Air Scoop December 2007

Battle for Subsidies: LCCs in the Storm Analysis of the Bulgarian LLCC Market SWOT of Germanwings Which Perspectives for Air Berlin? LCC Websites Under Investigation

Highlights in this Issue p. 2 p. 3 p. 5 p. 14 p. 17

The Low Cost Carriers Analysis Newsletter

EDITORIAL

AIR SCOOP ANNOUNCEMENTS

Subsidies, Investigation and Consolidation!

Air Scoop, 2 Years Already!

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n their Business Model, Low-Cost Carriers need to get the lowest cost at “all cost”. We know well ancillary revenues and hidden fares increases (Air Scoop October 2007), but we are less aware of subsidies received by LCCs. In our last issue, we analyzed the relationship between carriers and French airports, uncomfortable with these subsidies (Air Scoop November 2007). Subsidies from airports or local authorities are in the center of LCCs’ business, especially Ryanair. The Irish carrier usually won’t pay more than 5 Euros, up to 10 Euros some times, to land in an airport; therefore it has set up a system to get some money back without being caught by local or European competitive authorities. The whole system is unstable as currently under investigation of the European Commission. Conclusions of these investigations could have a direct impact on LCCs’ activities and financial results (p. 2). From one investigation to another, carriers’ websites are also under the spotlights as they are accused of misleading customers. Airlines have to change the way prices, as well as terms and conditions, are displayed on their websites. Even if the risk is very low, if airlines fail to comply with the EU directive, they could face fines or the closure of their sites. As websites are now the primary way passengers in Europe book tickets, such a closure would affect carriers dramatically (p. 17). Germany has known an unprecedented consolidation of his airline market. Air Berlin, the third European LCC, has absorbed its competitors DBA, LTU and Condor to become a strong challenger for Lufthansa. However, some experts expressed skepticism about this new acquisition, pointing out the fact that integrating these three companies in a few years is a tough operation. The stock market reacted cautiously to the announcement of the deal: the Air Berlin share lost 5% the following day, and remains quite low since then. In November, the share was weaker than its 12 Euros issuing price in 2006 (p. 14). To face Air Berlin, Germanwings stands alongside with Lufthansa, its legacy “mother”. What are the strengths and weakness of the carrier? What are the main opportunities to seize or the biggest threats to fear? To find out, we realized a complete SWOT of the carrier (p. 5).

Launched in January 2006, Air Scoop has already two years. Air Scoop Team has brought the best of LCCs analysis on hottest issues (subsidies, ancillary revenues, business models...). We have provided you with exclusive interviews of top executives and reports from main low-cost carriers events (World Low Cost Airlines Congress, the Low Cost Air Transport Summit, French Connect...). Through our news portal weblog (airscoop. blogspot.com), you are kept updated with fresh and most important informations of the market. Each month, a new carrier is deeply analyzed in a SWOT matrix (read under), and a Central and Eastern market is rigorously studied from a LCC point of view (Hungary, Slovakia, Romania, Czech Republic...). These different services make today Air Scoop Newsletter, a reference for European low-cost carriers information and analysis. We would like to thank all our customers and partners for their confidence and their support! Air Scoop Team

SWOTs AVAILABLE ONLINE • SWOT of European LCCs Market • SWOT of Ryanair • SWOT of Air Berlin • SWOT of easyJet • SWOT of Vueling • SWOT of SkyEurope • SWOT of Germanwings

