Air Scoop December 2006

Highlights in this Issue

No Frills carriers: Revolution or Evolution? A Five Forces Analysis of the Central European Market World Travel Market Conference 2006 LCCs in Russia LCCs in Poland

The Low Cost Carriers Analysis Newsletter

EDITORIAL

L

ast May, Air Scoop made a special issue on Central and Eastern European LCC markets. These markets are more than ever under heavy competitive pressure (p. 13), especially since powerful “Islanders” decided to invade them (p. 14). Maciej Kwiatkowski, CEO of Centralwings, Polish LCC, has kindly answered to our questions about his company, his market and his competitors (p. 2). These C&E markets are also important as they are considered as a step towards far eastern areas, such as Russia (p. 11-12), for many European LCCs. Indeed, German LCCs prefers to attack these new markets with currently low LCC penetration rather than western European markets (p. 11). Russian airports are also aware of the opportunities and threats created by the development of low-cost carriers in these markets (p. 12). The use of SWOT Analysis or Michael Porter’s Five Forces framework (p. 6-7) applied to these markets is really relevant to understand factors of influence and to anticipate as best as possible future mutations. For instance, Ryanair is generally given top billing for generating non-ticket revenue from its passengers. But another star may steal a portion of the spotlight from Europe’s top low cost carrier (p. 5). A recent study from the Civil Aviation Authority (CAA) pointed out benefits of European LCCs, but also revealed that socio-economic profiles of air passengers have not changed (p. 4). The release of this study matched with the World Travel Market 2006 in London (p. 8). This was an opportunity to meet some delegates and speakers, like Vojin Vlahovic (Director of Montenegro National Tourism Organisation) and Niko Bulic (Director of Croatian National Tourist Board) and to know their points of view on Low-cost carriers in Europe (p. 9). This event was also a chance to discover smaller carriers, such as Fly Gibraltar (p. 10). As the year 2006 finishes, the whole Air Scoop Team wishes you a merry Christmas and a great new year 2007! We would like to thank all our readers who have made this first year of Air Scoop newsletter such a phenomenal success. See you in 2007 for more LCCs analysis, exclusive interviews of LCCs leaders, full LCCs events coverage, and many new projects yet to come.

Air Scoop - November 2006

p. 4 p. 6 p. 8 p. 11 p. 13

AIR SCOOP ANNOUNCEMENTS Air Blow - News In Brief Air France-KLM announced the launch of a new LCC. Based in Paris Orly Airport, it would be modeled on its subsidiary: transavia.com, and jointly owned by Air France (60%) and transavia.com (40%). The French-Dutch legacy carrier wants to benefit from the important leisure market with this medium-haul carrier with “southern” destinations (Morocco, Spain, Tunisia…). Ryanair announced a third base in Spain by the end of 2007. Ryanair has already two hubs in Spain in Girona and Madrid, and is still negotiating with five Spanish airports to decide where to settle its last base.

Air Scoop - In the Air Vueling: a base in Paris

Ryanair and UAV 737RS

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BIRD’S EYE VIEW Exclusive Interview of Maciej Kwiatkowski, (CEO of Centralwings) Could you please present Centralwings to our readers? What are your specificities compared to other European LCCs? What do you do better than your competitors? Centralwings has been operating flights into the UK since February 2005 and into Ireland since October 2005. We operate routes into London Gatwick from Warsaw and Krakow; Edinburgh from Warsaw, Gdansk and Katowice; Shannon from Warsaw; and Dublin from Wrocław, Gdansk and Katowice. We have carried over 1.9 million passengers since the beginning of our operations. Centralwings operates nine Boeing 737 400s and 300s. The fleet is serviced and maintained at a certified technical base of PLL LOT. We offer our passengers all kinds of services to make their travel easier, faster and more low cost. Centralwings gives wide variety of payment methods, by money transfer, cash or credit card. Our passengers are able to choose their seat at the check in and pay less for any excess luggage then in any other low cost airline. Children aged between 2-16 years old are eligible for a 20 per cent discount when traveling with Centralwings, and there is no charge for infants under 2-years old. Passengers needing to check in excess baggage can pre-book at a discounted rate via the Centralwings website. We also offer two options for travel insurance, group rates, special offers, car rentals, hotels and much more. Our Call Centre is available in five language versions and our Website – www.centralwings.com - is one of the three most popular websites in Poland with more than six million page views per month. We are the only Polish low cost airline operating from seven regional airports in Poland, carrying people to and from

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Maciej Kwiatkowski, CEO of Centralwings

many attractive destinations all over Europe. We know the market and we know it well. We want to be as attentive as possible to our passengers needs - offering good quality and best standards. Ryanair, easyJet and Wizz Air have announced the launch of new routes to Polish market. How do you plan to manage such competition in this market? What are your advantages on this market? In addition to the routes mentioned above, Centralwings has added 11 new routes to its schedule for winter 2006/7. Centralwings operates the largest number of the flights on the Polish market during this season. This includes 6 new flights to the UK and Ireland (from Warsaw to London Stansted, Gdansk to Shannon, Wroclaw to London Stansted and Cork, Krakow to Cork and Szczecin to Dublin). This winter we offer a total of 24 connections. We operate to the UK, Ireland, Italy, France (routes to Lille and Paris launched this winter) and other markets. We also offer charter flights and charter-mix products (in the winter season this year this will feature Grenoble - very popular with Polish skiers last year and a successfully performing route for Centralwings). During the summer seasons we also operate Mediterranean charters to holiday destinations in the Greek Islands and Sicily. These are extremely popular with Poles. At present we are a major charter operator within the Polish market, with a 33% share of the sector. We are able to combine ticket sales for tour operators with direct online sales through charter-mix. Currently the most important strategic markets for Centralwings are the UK and Ireland, due to the large

number of Polish nationals choosing to travel for business and occupational opportunities; for tourism; and to visit family and friends. We also provide visitors to Poland with access to some of the most beautiful and exciting destinations, such as Krakow, Wroclaw, and Gdansk. “Islanders” (Ryanair and easyJet) need to find new attractive destinations to maintain their growth; Therefore Central Europe represents an important market for these LCCs. Who are your most dangerous competitors: ‘Centralers’ (SkyEurope, Wizz Air, Estonian Airlines…) or ‘Islanders’: Now? In near future? Poland is the second fastest growing air travel market in the world after China. Central Europe is very competitive, with the presence of all the major European players. Even this year, there have been new entrants. Centralwings has just celebrated a second year of operations during which time it has become third largest player in the Polish LCC market and achieved a 17 per cent share of the market. Next year, we will build on this strong footing. Healthy competition is very good for passengers in terms of pricing and the wide variety of schedules and services available. We are able to offer attractive discounts and promotions to our customers, offering tickets sometimes for as little as 1 euro, pound or zloty.

