flights would give Ryanair many opportunities to expand its services, it could also lead to problems. If Ryanair’s planes were flying fewer passengers per day, then ancillary revenues may decrease. On a tenand-a-half-hour round-trip (approximately five hours each way with 25-30 minutes turnaround time), Ryanair only has a potential market of 378 customers for its ancillary products (up to 189 passengers each way), while Ryanair could fly more than two two-hour round-trips in the same amount of time, doubling the number of potential customers who could utilize ancillary revenue products. Consequently, this may decrease Ryanair’s revenues per available seat mile, because although longer segments could generate higher fares, they would decrease the importance one of Ryanair’s most profitable revenue source. Also, if Ryanair flew more medium-haul routes, it would be flying fewer segments and it would need more planes to increase its passenger loads to 85 million a year, than if it were just to focus on shorter segments. But another lingering difficulty that Ryanair may have in adopting a medium-haul strategy is regulatory issues. Ryanair has been able to expand quickly within EU states because it faces few regulatory hurdles when opening a new route. But Ryanair encountered much greater hurdles when entering Morocco, where it took the airline six months of negotiations to reach an agreement with the Moroccan government. If Ryanair expands further into non-EU states, then it could delay the opening of new routes while terms are negotiated. That could enable competitors to wield their influence with foreign governments to deny Ryanair’s application, or to at least stall Ryanair’s arrival, enabling foreign carriers to adapt to changing passenger needs.

But if Ryanair chose not to operate long-haul flights, and instead focus on medium-haul flights, between 4 and 6 hours in length, the airline could operate them with its 737-800 aircraft. While longer flights deviates from Ryanair’s established business model to operate quick 1-3 hour flights, operating medium-haul flights could allow Ryanair to increase its aircraft utilization. This could be accomplished if Ryanair operates many of the flights as red-eyes, provided the airline leaves enough time in the schedule to make up for any delays or maintenance. This model opens up many opportunities for Ryanair to serve markets that badly need competition. Ryanair succeeded beautifully in Poland where the airline significantly lowed fares and expanded service to many smaller markets that

Sam Sellers provides analysis and commentary on the airline industry at his website, www.airlinebulletin.com, and is the author of Take Control of Booking a Cheap Airline Ticket, an ebook for travelers in the United States who are interested in purchasing cheap airline tickets.

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Air Scoop - April 2007

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DOWN TO EARTH The Great Carve-Up in the Nordic Sky Friday night, 2 March, Swedish mobile network operators were probably heavily loaded as Swedish low-cost carrier FlyMe was sending more than 2500 SMS to its passengers reporting of bankruptcy. The airline flights to three domestic and 15 international destinations were cancelled though the staff was not aware of it until the first checkin. As explained by the company’s board, FlyMe does not have enough money to continue operating flights. The whole question is about a considerable sum of money that was to be paid by the LCC to its bank. The airline’s partner bank, Handesbank, decided not to continue transactions as it had 60 MSEK on blocked accounts as insurance claims from passengers. In case FlyMe had demonstrated payments and closed all the right issues, the bank would have resumed operations. Unfortunately, at that moment FlyMe did not have enough means to pay off. Finn Thaulow said to Swedish Aftonbladet that the company lacked 33,7 mln SEK. Before the deadline set by Handesbank there were some hopes for certain investments but the company did not receive any. Though it was rather profitable it had experienced some economic difficulties for a long time. Its strategy was to expand as fast as possible. Obviously, those 11 new routes opened in a short period of time did not bring expected profit. That makes us to recall that sometimes less is more. The matter of FlyMe collapse is now handled by Rickard Ström, an attorney at Lindahl KB law firm, and is investigated by Swedish National Economic Crimes Bureau.

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This lack of money has been a hotly debated issue in Sweden. Some Swedish periodicals assumed other reasons for the unexpected economic failure than just red flights. In September 2005 Christen Ager-Hanssen, FlyMe financier and the owner of Cognition, bought out shares in the company from Iceland’s Fons and basically took over the carrier. He is known as a financial scam artist who has 60 mln SEK of tax liability. And he was that very person who did not comment on FlyMe bankruptcy. Interestingly, the airline who announced to replace FlyMe flights was Sterling, the one FlyMe wanted to buy once. Sterling promised to take care of passengers and to carry them free of charge within Sweden and at a cut rate of 200 SEK within other Europe. The airline did not charge those who just needed to travel back home. Obviously, rivals are not that sorry for the company as passengers are. Some of them have already expressed their happy feelings. As reported by Finnish Kauppalehti Online, Maunu von Lueders, FlyNordic CEO, hopes to benefit from FlyMe collapse and replace some of its flights. Apparently, Mr. von Lueders looks forward to Stockholm-Gothenburg route that was literally in FlyMe hands. He also expects improvement in the overall situation as the cutthroat competition in the region might get less tense after one of the major players left the field. Read our Exclusive Interview of Finn Thaulow, CEO of FlyMe, in Air Scoop March 2007.

EVENTS

Air Scoop is proud to be media partner this year again of the 2nd Air Transport Conference for CSEE. Following the success of our Inaugural event last year, this year we are continuing in dealing with the issues Air Transport is facing in this region. This is a unique opportunity to meet face-to-face with Key Players in this sector and discuss what additional strategies you can easily implement to empower your business development. http://www.transport.easteurolink.co.uk/air_Upcoming.html

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Air Scoop - April 2007

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BIRD’S EYE VIEW Air Travelers’ Habits Evolve Due to Climate Changes John Valentine, an environmental campaigner founded the site www.flightpledge.org.uk which invites travelers to take a pledge to stop flying altogether or restrict themselves to one long-haul or two short-haul flights a year. So far 1.240 people have given the undertaking, with nearly two-thirds (776) giving the «gold» pledge not to fly anywhere for a year. John Valentine said:”There is a need among people to be able to do something positive to cut their carbon emissions and reducing flying is the most obvious and significant way of doing it.” The popularity of this website combined with global environmental concerns has an impact on air travelers’ habits. A research for the aviation industry estimates that up to 3% of regular flyers in Britain have stopped boarding flights because of concerns about the environmental impact. A previous unpublicized a survey for the British Air Transport Association (BATA), found that a further 10% of flyers had decided to reduce their travelling by air because of climate change concerns, and 35% had changed their flying habits.

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Air Scoop - April 2007

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