SWOTs COMING SOON • SWOT of Flybe • SWOT of WizzAir • SWOT of clickair

Air Scoop - December 2007

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BIRD’S EYE VIEW Battle for Subsidies: LCCs in the Storm It seems that the competition between the rival carriers has been taken to a totally new level: level of litigations and legal actions. The aggressive and fast expansion of Ryanair has posed a threat both to large airlines and other low-cost carriers. In their attempts to at least partly drive the Irish airline out of business other carriers brought several cases of airport subsidies before courts and the European Commission to make the competition at the secondary airports fair and open. Subsidies are of course not given in cash. Usually airports provide the carrier (in this case Ryanair) with a standard service package at reduced price. That is, the carrier gets lower landing fees, cheaper ground handling and maintenance. This form of support is logically illegal and contradicts the EU Competition Law. Ryanair has reportedly tried some other types of commercial agreements in France which were then ruled as concealed subsidies by the French Civil Aviation Authority. To find a loophole in the law the carrier, for example, made contracts for media and advertising services with airports either itself or through its subsidiary: Airport Marketing Service. However, the two contracts concluded by Ryanair’s Airport Marketing Service, Ryanair itself and the French Chamber of Commerce of Pau-Bearn which operates the Pau Airport have already interested the EC. The Commission is going to investigate and examine the contracts to make sure that they do not make for illegal advantages and benefits for the carrier. Seemingly, the investigation seeks to bring the needed certainty in the sector by distinguishing legal and illegal forms of financial support. Ryanair’s run-ins with the European Competition Law began in 2003 with the BritAir case. Air France’s subsidiary filed complaints to the EC for subsidies and unfair competition on London-Strasbourg route. A year later, Ryanair was ordered to repay about 3 mln Euros it had got in illegal subsidies from the Charleroi Airport. The decision taken by the EC was welcomed and upheld by other carriers. O’Leary in turn referred to it as a disaster for passengers and small airports. In response to the decision the airline cancelled its flight on London-Charleroi route as unprofitable. EC too checked the terms of deal between Ryanair and the City of Derry airport which was questioned about the public money it had given to the carrier in return to a five-year obligation to bring passengers to the airport. Not only national carriers seek to charge Ryanair. Air Berlin too took a legal action against the Irish airline and its deal with the airport of Luebeck in Augist 2006. Given that

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about 20% of Ryanair’s traffic depends on the publicly owned airports, the reveal of further cases of illegal subsidies might influence ticket prices. The most recent cases show that subsidies do not guarantee Ryanair’s presence at the airport. Thus, two Croatian airports of Pula and Zadar were basically deceived by Ryanair. Having received more than 500.000 Euro per year and having promised to operate flight all the year round, Ryaianr decided to terminate its contracts with the end of the tourist season. The same happened in Poiters, Rodez and Biarritz where the carrier just closed some of its flights with winter approaching. The concern about illegal subsidies prompted further investigations in Germany and Finland. Several small airports were checked whether there were cases of too favourable deals between the airports and the LCCs, especially Ryanair and easyJet, which could be regarded as illegal subsidies. Upon the results of the investigation it was revealed that both Ryanair and easyJet enjoyed some marketing grants from the airports. O’Leary of course had a good case. He accused the biggest rivals, namely Lufthansa, Air France-KLM, of having received illegal subsidies from their respective governments and airports. The situation with subsidies around the Ryanair brought about much confusion and suspicion. Thus, Ryanair’s arrival at Malta caused a huge argument between the Minister for Investment, Industry and IT, Austin Gatt and Michael O’Leary. Whilst the former ran down the carrier which he believed breached the Competition Law and the very law of business by asking subsidies, the latter told he had never sought for any subsidies. Subsidies not only prevent consolidation in the market but obviously detract from other LCCs’ reputation as well. The taxpayers too seem to be annoyed knowing that that money went to Ryanair’s pocket and are vividly discussing the issue on some online forums, especially in relation to the Galicia case where more than 7 ml Euros of public appeared to have been spent to promote Santiago and Galicia routes operated by Ryanair.

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BIRD’S EYE VIEW Analysis of the Bulgarian LCC Market Together with Romania, Bulgaria is the youngest member of the European Union, as the country gained its membership status on 1 January, 2007. The 7.7 million (2006) large population faces the future with confidence: the economy has been rapidly growing in the past couple of years and recently, foreign investors are also crowding into the country. At the same time, Western European tourists have begun to discover the natural beauties of Bulgaria and many of them are considering of buying a property there. Sofia is the cheapest living destination in the EU and the property prices, in spite of the booming market, are still comparatively lower than in other Central and Eastern European EU members.

All of these factors contribute a great extent to the steady growth of the commercial air transport market of the country, in which low-cost carriers play an increasingly important role. There are three international airports in Bulgaria, which are served by LCCs. Two of them, the seaside cities of Varna and Burgas, are popular holiday resorts in the summer. For this reason, passenger turnover shows high seasonality at these airports, which is also reflected in the lower number of destinations offered by LCCs in the winter season (Figure 2).

Currently, there are 15 low-cost carriers that operate in Bulgaria, but in spite of this relatively large number, the market seems rather concentrated. According to the winter flight schedule of 2007/2008, 81 routes are served by low-cost carriers. However, the three biggest take half of the routes, while the first seven is responsible for almost 90% of the total routes (Figure 3).