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BIRD’S EYE VIEW 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 the European Low cost carriers? Fuel rising? Overcapacity? Evolution of airports? Regulation? As a Polish low cost airline operating from a large number of Polish regional airports, we see operational efficiency as paramount. Some airports struggle to keep pace with the growth of the market and the increased traffic, and monopolies exist between handling companies, fuel providers, agents and airports. Fuel prices and security at airports also have an impact on airlines, particularly the low cost sector, which operates with lower margins. The key for us is to ensure that we are able to react quickly to the slightest changes within the market – resigning routes that are not performing well enough and moving operations to more profitable locations, whilst retaining our standards of quality and service. Many LCCs look after extra-revenues to offset the low price of their tickets. What are the projects of Centralwings in terms of Extra-revenues? Extra revenues are very important for low cost airlines such as Centralwings. Ancillary profits derive from

the different kinds of activities that the airline undertakes. Our onboard sales are working well and continuing to develop. We offer a special menu during flights as well as duty free service available during flights outside the EU (charter flights). There is a special offer for children who fly with Centralwings - the Captain Bear menu. Toys and gadgets are available to keep youngsters amused during the flight. Passengers also have a unique opportunity to send a postcard from onboard the plane, with greeting courtesy of Centralwings. Advertisers from all over Europe can use our media products to raise their profile. Adverts can be placed on tip-up tables, seats, headrests and a range of other surfaces. During the first quarter of 2007, Centralwings will launch the first issue of its in-flight magazine. 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? Consolidation is a very probable scenario in the medium term for the LCC sector. This may mean that investors choose to collaborate with other investors to streamline their efforts and manage financial risk.

Are you worried about the shortage of pilots and crew hitting LCC market? There are concerns which all airlines will need to address, due to the dynamics of the growth in the LCC sector. As the market grows, more pilots are needed. Centralwings has a highly qualified group of pilots and is in a strong position to deal with this challenge. What are the options for Centralwings to transform its business model in order to make more costs savings? Since taking up my role as CEO in June, my goals have been to build the strategy for the airline and focus on cost efficiencies. Our primary aim is to reach profitability and also to be a low cost, and sustain our market position through dynamic growth. Early on, I identified short, medium and long term goals for Centralwings. One of the most important long-term goals is to find an alternative base as Warsaw does not currently meet our needs as a low cost airline. Medium term goals focused on cost savings in different areas of our activities and in some cases to renegotiate contracts. The first task was to review the performance of routes and make overall improvements to our flight network. We are aiming to reach profitability (break even point) in 2008.

UPS AND DOWNS Vueling: The Third European LCCs IPO of 2006 Vueling Airlines has received the approval of the stock market regulator CNMV for its forthcoming initial public offering. The Spanish LCC aims to collect around €100m in fresh equity to support its rapid expansion from current bases in Barcelona and Madrid. Some 42.62 per cent of the airline should be floated, and this could rise to 46.88 per cent. In its IPO prospectus, Vueling said it expects revenue in 2007 to nearly double to 427.2 mln from the 237.8 mln expected this year. Vueling is the third European airline to be floated this year following Air Berlin and Ireland’s Aer Lingus. Both of these carriers had difficulties with the launch of their IPO. What about Vueling?

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BIRD’S EYE VIEW ANALYST PORTHOLE No-frills carriers: Revolution or Evolution? The Civil Aviation Authority (CAA) has released a study entitled No-frills carriers: Revolution or Evolution? This study points out benefits of LCCs, but also reveals that socio-economic profiles of air passengers have not changed. Analysts of CAA agree that Ryanair, easyJet and other LCCs have revolutionized the European short-haul market. They had a deep impact on business travelers, especially on lower income business travelers. However, the study also adds that passengers taking LCCs have mostly the same profile than before. This point is interesting as it contradicts most of LCCs communication which insists on the fact that many of their passengers couldn’t afford airlines tickets before them. LCCs had two simultaneous effects: a push and a pull effect. The “push effect”: the coming of LCCs has increased routes and choices of destinations for passengers. The “pull effect”: some cities have experienced a decrease in long-term tourism demand because of the decrease in domestic demand as domestic tourists use LCCs to travel abroad. No-frills carriers: Revolution or Evolution? is available there: http://www.caa.co.uk/docs/33/CAP770.pdf

European LCCs Network in 2000

European LCCs Network in 2006

LCC EVENT

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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DOWN TO EARTH Allegiant Air Declares its Ancillary Revenue Manifesto Ryanair is generally given top billing for generating nonticket revenue from its passengers. But another star may steal a portion of the spotlight from Europe’s top low cost carrier. Allegiant Air generated ancillary revenues of €10.79 (US$13.58) per passenger during the first 6 months of 2006, which bests the €7.84 (US$9.87) posted by Ryanair for the same period. This activity translated into total ancillary revenues in excess of €10 million (US$12.6 million), which admittedly were dwarfed, by revenues of €147 million (US$185 million) reported by the far larger Ryanair for the same period. But Allegiant’s results are remarkable due to the competitive environment that exists in the U.S. air travel market. Las Vegas based Allegiant Air has strayed from the model currently favored in the United States which bundles amenities in the price of a ticket. Many US-based LCCs don’t charge extra for advance seat assignments, checked baggage, onboard beverages, video entertainment, and payments made by credit card. The phrase “ancillary revenue” has not yet captured widespread use. In contrast, Allegiant Air described its ancillary revenue manifesto in its recent common stock prospectus filed with the U.S. Securities and Exchange Commission (SEC): “We believe most leisure travelers are concerned primarily with purchasing air travel for the least expensive price and do not value many of the amenities provided by most other airlines for free. As such, we have created new sources of revenue by charging fees for services most U.S. airlines currently bundle in their product offering. We believe by offering a simple base product at an attractive low fare we can drive demand and generate incremental revenue as customers pay additional amounts for conveniences they value. We aim to continue to create new revenue sources by further unbundling our product.” While this strategy may be little used in the U.S. market, it’s difficult to argue with the success enjoyed by Allegiant Air. According to the same SEC filing, Allegiant Air achieved revenue growth of 46.6% for fiscal year 2005 over prior year results. Its cost structure may be the envy of the U.S. airline industry with an 18.3% advantage over the average costs of its LCC peers. Allegiant’s profitable record, emphasis on low costs, and drive for ancillary revenues places it closer to Ryanair and the European model of offering consumers low fares and an unbundled product.

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‘‘IDEAWORKS AISLE’’

by Jay Sorensen (President of IdeaWorks)

www.IdeaWorksCompany.com

In a manner similar to LCCs in Europe, Allegiant Air derives its ancillary revenues from a variety of sources: • Commissions and mark-up on vacation packages including hotels, rental cars, show tickets, night club packages and other attractions. • Fees charged for advance seat assignments. • Sales of beverages and snacks onboard its aircraft. • Onboard retail sales of items such as discount coupon books and destination souvenirs. • Fees charged for reservations made via the call center and online booking site (airport ticketing does not incur fees). • Charges for excess baggage (checked baggage does not incur fees). The largest percentage of ancillary revenue is generated by the sale of hotel rooms packaged with air travel. All of these distinctions make Allegiant Air a rare bird in American skies. Its record of consistent profits since 2003 suggest the airline has found an attractive niche with U.S. consumers. Allegiant’s ability to achieve continued growth and success may eventually force a redefinition of the model used by LCCs in the United States. As Southwest Airlines once influenced a revolution in Europe, Ryanair may return the favor by providing the model that is fueling success at Allegiant Air. Sources of Information used in this article: • Allegiant Travel Company SEC Form S-1, Preliminary Prospectus dated August 23, 2006. • Financial reports filed by Ryanair for quarters ended June 30, 2006 and March 31, 2006. • Exchange rate assumptions: 1US$ = €0.794 Euro, and 1€ = US$1.259 IdeaWorks cannot guarantee, and assumes no legal liability or responsibility for the accuracy, currency or completeness of the information.

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BIRD’S EYE VIEW A Five Forces Analysis of the Central European LCC Market

the market demand lags behind the capacity increase of the carriers, internal rivalry is likely to reach a high level, resulting in diminishing profit margins.

Michael Porter’s five forces framework is a simple model which helps identifying the strength of those market factors that affect the profitability of an industry. When applied to a well-defined market, the following factors have to be assessed: internal rivalry, entry/exit barriers, substitutes and complements, supplier power and buyer power. The regulatory effects are not included as the framework is concerned only with forces arising from market competition. The Central European (CE) geographical market is conceptualized here as including the territory of the eight new EU member states plus Croatia, Bulgaria and Romania. In the airline industry, each route represents a distinct product; this definition of the market includes all international routes (products) that touch at least one destination within the territory of these countries. For instance, both the London-Warsaw and Warsaw-Budapest routes are part of the market, if served by a low-cost carrier. Internal rivalry Market share can be gained either by opening up a non served route or entering into one which is already served by another carrier. Direct competition therefore occurs if at least two airlines serve the same route and in this respect an entrant can cause the exit of the incumbent player. So far, the Central European carriers have been able to expand relatively freely without facing major threats from other players. However, as the ‘Islanders’ started their expansion to the CE market, intense rivalry arose exactly on those routes which represent the biggest passenger flows: destination pairs from CE capitals to Western and Southern European metropolises (especially London, Paris, Rome and Barcelona) are affected the most, although the high and relatively less volatile market demand on these routes lowers the intensity of rivalry. This is one reason why local carriers keep opening up non served routes and why some exits from certain routes have already taken place (for example SkyEurope withdrew from Budapest-London and Warsaw-London, WizzAir from Budapest-Milan and Budapest-Amsterdam, serving instead Budapest-Eindhoven). On the one hand, the total number of those routes, where competition is stiff, is still not significant enough compared to the overall size and number of routes served in the CE market. On the other hand, the limitations to product diversification (price is the most decisive element of competition) together with the high price transparency that makes switching from one carrier to another rather easy for a customer, internal rivalry tends to range from low to medium levels. In the long run, if the growth of

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Entry barriers The capital intensity of the industry and the limited possibilities of alternative use of the equipments mean that sunk costs are generally high constituting a high entry/ exit barrier to players. However, the new, flexible forms of financing and the tendency to lease aircrafts have significantly lowered those barriers. Furthermore, due to liberalisation, administrative obstacles have been eliminated to a large extent, thus entry to the market became much easier. Expectations about post entry competition, however, play a substantial role, especially because the Western market is about to reach saturation point and expansion is primarily taking place in Central Europe. As the number of non served routes decreases, entry will be possible only into routes where at least one low-cost player is there already. Consequently, even if entry/exit barriers currently are relatively low in Central Europe, they are expected to rise to a medium level in the future. Substitutes and complements Traditional air carriers, charter airlines and other means of transport may appear as substitutes to low-cost flights. Even though the fares of traditional air carriers have fallen on routes where they face competition from LCCs, in general, their service still cannot be considered competitive if price is taken as the defining element of consumer choice. While low-cost carriers mostly target new demand, at the same time price sensitive passengers tend to switch from traditional carriers to LCCs. In the CE market the Euro-