This relative concentration of the market becomes really striking if one takes a look at the distribution of destinations among countries. While this year, in the summer season, 22 countries were served with 71 destinations, lowcost carriers currently fly to 18 countries and to 63 destinations. However, the United Kingdom and Germany alone represents 20 and 17 of them, respectively (Figure 4). This means that these two states are responsible for 58% of the destinations, which implies that Bulgaria is a preferred travel location especially for German and UK citizens. In this sense, it is not surprising that low-cost carriers of Germany and the UK are the LCC market leaders in Bulgaria, with the single exception of Hemus Air, which is the local, Bulgarian low-cost carrier.

The further expansion of Hemus Air may be restricted, however, because of several factors. First, German and UK passengers have a limited knowledge of the Bulgarian lowcost carrier, moreover, the incumbent LCCs, like Thomsonfly or Germanwings have already established reputation and raised customer awareness in their domestic market. This is a natural consequence of being a first mover and

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BIRD’S EYE VIEW this is the reason why it is hard for new players to enter into the competition. Even though passengers from the UK represent a huge share of the Bulgarian LCC market, it is quite surprising that the two biggest European lowcost companies are not present there. EasyJet serves only one single route (Sofia – London-Gatwick), while Ryanair does not fly to Bulgaria at all. This implies that once profitable routes with a significant passenger demand are occupied, it may be hard for new entrants either from the domestic or the external market to challenge the positions of those players which enjoy the benefits of being first-movers. Nevertheless, Bulgaria is a growing market; therefore it is most probable that LCCs will continue to offer new destinations for passengers. The Russian and the Turkish market are particularly underserved from this aspect. Given the traditionally good historical relations between Bulgaria and Russia, and considering

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the fact that the Turkish minority is still estimated to reach 10 % of the population, it may be worth considering for LCCs to start serving those markets. Wizz Air has already taken the first step and introduced a flight between Ismir and Sofia. All things considered, the Bulgarian LCC market is one of the most promising in Central and Eastern Europe, especially due to its attractiveness for those Western European citizens that are concerned about the way of spending their holiday budget. As the awareness of Bulgaria grows in Western Europe, more demand for flights can be expected. The booming property market of the seaside resorts and of the capital of Bulgaria is already a certain sign of further growth in the air transport sector, including the low-cost segment as well.

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BIRD’S EYE VIEW SWOT Analysis of Germanwings Introduction European LCC market: The continuous growth of passenger numbers masks the fact that the European market for low fare air travel is radically changing. New airlines, takeovers as well as bankruptcies are reflecting strong competitive pressures within the market and from established network airlines fighting back to retain their market shares. European low-cost airlines (LCAs) operate with significant differences in unit costs and most of them are reporting marginal profits or losses. Low cost flights now account for 16% of all flights and 20% of all seats worldwide, compared to 14% and 17% a year ago. Within Europe, low cost flights account for 22% of the total flight activity within this region for September 2007, up from 18% year on year. Low cost capacity in September 2007 represents 30% of the total seats available within the market, a jump of 6% compared with September 2006. The LCC market is expected to increase to 35.7% of European traffic by 2010. A study carried out by the University of Amsterdam estimated that 75% of the LC market share represents new customers. The study of the University of Amsterdam further provided that 70% of the LC customers are leisure travelers, of which 20% are holiday markers, 25% are city trips, weekend trips or visits to family/friends, and 25% are people traveling to their second residency. German LCC market: Since 2002 there has been a huge expansion of the low-cost airline market in Germany, with growth rates in double figures. In March 2001 seats on low-cost airlines represented only 1 per cent of the total seat capacity available to/from and within the German market. In March 2006, this figure had grown to 21%. The low cost market share of Germany for all international flights was 21% in the first half of 2007, an increase of almost 3% over first half of 2006. Similarly, it also saw increase in its local low cost market share from 18.6% in 2006 to 21.4% in 2007. Thousands of cheap flights are now available from German airports like Cologne/Bonn, Stuttgart, Hamburg and Berlin-Schönefeld to almost every region in Europe. Low-cost travel in Germany has brought about a trend of democratization in this once exclusive mode of transport. Whilst a few years ago, flying was the privilege of middle and senior management in large companies, the new lowcost airlines have enabled company staff of all levels to fly – thus saving valuable working time. Even freelancers are flying at affordable prices on a regular basis; freeing up the German motorways as people opt to leave their cars in the garage and choose a stress free journey. Interest in long-