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BIRD’S EYE VIEW pean flights of LOT, Czech Airlines, Malév and Tarom are the most exposed to competition posed by LCCs. In this respect, traditional airlines do not appear as potential substitutes to LCCs, it is rather true the other way around: LCCs compete traditionals’ passengers away. The main substitute of low-cost carriers thus is rail, bus or car travel but compared to these vehicles, air transport is the fastest and most time-efficient of all within distances that LCCs fly. Transport on the ground in Central Europe is much more time consuming than in Western Europe because of the lack of proper infrastructure, thus it is viable for LCCs to strengthen their position in this market by opening up more intra-CE routes. Consequently, although price elasticity within a specific route is high because customers are by definition very price sensitive and can easily switch from one low-cost provider to another, price elasticity at the industry level is inelastic which shows that the power of substitutes is low in Central Europe. Supplier power Supplier power consists of airports on the one hand and jet fuel suppliers on the other. Generally, the bigger the LCC is, the more bargaining power it can exercise over suppliers and the more able it is to beat down airport prices and squeeze profits away from them. In the CE market there is not an LCC yet with such a high bargaining power like Ryanair and easyJet have, but if we take into account that secondary airports tend to establish themselves as low-cost airports, these efforts can be considered as relationship-specific investments which manifest a strong commitment to the low-cost sector. These airports therefore will offer very competitive prices to LCCs in order to attract them.

a competitive advantage over small ones but this can be balanced to a certain extent if young and more fuel-efficient fleet is used. All in all, supplier power seems to range from low to medium level in Central Europe. Buyer power This is one of the most significant forces that can squeeze away profits from the low-cost carriers. Differentiation between customers is very limited: they are price sensitive and prices are, to a large extent, transparent. Furthermore, LCCs products have very few features that can differentiate it from others. Moreover, switching costs of customers are low. Where a carrier does not face competition, it may ask for a higher price but only within certain limits. Where LCCs directly compete, buyer power tends to be high. This is partly the reason why LCCs are eager to extend their revenue base and rely more on ancillary revenues. Based on the analysis of the Central European market, it can be concluded that the low-cost carrier business is rather unattractive because of the relatively strong presence of forces that squeeze profits away. Only those players can have bright prospects in the long run that achieve the lowest cost base and critical size in order to have bargaining power over suppliers and take advantage of economies of scale. However, being a first-mover seems to be important – if a carrier is the first to serve certain routes, it is likely that it can capture the whole of the market demand and if it manages to keep fares low, even a small player can thrive in the market.

Concerning airports, the real bottleneck is the availability of slots – if an airport is about to reach saturation, the bid for the empty slots becomes more and more intensive which decreases the margins of the bidders. In the CE market even the major airports are not as contested as in Western Europe, thus bidding is not likely to become heated. The exceptions are those “hub” airports for certain low-cost carriers (Budapest, Bratislava, Warsaw, Katowice and Prague). In these cases, those players will find it more difficult to obtain slots that have their hubs elsewhere, thus “outsiders” will be in a disadvantageous position. In case of fuel, the larger the purchasing volume is, the bigger the probability that a lower price per barrel will be bargained. However, fuel suppliers cannot reduce prices infinitely and if fuel expenses of LCCs rise, sooner or later it will impact on ticket prices. This primarily affects small players in the CE market as their product portfolio and revenue base is limited. In this respect, the big LCCs have

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Michael Porter’s Five Forces Framework

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DOWN TO EARTH World Travel Market Conference 2006 For the 27th time, the World Travel Market in London has provided for the whole global travel and tourism industry the opportunity to meet, negotiate, network and conduct their business in one of the best growing sector. Conferences, seminars, debates and presentations took places on the latest industry trends and developments. Many areas of the exciting sector like airlines, hotels, and health and wellness were focused on the event. More than 5.500 companies from more than 200 countries exhibited on this event on 41,500 square metres. Government Ministers, Ambassadors and High Commissioners participate in the WTM programme. “It is very important that the industry remains a major contributor to today’s global economy. If you continue to make life difficult for us then you must reap the whirlwind. That will happen, if we cannot manage the job as people like us to do“, said Tim Clark, President of Emirates Airlines at the World Stage in his interview by John Strickland, airline analyst. “Airlines should stop meekly surrendering and accepting their image as the world’s environmental “whipping boys” it was his message. “Airlines are responsible for 2 or 3 % global emissions. That compares with 75 % from automotives and I know the UK has some interesting proposals about that sector”. Dr. Martin Cetron, the world´s leading futurist said: “Airport check-in queues could soon be a thing of the past for travelers because of radio-frequency identification… airport misery for millions of holidaymakers is set to end by 2010“. Recent developments of the new low cost airport at Comiso by the Province of Racusa in Sicily in Italy were presented at the Italian Press Conference. A new airport that is still waiting for some final decision is open to welcome any European LCCs on its 2,500 meters runway soon. South part of Italy will offer to their new tourists a beautiful area and atmosphere to enjoy their holiday or even facilitate the purchase of a second home. In the panel “Does size matter”, Noel Josephides, Managing Director of Sunvil Holidays believes that there is no doubt that liberalization and growth of the market are excellent for consumers. Air travel is very cheap, however he is worried about the fact, that Brits are colonizing Europe by buying properties. This can have negative impacts

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on destinations on a long term scale. The properties are left empty, local people cannot afford the increasing prices. He also declared to be worried about environmental impact on middle and long term. The low-cost airlines moved now in the same way to Morocco, they receive enormous help from the local government. He believes that we all have benefited from what LCCs have initially done, but warns not to be blind to LCCs impact in middle and long term. On the Tourism Business Frontiers Forum: Looking into the Future of Tourism leading academic and professionals tourism experts agreed on the statement that the LCCs have revolutionized the European travel market and gave a new opportunity to people that had not flight before (Read CAA Study in this issue). One of the panelist said that passengers probably do not care about the food on the plane, do not care about seats allocation and some other frills because they get what they pay for, and they are happy with it. But on the other hand, what he does believe is, that consumers will start to care in the future about the attention service and any help or support in case of any inconvenience at the airport. WTM Forecast Forum presented Global Trends Report in partnership with EuroMonitor International. Growth and impact of LCCs in Europe have been pointed out many times. Mr. Clement Wong spoke about the first long-haul low-cost connection between Hong Kong and London in Europe. According to him, it will be now a new trend in the travel industry. The rise number of tourists traveling from Asia, particularly from China and India, to Europe will be an issue that will drive this sector over the next five years.

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DOWN TO EARTH Exclusive Interview with Mr. Vojin Vlahovic

Director of Montenegro National Tourism Organisation Mr. Vlahovic, this is the first year at the WTM as an independent nation for Montenegro. What do you believe will be the development of Low-Cost Airlines in your country? We already have some conversations with two low cost airlines, Ryanair and easyJet. However, Ryanair did show higher interest than easyJet. Ryanair spoke to our Minister of Tourism about their launch, which is supposed to be any time during the year 2007. These are the only talks with LCCs till now. Ryanair will probably fly to our two airports, one in the capital Podgorica and other in Tivat. Both airports are completely reconstructed and renovated. We did invest more than 20 million Euros improving the infrastructure to attract investors. The funds came as a loan from the European Bank of Reconstruction and Development. Will be given any incentives for Ryanair for operating these two airports? It is too early to speak about incentives given to Ryanair. Some negotiations are not finished yet, and we are waiting for the final decision in this issue. Are you open for negotiations with other LCCs? We are open to welcome any Low-Cost Carrier on our airports after joining the Open Sky Agreement. There are already some proposals and negotiations between the National Montenegro Carrier, Ministry of Transportation and the Ministry of Tourism regarding the development of LCCs in our country.

Vojin Vlahovic

Some new members of Open Sky Agreement after joining the European Union are afraid of negative consequences in their countries because of the influence of LCCs, I am speaking for example about the “cheap tourism effect”. Are you not afraid of it? We are not afraid of Low-Cost cheap tourism. We are very committed to high quality of Montenegro tourism. We know our capacity and we look for sustainable economic, ecological and social development. And the LCCs are very well informed about our wishes and plans. We do not want to exaggerate and receive massive of people, and we will be very careful in this issue

Questions to Mr. Niko Bulic

Director of Croatian National Tourist Board You did speak about LCCs connections and routes in your country, growing numbers of independent travelers and subsidies programs in the tourism sector. What do you believe will be the further development of LCCs in your country and the consolidation in that sector? Are there any figures related to the investment in your airports, any subsidies for this sector? At last but not least, what about the “Cheap Tourism Effect” in Croatia, are you not worried about it? Sky operations and rules are completely opened in Croatia, so it is now to the commercial and risk estimation of the Low-Cost Carriers to entry to Croatia. The only problem that we see for ourselves comes from the structure of the accommodating units. There are two things we should be going for all together by using already our

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Niko Bulic units sides, turning some premises that we are not in tourism active like further arms areas into tourism. Croatia needs additional 50.000 hotel rooms for 3 class and 4 and 5 stars. And then it will be for anyone who wants to feature Croatia to see how to better connect Croatia with the rest of Europe. You do not have to be now a British Tour Operator or British Air Carrier to fly from Britain to Croatia. You can do it with British, Irish or other Carrier from Britain from Spain, France or other parts of Europe and fly to Croatia. We do not see any obstruction. It is not threatening our National Carrier Croatia Airline but competition adds to the market excitement.

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DOWN TO EARTH AIRWAY MARKERS

Exclusive Interview with Mr. Joe Gomez Commercial Manager of Fly Gibraltar

Could you please present Fly Gibraltar to our readers? What are your specificities compared to other European LCCs? Fly Gibraltar is totally private and independent airline. The funding comes from a Property Development Company, the owner is Mr. Robert Noonen from Ireland. Fly Gibraltar is based on LCC model but we start to introduce some differences, an extensive selection of services, a choice of hot meals, light snacks, newspapers, magazines and seat allocation. We do not want to compromise us just to the LCC No Frills model. Fly Gibraltar will connect Gibraltar with London Stansted, Birmingham, Bristol, Manchester and Dublin from April 2007. We will start to operate with 2 aircrafts, then we intent to increase one aircraft and the fourth in the third year. What about your routes strategy for the future? We plan to expand our routes to Russia and Spain, with direct flights to Barcelona and Galicia. The connection to Galicia is for example at the moment quite complicated; indeed for passengers that fly to Málaga, they have to change the plane in Madrid to finally arrive in Galicia. What kind of passenger are you looking for and which area are you focused on? Our passengers will be 50% holiday makers and 50% business travelers and British expatriates. Our area of operation is focused in Gibraltar as a destination. But we are also focused on Andalusia (south part of Spain) as a catchments area. We are promoting both areas and making Marketing Mix for those two regions.

http://www.flygib.com

We should see shortly the first low-cost long-haul flight to Europe. Do you think it can be the new trend in the Low Cost Carrier Industry? Do you believe that consolidation of the market will lead just to very small number of LCCs in Europe. The future of LCC is on short-haul flights. The traditional airlines will operate long-haul flights and will have fewer opportunities on short-haul. People want to travel as cheap as possible. There is no danger; there is enough space for all of them. And the final decision about the future of LCC will make the passengers. What is your opinion on Low-Cost Carriers quality? Do you believe passengers will see any changes in the future? Low Cost Model means flexibility in Cost Management, but meanwhile a certain minimum level of service must be maintained. Flying is a commodity and passengers want to travel comfortable, but above all cheap. Many people are flying now because it is cheap, many of them could not have afforded it in the past. Obviously you cannot expect a special service quality flying for 20 Euros. If we start to offer more than the minimum level of service, it would not be a low cost model any more.

How do you analyze the competition with other LCCs? Are you not afraid about it? We are not afraid of competition, competition is good for us. We are also not worried about the increase of capacities at the airport in Málaga. Our Gibraltar Airport is smaller than the Málaga Airport. The passenger can be within 20 minutes outside of our airport.