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SWOT TEAM haul holidays, city trips and the eastern Mediterranean is increasing. The premium form of the LCC Model: In order to improve margins and differentiate from the established LCCs many market participants are re-evaluating the low cost business model and departing from aggressive low-cost, no-frills positioning by using service features to offer something more than just cheap tickets. A new breed of budget airline has thus emerged that’s spurning the golden rules of the triedand-true low-cost formula -- such as having a single type of aircraft and offering point-to-point service only. The new model introduces paying perks, such as lounges, leather seats, extra leg room, speedy boarding and frequentflyer miles as a way of differentiating from competitors and sweetening the margins. An example of such an airline is the legacy ‘daughter’ of Lufthansa – Germanwings. «We think the first phase of low-cost is over. ... We believe that the landscape is changing and some of the basic rules of the low-cost model are not being respected anymore,» said Germanwings MD Thomas Winkelmann. «The new low-cost carriers are offering amenities to passengers who are willing to pay for the extra comfort. They are also sometimes flying to central, expensive airports,» he said. Germanwings: Germany’s premier low-cost airline launched its first services in October 2002. The airline began operations in October 2002 as a separate low-cost carrier entity but fully belonging to the Eurowings Group. Lufthansa (LH) participated with 24.9% of the shares, and later increased its stake to 49%. Cologne is Germanwings home base, with Stuttgart as its second base. In the following years it established bases at Berlin Schönefeld Airport, Hamburg and Dortmund. The Airlines has a fleet size of about 27 aircrafts - 24 Airbus A319-100 & 3 Airbus A 320-200. Fleets are maintained by Lufthansa Technik. In comparison to other LCCs, Germanwings has the advantage of using Lufthansa training centre that involves both staff educational training and aircraft maintenance. This and the extremely strict statutory requirements in Europe ensure the highest safety standards. The airline also offers guaranteed connection flights between some of its destinations (from €20 all inclusive, one-way, to all destinations). Germanwings also operates one of the most successful European travel web pages, visited by 2.5 to 3 million users each month. In May 2006, the Supervisory Board of Eurowings AG ap-

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BIRD’S EYE VIEW pointed Thomas Winkelmann, previously Vice-President, The Americas of Lufthansa German Airlines as a member of the Executive Board of Eurowings AG with effect from 1st September 2006. He simultaneously became Managing Director of the Eurowings subsidiary Germanwings GmbH. Dr. Andreas Bierwirth, previously Managing Director of Germanwings GmbH, became Marketing Manager of Lufthansa German Airlines in Frankfurt as of 1st September 2006. In this position he succeeded Harald Eisenächer. Extensive fleet enhancement, hubs close to major cities, flight operation to more 30 European destinations and valuable LH experience – all these factors helped the company achieve record passenger numbers: more than a quarter of a million passengers a day. Lufthansa’s financial and infrastructural support and Germanwings position of being the first pure German LCC, contributed greatly to its success. Awards According to the survey of one of the leading economic magazines in Europe, Capital, Germanwings was awarded as “Discount Airline - 2004”. 1200 readers and online users participated in the survey, which evaluated altogether 20 000 flights. Germanwings reached excellent results in the categories of punctuality, safety, onboard comfort and service. In 2004, Germanwings was awarded by frequent flyers with the First Prize for being the airline with the best ratio value for money. Around 4000 frequent flyers took part in the survey conducted by Internet Booking Portal Travel Channel. In April 2006, Germanwings was voted best German airline, according to a survey by consumer protection groups from 6 European countries (Belgium, France, Italy, Portugal, Spain and The Nether¬lands) who evaluated more than 36 000 flights from legacy airli¬nes, charter airlines to low cost carriers. The 9 000 passengers provided information on their travel experiences on board in flights from July 2004 to Sep¬tember 2005. Germanwings, with an overall rank at the 14th spot, became the best German airline with highest evaluation. This result was attributed to the punctuality of its flights, the good relation between price and performance, the cleanliness on board and the efficiency of the ground staff. Skytrax awarded them 3 stars, with it earning good marks for food, seats and staff.

Overview of Germanwings History: Germanwings is a low cost airline based in Cologne-Bonn airport, Germany. Germanwings started operations with a fleet of five A320s and brought the total fleet to 43 items in less than 4 years. The low cost carrier was quick to establish a presence at its flagship base at Cologne-Bonn, where it based its first eight A319s. It had offered fares from €19 one way to each of its 11 destinations throughout Europe--Barcelona, Berlin, Istanbul, London, Madrid, Milan, Nice, Paris, Rome, Vienna and Zurich. Later it established bases at Berlin, Hamburg and Dortmund. It operates a large network from all its bases. The foundation of Germanwings resulted from the transformation of the unprofitable charter business of Eurowings into a low cost carrier. Though Lufthansa publicly stresses that the relationship is settled only by the definition of the financial investment through its participation in Eurowings, Lufthansa supported the creation of Germanwings in the supervisory board of Eurowings. Prior to this, Lufthansa carried out several studies in examining the start of an own low-cost carrier, but it concluded that this could be realized only as a separate entity. At that time, Lufthansa also examined the possibility of making an investment in Ryanair. Germanwings is considered as the legacy carrier’s ‘daughter’. The interest is both financially and strategically given, but the influence on the operating decisions of Germanwings is limited. The organization of Germanwings is located in Cologne, away from the headquarters of Eurowings in Dortmund. Partly, the staff and certain departments, like the production and network planning and marketing and sales, have been transferred from Eurowings while other functions, such as financing, controlling, revenue accounting, and IT, are sourced from Eurowings. The autonomy of Germanwings is moderate to high, only restricted in terms of investments and basic strategic decisions towards Eurowings and Lufthansa. Growth: The growth of Germanwings since 2003 has been extraordinary. It initially leased its planes and 10% of its pilots but later placed direct aircraft purchase orders. During the very first year of operations, Germanwings became the largest airline to operate from its home base - Cologne/Bonn airport. Cologne/Bonn is located in the west of Germany which is the most populated area. More than 2.4 million passengers traveled on Germanwings that year from this airport. In September 2003, it opened its second base at Stuttgart. The load factor reached an average of 77% during this year on all their 23 destinations. Germanwings also started operating flights to Athens’ Eleftherios Venizelos International Airport in Greece. By the end of year 2004, 3.5 million guests flew with Germanwings (plus 44 percent in comparison with the year

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BIRD’S EYE VIEW 2003), the revenue climbed from 150 to 247 million Euros (plus 65 percent). A load factor of more than 82 percent was recorded. Eurowings and its low cost subsidiary, Germanwings, achieved profits after tax of €6.4 million for 2004, up from €900,000 the previous year. In June 2005, the German low-cost carrier Germanwings opened its hub at Berlin Schönefeld Airport. Berlin was chosen for economic considerations and for its strategic importance as a gateway to Eastern Europe – a focus for future development. Germanwings offered daily flights to and from four German cities of Cologne/Bonn, Stuttgart, Munich and Düsseldorf. It also operated weekly flights from this base to six international destinations namely: Ankara, Istanbul, Moscow, Stockholm, Split and Zagreb. It also placed a direct order for 18 A319s as well as options for a further 12. Deliveries are scheduled from 2006 onwards. During the summer of 2005, the airlines began flight operations between Cologne and Moscow and between Berlin and Moscow. Germanwings became the first west European no-frills airline to operate scheduled flights at the Vnukova International Airport in Moscow. In August 2005, the capital of growth, Hamburg, was chosen by Germanwings to be their fourth base in Germany. The new Germanwings destinations from Hamburg are: Munich, Istanbul, Krakow, London (Gatwick), Munich, Oslo, Stockholm, Stuttgart, Toulouse, Warsaw, Zagreb. The low-cost airline Germanwings carried 5.5 million passengers in 2005, a massive 57% increase over 2004 and has now become market leader in Cologne with a 35% share and ranks second in Berlin Schönefeld with a 17% share. In Stuttgart the airline has the highest share of 20% as an LCC. Germanwings had, by now developed a broad and attractive route network to 43 primary destinations in Europe. During 2006, Germanwings expanded its routes rapidly. In June it started flights from their Cologne-Bonn base to Albania and Serbia and Montenegro. In the summer schedule, it operated flights to Saint Petersburg and later in October, Germanwings connected Hamburg to Moscow and Berlin to Saint Petersburg. On 28th July, 2006 Germanwings took delivery of the first of 18 A319 aircraft on 14-Jul-06 and announced plans to expand its Cologne Bonn hub. Germanwings enjoyed a successful year in 2006. It welcomed 7.1 million passengers on board its aircraft, increasing their number by 31.2 per cent. The passenger load factor stood at 82.2 per cent. Adjusted for consolidation effects (Germanwings) revenue climbed by 7.5 per cent with a turnover of 560 million Euros.