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Air Scoop - November 2006

Joe Gomez, Commercial Manager of Fly Gibraltar

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BIRD’S EYE VIEW LCCS AND RUSSIA German LCCs Going (Far) East By buying his challenger DBA in August 2006, Air Berlin has not only reinforced its national network and its number of business customers, the leading German LCC also won new international routes. Indeed, since 2005, DBA was flying from Munich, Berlin and Düsseldorf to Moscow, and since June 2006, it was also connecting Stuttgart to the capital of Russia. In addition, on December 21st, Air Berlin will open for the first time its own route to Russia (Nurnberg-Moscow), three times a week, with connections to several national and international Air Berlin destinations, such as Milan, Paris, Rome... The airline will also inaugurate on December 18th a route between Berlin-Tegel and Saint Petersburg, on Mondays and Fridays. Now the battle for Russia really begins in the German sky. Germanwings, Air Berlin’s challenger, opened its first routes to Russia, Köln-Moscow and Berlin-Moscow, during the 2005 summer season. Since summer 2006, it operates flights from Köln/Bonn to Saint Petersburg. And since the end of October 2006, Germanwings also connects Hamburg to Moscow and Berlin to Saint Petersburg. The expansion to East is not over: next year, Germanwings will operate one flight per day from Köln/Bonn to Moscow. In

the Russian capital city, Air Berlin/DBA is landing at Domodedovo airport (South of the city), and Germanwings at Vnukovo (West). Eastern Europe is still one big battlefield for European LCCs. Poland and Hungary represent already quite busy markets, and in Romania and Bulgaria, new routes open every season. SkyEurope even called its global development strategy « Go East ». But until now, neither the two big « Islanders » (Ryanair and easyJet), nor the « Centralers » (SkyEurope, Wizz Air, Centralwings...) operate flights to Russia. Apart from German ones, only WindJet, Air Baltic or eVolaVia are landing in Moscow. By opening its Nurnberg-Moscow route, Air Berlin becomes the first huge LCC connecting Western Europe to the Russian city. For the German carrier, it may be an important competitive advantage for the future, as the edges of Europe - Russia, Scandinavia, Northern Africa... - are becoming new stakes of the competition on the low-cost market. Russia may also soon have its own low-cost company as the first Russian budget airline is expected to be put in service at the beginning of 2007. SkyExpress, a common investment of the Russian airline KrasAir and the EBRD (European bank for reconstruction and development), may serve 20 destinations in the western part of the country.

LCCs’ Subsistence in Russia December 2006 has been preliminarily declared to be the birth month of the first Russian low-cost carrier ever, Sky Express. The project is being co-ordinated by the AirUnion alliance that consists of such carriers as KrasAir, «Domodedovskie Airlines», «Omskavia», «Samara» and «Sibaviatrans». According to the business plan presented by parties concerned, Sky Express will operate flights from Moscow “Vnukovo” Airport to more than 20 destinations within Russia. However it is plausible to assume that Sky Express being AirUnion’s youngest and promising daughter can later on operate flights to such ever trendy destinations as Turkey and Greece. As previous experience of working with foreign low-cost airlines has shown, the perspectives of Sky Express are not something predetermined. On the one hand, such a budget transportation is a real steal for those who have to deny themselves travelling through vast territories of Russia and go for example to Baikal Lake that is basically cut off from the European part of the country because of

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the high cost of tickets. On the other hand, railway is still a competitive and is seen more preferable and secure for a certain segment of tourists. Apparently some destinations will be in greater demand than others, with Southern destinations being the most popular. Undoubtedly, it is still foreign discount airlines which run the show in Russia. Most of them are successful though there are several exceptions. In 2005, German Aero Flight and Air Arabia based in the United Arab Emirates had to leave the Russian market because of unprofitability. Norwegian Air Shuttle and WindJet were the last carriers to enter the market. Overall there are 7 LCCs operating flights from Moscow and Saint Petersburg. Meanwhile the really interesting aspect of LCCs’ being in Russia is their atypical “behaviour.” In the first place, prices are not the same than those implemented in Europe. In general, they are lower than those of non-low cost carriers but this difference is not significant. In some cases tariffs offered by national airlines, particularly Aeroflot and Russia (former Pulkovo), are more economical than

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BIRD’S EYE VIEW LCCS AND RUSSIA those offered by low-cost carriers. Several reasons can be named that provoke the current situation. Firstly, there is a lack of “cheap” airports in Russia. Operating flights from Moscow and Saint Petersburg, LCCs have to sign the same kind of agreement that other airlines do. That simply means they get ground handling and maintenance for normal prices that are high for them. Furthermore, these Russian airports still don’t have all necessary equipments and trained personnel for dealing with LCCs. Especially when it comes to e-ticketing both checkin agents and passengers got lost. Indeed, there are far less people with internet access in Russia than in Europe, thus not everybody can purchase a ticket. Thirdly, LCCs cannot simply afford budget prices since it is not profitable taking into consideration low flow of passengers which can be explained by rather slack advertising policy.

Fourthly, distance does matter. No doubt that it takes longer to get from Moscow to Berlin that from any German city which is why a flight operating from Moscow is less apt to pay off. And at last, aviation authorities in Russia in many cases do not simply allow LCCs to have low prices. For instance, Germanwings could only start operating flights from Russia providing that an average price would not be less than $100. It is clear that LCCs play now a very considerable role in air transportation and it is also clear that Russia needs to take its place in the market. In case Russia does not enter into it, Russian airlines may soon become non competitive, especially on international flight routes.

Exclusive Interview with Sergey A. Ryzhov Deputy Sales Director Vnukovo International Airport in Moscow

Could you please present the Vnukovo Airport to our readers. What are your goals for the future related to the LCCs development? Vnukovo Airport is the oldest airport in Moscow; we celebrated the 65th anniversary this summer. The Vnukovo airport is the closest to the Moscow City, only 11 kilometers to the Moscow Ring Road. Now we are on a big development program, we are constructing a new terminal for international and domestic flights. The new international terminal B is already constructed and was put into operation two years ago. Our main shareholder the Moscow City Government plans this development till 2015, so there is so much to do. Which LCCs are you going to welcome on your airport? Now we have two terminals, one for domestic flights and one for international flights, the third is under construction now. When the new terminal will be launched, Terminal A, in this Terminal we will serve only regular flights, scheduled flights international and domestic. Other parts, now existing parts of our terminal complex, will be used for charter flights and low-cost carriers. So any types of LCCs are welcome in our airport.