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During 2007, the airline continued expanding its operations. In March Germanwings announced the launch of new seaside destinations in Bulgaria like Varna and Burgos besides the flights to the capital city of Sofia. It also launched its flights to and from Malta International Airport, operating from Cologne and Stuttgart. Later in the year it also began operating flights from Cologne/Bonn to Moscow’s Vnukova airport. On June 22 Germanwings opened its fifth base in Dortmund. It flew to Vienna, Istanbul, Ataturk, Palma de Mallorca, Ibiza and Faro from this base, using the A319 aircraft. It later added Ankara, Izmir and Antalya to its destinations. The Flex Plus offer, which was introduced in Germany in Mar-07 for business travelers was later extended to select international routes to allow passengers to make alterations in travel plans at a short notice or even cancel the booking, all free of charge. In September, the German budget airline, introduced for the first time low-cost connecting flights from Russia. Ten destinations would be available from Moscow and seven destinations from St. Petersburg, connecting flights through the airports of Cologne-Bonn, Stuttgart and Berlin-Schönefeld. Last year Germanwings served 3.5 million passengers in Northern and Eastern Europe, Gerdes said. This year the company expects this number to increase to four million, and to 4.7 million in 2009. Current Status: CEO Thomas Winkelmann stated that the carrier was growing «organically» and is on its way to becoming an important player in Europe’s crowded LCC market. A sixth German base is expected to come on line next year. He also stated that, Germanwings will not be opening any overseas bases in the near future as there were plenty of opportunities to expand in its home market. Following the sale of dba, Condor and LTU to rival Air Berlin, Germanwings became the only pure low-cost carrier left in Germany. He also pointed out that Germany had a population of 80 million. Germanwings currently operates 27 A319s/A320s and flies to 53 destinations. The fleet will become a pure 42-strong A319 by 2009. The passenger turnover is expected to cross 8 million this year and predicted to reach 10 million in 2009. Lately, there have been rumors from reliable media sources of a possible merger between Germanwings and TUI’s TUIfly division which would also include Eurowings as the third partner. Travel giant TUI Travel, which is 51 percent owned by TUI, had told in September that it could

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BIRD’S EYE VIEW sell TUIfly. But Lufthansa, TUI and Germanwings have not made any official comments on a possible tie-up. But such a merger would definitely strengthen the position of Germanwings in the European LCC market. Issues/Challenges: 1. Would Germanwings be able to contain itself to forming bases within Germany or be forced to look outside with the changing competitive scenario? 2. Will the current stable relationship between Lufthansa and Germanwings continue in the long term? 3. Which is a better strategy for Germanwings? - Organic growth or growth through mergers/acquisitions or both. 4. What should be the long-term objective? – To become a successful German LCC or a successful European LCC. Business Model of Germanwings The carrier can be called a premium low-cost carrier. The airline follows the easyJet-type low cost formula, flying mostly to primary airports and deploying airplanes which are equipped with leather seats and in-flight entertainment devices. Germanwings shares flight crews, maintenance and some aircraft with Lufthansa and Eurowings, who are its owners. Flying to a total of 53 destinations in 20 European countries on nearly 100 routes, Germanwings is now one of the major low cost airlines in Europe. Their base is in Germany at Cologne Bonn airport, with other flight hubs at Berlin Schoenefeld, Hamburg, Stuttgart and Dortmund airports. In the UK, Germanwings scheduled flights operate between: Edinburgh - Cologne-Bonn; London Gatwick - Hamburg; London Stansted - CologneBonn & Stuttgart. The Germanwings team of approx. 460 employees, from check-in specialists to pilots, is trained at Lufthansa Flight Training Center in Frankfurt with the objective of providing a safe and pleasant flight with top-quality service. Germanwings passengers constitute: 40% business travelers and 30% students and young people. Although the majority is German, the percentage of foreign bookings is around 30%. Innovation has been the hallmark of its business model which aims to attract and retain business travelers. Mr. Thomas Winkelmann believes that success lies in the airline’s ability to win over the business customer. In his words, “No low-cost airline can survive without the business customer in the long term.» Main Innovative features of its business model are: A319 aircraft: In July 2007 Germanwings owned a fleet of 22 Airbus A319 and 3 A320. Seven of the A319 use a