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Are you giving any incentives for operating your airport? And how high are the fees? We give to our partners Air Carriers marketing support, especially as advertising programs, because we want to develop our airport as fast as possible. Unfortunately main fees, in Russia and especially in Moscow, are under Government regulation, so these three airports should have the same rates. Do you see any difficulties for European LCCs to join the Russian Market? We have some legal and technical problems. For instance, not so many people in Russia use internet payments and credits cards, this is the first problem. Then, we are still waiting for a new Tax Law that would permit using of electronic tickets, the newest tickets technology. Currently, the sale of any type of tickets, except paper tickets, is simply illegal. However, I think that these problems about this law should be solved in beginning of coming year. Many airlines are looking to increase their frequencies to Moscow. For example, SkyEurope is looking to connect Bratislava with Moscow, therefore the Slovakian President is now negotiating with Russia about the route. Many bilateral agreements between Russia and European Union should be solved, but we do not know when.

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BIRD’S EYE VIEW Future prospects for LCCs on the Polish market Because of its projected growth and its 40 million inhabitants, the Polish market has become a main target for European LCCs. Many Polish workers travel in order to get new incomes abroad in Germany, England, Ireland and other Scandinavian countries. And on the other hand, more foreign tourists come each year to visit new Eastern countries of European Union. According to IATA , the Polish aviation market is supposed to grow 11.2% yearly till 2009.

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The sappers on the Polish low-cost carriers market WizzAir and SkyEurope become each new day financially stronger and hard competitors, but many other carriers are already on this market: Air Polonia, Centralwings (a baby of LOT), Germanwings a subsidiary of Lufthansa, and also Sterling which started to connect Krakow with Copenhagen, Jet 2 with Newcastle and Leed Bradford. Norwegian is the “connections leader” of this year on the Polish market. Last year it started with two flights from Krakow and Warsaw, where this spring opened its first base outside of Norway. Now, Norwegian connects Warsaw with Alicante, Malaga, Stockholm, Oslo, Rom, Dublin, Athens and fly from Krakow to Stockholm and Oslo. Blue 1 connects Warsaw, Lodz, Wroclaw and Krakow with Helsinki. easyJet supports Polish laborers with its publicity campaign, offers special programs and collaborates with recruiting agencies. Many others new comers will join in a short and medium term the Polish market. Finally, Ryanair joined the Polish market two years ago. Its local growth and future plans to capture the whole Polish market worries its rivals. Ryanair has a very important advantage with its financial situation which goes pretty well compared to some of its competitors. With its well-known aggressive marketing campaign, “Centralers” (local LCCs) definitely need to adjust their development strategy. However,

Air Scoop - November 2006

“Centralers” still have some assets. For instance, Centralwings benefits from its origin as a Polish carrier: the airline speaks the same language than passengers; it is well informed from the local government, it has good relationship with its own cities and citizens, it knows local rules… Ryanair transported 30 million passengers in 2005 with 2.700 employees and should transport 42 million passengers this year. To compare with “Centralers”, Centralwings transported 1.8 million with 335 employees since its launch in February 2005. Even though these low-cost airlines compete on the same market, they pay different salaries. Maciej Kwiatkowski recently declared that the lack of good staff is partly caused and created by emigration of Polish employees to England and Ireland. What a paradox! Indeed, passengers flying with Ryanair will find many Polish employees working for them as the carrier recruits some of its crew in Poland. The CEO of Centralwings has realized this weakness and has undertaken some measures. In fact, a scenario with four options as a future strategy for Centralwings has been recently presented to LOT: 1. Further development of Centralwings within LOT (offering a share to a new investors) 2. Merger with another European LCC 3. Integration of Centralwings into LOT 4. The sale of the two years old Polish LCC. The last option is preferred by some experts on the aviation market because Centralwings plans to start its benefits by the year 2008. Focus on Carriers The Polish national airline LOT still has the highest market share, but it has decreased from 47% last year to 33% this year. The biggest challengers on the market are the low cost car-

LCCS AND POLAND riers. LOT realized it and wants to adapt itself to a new proactive position. The carrier decided to readjust its price offers to the new market conditions and to operate more flights from the regional Polish airports, which are incredibly booming. The leader, between these Polish “low-cost airports”, is Krakow (1.75 million passengers), Katowice (1.1 million) and Gdansk (930.000). SkyEurope has transported 780.000 passengers from the Krakow airport during the last two years; it is approx. 20% of the total airport traffic. SkyEurope has based there three aircrafts and employs 100 peoples. In the next summer, the Slovakian LCC wants to open six new connections from Krakow airport. New destinations in Russia and Ukraine (first attempts in the past did fail because of some legislation problems) come back into consideration. New European Union countries, such as Bulgaria and Romania, would be very welcomed on the SkyEurope schedule too. SkyEurope tries to connect destinations where other LCCs, and especially Ryanair, are not flying. SkyEurope realized the low penetration of Internet and Credit Card payment in these countries, and looked after solutions to it in sales through Global Reservation Systems. A new agreement with Hahn Air will reduce the transaction costs. The loss of SkyEurope has risen from 28.6 million last year to 57.3 million this year. The new investor, York Global Finance II, is still supporting the Central European LCC. WizzAir, the LCC leader on the Polish market, announced it will open in May 2007 daily connections from Katowice and Warsaw to Belfast - another job location for Polish citizens. WizzAir´s shareholder is Indigo, an American company from the aviation sector.