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special Germanwings configuration offering 156 instead of 144 seats. Germanwings has raised the productivity of its existing modern fleet of Airbus A319 and A320 aircraft from 12 to 14 hours per day. Aircraft are used more efficiently and are often only on the ground for 25 minutes before they take off again. The average fleet age was 6.9 years in 2006. The new A319s for Germanwings feature a comfortable single-class cabin layout for a maximum of 156 passengers. Seats are all made of leather and have 30-32» seat pitch between rows, a good legroom for a low cost airline. The aircrafts would be powered by V2500 engines from International Aero Engines. User-friendly website: Germanwings operates one of the most successful European travel web pages, visited by over 3 million users each month, who along with the airline’s partners make it the most visited and attractive website in the low-cost airline sector. In 2006 the airline’s www.germanwings.com website was the airline portal with the highest revenue in Germany. Almost 95% of all the airline’s flights are booked through the internet. Its website offers everything from flight tickets, hotel nights and rental cars to events tickets and mobile phones. Virtual tour: Germanwings presents a virtual tour for its online visitors giving outdoor and indoor views of the aircraft A319, accompanied by short explanations about the products on the carrier. A real impression of the aircraft and its on-board-quality can be obtained at the virtual guide at its friendly website. Safety and Security: By the year 2009, Germanwings will be having a young fleet of 42 A319 aircrafts with an average seating of around 150. These aircraft are market leaders in terms of space, noise protection and energy consumption, which would be continuously, maintained using state-ofthe-art technology at Lufthansa Technik. The selected qualified pilots and the crew are further trained at the Lufthansa Flight Training centre in Frankfurt. Thus Germanwings ensures the safety and security of all its flights by following the above process stringently. Germanwings Credit card: As a holder of the Germanwings credit card one can withdraw cash at any location in the world with no handling charge. Card holders also enjoy increased baggage allowance; ten kilos, giving you a total baggage allowance of 30 kilos. Furthermore one can use it to book a Germanwings flight online without any handling fee. One can purchase it at just €19 p.a. Smart Connect: The airline recently introduced low-cost connecting flights from Russia. The company has introduced over 500 new destinations, which can be accessed through the airports of Cologne-Bonn, Stuttgart and Berlin-Schonefeld. The system, called Smart Connect, allows

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BIRD’S EYE VIEW passengers to order stop-over flights indicating only the final destination and showing the total price, which is lower than the cost of two separate flights. One of the major advantages was the short time of about 90 minutes required for changing flights. The company gets the advantage of entering new markets and new clients. Flex Plus Tariff: A special Flex Plus tariff, which was previously only available for business travelers on routes within Germany, has been extended to selected international routes to allow passengers to make alterations at short notice or cancel the booking, all free of charge. This free “Flex Plus” tariff can be booked at a fixed price of 169 Euros, and offers all customers full flexibility, in planning business trips. Flex Plus tickets are also eligible for double points, as part of the airlines Boomerang Club loyalty scheme. Over 40% of Germanwings passengers are business travelers, representing the single largest group of customers. Automated check-in: Passengers will be able to save a considerable amount of time by checking in at home or at the office before they fly: meaning there is no need to queue to check in and passengers can proceed directly to the gate when they arrive at the airport. In combination with the Germanwings Credit Card, which guarantees early boarding, Germanwings frequent flyers can now take the fast lane. Rail&Fly scheme: Flying with Germanwings starts right from the customers’ doorsteps. Using the Rail&Fly scheme, the budget airline now covers the whole of Germany. Customers will be able to travel to the airport by train for 19 Euros by booking Rail&Fly online for all flights to and from Germany at www.germanwings.com. Each of the Germanwings bases can be reached within two hours. “Before You Go”: It is the name of the new and innovative newsletter which, in addition to providing information about the latest saving offers for hotels and car rentals, gives passengers a free travel guide to the holiday destination of choice. Germanwings partners such as HRS, complement this perfect all-round service for passengers. Customers can save valuable time searching for a suitable hotel as the best offers will be sent to them by the airlines. In order to ensure the accommodation offers from HRS are always up to date for the newsletter, Germanwings automatically checks the best prices for each destination in real-time. The offers which exactly match the customer’s requirements are then compiled and sent to the customers conveniently by email 14 days before departure. Travel Agents’ Internet Portal: The premier low cost carrier is promoting travel agents as a sales channel. A separate portal has been created for travel agents on Germany’s most successful airline website: www.germanwings.com/ reisebuero. Group enquiries can be submitted directly via