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BIRD’S EYE VIEW LCCS AND POLAND Ryanair: Polish Market Ogre! The Polish aviation market has the highest growth since joining the Open Sky Agreement and is predicted to have the highest potential increase in a near future, according to IATA projections. By the end of this year IATA expects 14.4 million passengers (25% more than last year), and in the first half of the year, the overall increase was even 33%, expressed in number of passengers (a total of 6.7 million). An important influence on that result has been the low cost carriers, whose participation share is higher than 44%, significantly above the European average (according to the Mercer Consulting, this average is around 20% and expected 33% for the year 2010). But from airports’ point of view, the aviation industry offers a less spectacular picture. There are 49 international airlines flying within Poland, and they mainly operate out of only 12 airports. The Warsaw airports market share on the whole number of passengers is approximately 54% for first six months this year, decreasing from 61% in the whole year 2005, 68% for 2004 and 72% in 2003. A second terminal was supposed to be delivered by the end of 2005, but after negotiations and obviously some difficulties, the new deadline for the Arrival Terminal should finally be the 30th of November 2006, and for the Departure Terminal the 30th April 2007. The whole investment should be finalized by the 30th of November, and the airport capacity will be then of 12.5 million passengers. This is an excellent solution for legacy airlines which will operate out of the extended airport Okecie. But what about the low cost carriers which are still on the other side of

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Etiuda (Warsaw airport, former national airport)? Is there any solution in sight? Building a new airport in Warsaw may be too long and too expensive. The low cost airlines need urgently a secondary airport near Warsaw. Three military airports within a short distance from Warsaw have been competing to be converted into civil airports: Minsk Mazowiecki, Sochaczew and Modlin. For the last two years no agreement has been reached yet between executives, but taking in consideration the pressure of LCCs lobbies this problem should be solved any time soon. Ryanair which is currently operating out of 8 Polish airports did start recently its first connection from Warsaw to Dublin. Ryanair’s long term strategy is to reach 10 million passengers in the Polish market. The Irish carrier is desperately looking to start the operation to any of the three airports within a short time. According to competitions rules, higher number of airports would produce lower airports fees, and this would consequently mean lower ticket prices. On the 26th of October, the Civil Aviation Office did promise to convert the military airport of Modlin into a civil airport, if all conditions were complied. A new agreement is hoped between three estate shareholders: Military Property Agency (Owner of 99% of the plot), Polish Airports State Enterprise (Management expert owning 1% of the plot) and voivodship administration (with access to the EU subsidiaries). Because of the impressive growth in the Polish aviation sector, development of a new airport in Modlin would find many supporters. The region would get new investors, many new companies, hotels and other services would be established in that area. A new base for Ryanair and other LCCs would support the area even more.

Many Polish airports are offering their services for the future Ryanair base while waiting for its final decision, and the owner of Jasionka´s airport, Polish Airports State Enterprise, also owner of Warsaw airport, will definitely influence future Modlin airport. A new airport in Modlin (or near area), used as a base for Ryanair would probably open more access doors to future “new” East European countries, that have huge expansion potential not yet exploited. Negotiations are also in progress for Ryanair’s technical base. Riga (capital of Latvia) and Jasionka (near Rzeszow in Poland) are two potential candidates. The European Union will support 8 Polish airports (Gdansk, Warsaw, Poznan, Rzeszow, Wroclaw, Katowice, Szczecin, Krakow) with approximately 350 million Euros within the next six years. The airports will belong to the European Union Airport Network which will maintain a high dynamic of development and meet the conditions of Schengen agreement. The area of voivodship podkarpackie with its airport Jasionka (Rzeszow) that can be operated by all types of aircrafts has a long history of development of the aviation industry from the 1930´s. This region delivers 75% of the total domestic production of the aviation sector. The labor cost is 11% lower than the country´s average and is highly qualified. Some special economic zones that offer exemptions in income tax are present in the voivodship. Furthermore, in April 2003, Aviation Valley Association (a group of aviation industry businessmen) has been established with the majority of members located in the area podkarpacie. The goal of this association is to transform south-east Poland into one of Europe´s leading

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BIRD’S EYE VIEW LCCS AND POLAND aerospace regions, which would be able to provide a diverse cross section of products and services for the most demanding clients. Favorably located, this region opens the doors of Eastern markets and looks forward to develop further great opportunities. Ryanair, which is already the third airline after LOT and WizzAir, is ready to invest in its new technical base in Rzeszow, but would also need one

or more operational bases to connect this fast growing Polish market, especially focused on the high demanding area for air travel near Warsaw. With its expansions strategy, Ryanair plans to achieve a better result than its competitor WizzAir. Ryanair would like to aim 10 million passengers, but without a second airport near Warsaw, this goal would be difficult to reach. Despite a great growth, Central

European market is still smaller than West European market, and routes are longer and therefore less rentable. This means that the LCCs market still needs further investments to obtain result and start to operate with profit on Central East European routes. Some LCCs which concentrate their business on the CE Europe (WizzAir, SkyEurope and CentralWings) may soon encounter problems without any strong capital support.

UPS AND DOWNS Aer Lingus: A Cold Shower for Ryanair… The Aer Lingus Employee Share Ownership Trust’s decision to reject the offer ended Ryanair’s takeover bid. Some 97 per cent of ESOT which owns 12.6% of the company voted against the bid. An Impact statement was headlined: «Staff don’t want Michael O’Leary as boss at any price.» The Irish government which has a 28% stake in Aer Lingus also refused to sell it. However, Ryanair (19.2% of the airline) declared its intention to remain a long-term shareholder in Aer Lingus. It is prevented from bidding for its rival for 12 months. But Ryanair recently brought its total stake to more than 26% in Aer Lingus when buying €88m worth of shares.

BLOGS TREND Blogospehere: A Close Buzz Coverage Ryanair is the European LCCs leader in real life, but also in virtual. Ryanair experienced a high peak at the beginning of the month as the hostile takeover bid for Aer Lingus was still ongoing. However, closest competitor, easyJet, has been well covered by blogs media, especially because of the positions taken against environmental taxes over LCCs. Both Islanders are getting closer in terms of weblog and buzz coverage.

Air Scoop is a Registered Trademark of Global Wings Publications. Subscription to Air Scoop: 290 euros for 1 year (10 issues) Copyright 2006 - Unauthorized distribution or reproduction is forbidden. http://www.air-scoop.com ; http://airscoop.blogspot.com (free portal news)

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