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the portal to which Germanwings will answer within two working days. The new travel agents channel also offers agents important and useful information at their fingertips, a newsletter specially designed for travel agents with attractive prize giveaways and regularly discounted flight offers for travel agent employees. Germanwings advertising packages can also be ordered via the website. Corporate Flex: This program is exclusively for corporate customers. Companies who wish to participate can register on the website under the section ‘business travel’. It has flexible boarding prices starting from 49 Euros plus taxes, fees and other charges. It offers full flexibility and allows free rebooking, reservation changes and cancellation until 2hrs. prior to departure. ‘Boomerang’ club: Their frequent flyer program, called Boomerang, allows members to accumulate miles and redeem them against free flights. The main elements of this program are: • One can register as member by filling in a registration form available on the website, pay a processing fee of €5 and immediately earn 1000 Boomerangs. • An award flight is gifted after every eighth return flight or a collection of 24000 Boomerangs • Boomerangs are allotted on every Germanwings flight. 3000 Boomerangs are earned for every return flight and 1500 points for a one-way flight. • As a member of the Boomerang Club one can also collect Boomerangs with the club partners of Germanwings, such as HRS, Sixt, Lindner Hotels. • A Boomerang club member becomes automatically eligible for the Germanwings credit card with pre-boarding function. • Exclusive Boomerang offers are often announced on certain flights through which a passenger has the opportunity to earn double Boomerang points on just one flight. Information about all the offers can be obtained either on their website or in the Boomerang newsletter. Other facilities: These include: reasonably prized quality food, fast & efficient baggage handling, attractive travel packages, special care for babies and the disabled and onboard entertainment like journals, music and videos Ancillary Sources of Income: Baggage: The free check-in baggage limit is 20 kg, but a maximum of 50kg per person is allowed for a fee. There is no weight restriction on hand luggage of just one item only with maximum dimensions of 56x45x25cm. Babies under 2 years old get no baggage allowance. Excess baggage costs £5/kg per flight. Sports equipment charges are from £14£17 per item, but skis are carried free on selected routes.

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BIRD’S EYE VIEW Ticket Booking: The earlier one books, the cheaper are the tickets. No tickets are issued; only the Booking Reference number has to be presented for check-in. A credit card payment charge of £1 pp. per flight is added to the fare. Babies under 2 years travel for a fixed fee of 10 Euros. Seats can’t be reserved at the time of booking or checking in, but there is priority boarding for the disabled and for parents with small children. Flight Changes: Date changes can be done online for £17/€25 pp. per flight plus any fare increase for international flights. The rebooking charges within Germany are 29.75 Euros. Changes by telephone cost an additional £5/€7 pp. per flight outside Germany and +8.33 Euros(incl. 19% VAT) within Germany. Destination or passenger name changes are not possible. No refunds for missing or canceling a flight. Other Sources of ancillary income: This includes fuel surcharge (12 euros), Germanwings credit card fees, Boomerang club registration, the Rail&Fly scheme, sale of food

Recommendations 1. Germanwings should not restrict its bases within the German market for the following reasons: - Germany is becoming intensively competitive with many low cost players wanting a share (70% of the market is shared almost equivalently between Air Berlin, Germanwings, Ryanair and easyJet). - It already has five bases in important cities that are strategically located to attract maximum number of travelers. More bases could lead to overlapping of routes and doubling of costs. - Long term goal for any big player is to be able to expand internationally which will ensure its survival and success. 2. The continuance of the current strategic relationship between Lufthansa and Germanwings is very critical for the progress of the ‘daughter’ for achieving its stated objectives. But history has been a witness to breaking up of many such relationships profitably or otherwise. This occurs due to several incompatibilities that arise in course of the journey such as: cannibalization between business models; implausibility of the communication concept; increase in organizational complexity to mention a few. So the sustainability of this relationship will depend on the extent of fulfillment of the basic purpose, for which this was initialized and the value generated.

and entertainment, online advertising and direct marketing revenue etc. SWOT Analysis The main advantage that Germanwings has had over other lesser successful legacy ‘daughter’ airlines is the higher degree of freedom it enjoys in managing its network, the overheads, and its fleet. Strategic goal of Germanwings is to emerge as a leading low-cost carrier in terms of market share and prices at all its hubs, while a short-term goal entails achieving a minimum market share of 30% in all airports where their aircrafts are stationed. “Fly high – pay low” is the motto of Germanwings. Their claim: ‘you fly to the highest standard at an attractive price’.

its operations as far as possible at a reasonable pace to keep ahead of the competition. The rule is: You beat the competition or the competition eats you. In the LCC market, success can be achieved organically or through mergers and acquisitions or both. When Germanwings expands into markets that are not travel savvy and are extremely price sensitive, the better option would be to go for a merger or acquisition or collaboration. Conclusion The success of Germanwings can be attributed to two major factors: Its innovative business model and the wide economies of scale enjoyed by it from Lufthansa. It has managed to integrate and reinforce the quality image of its parent within the low cost framework. The key challenge for Germanwings is to be able progress rapidly under the strategic protection of its parent in a market which is increasingly changing from a ‘growth’ market into a ‘displacement’ market.

3. In order to be successful, any organization has to expand

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BIRD’S EYE VIEW

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DOWN TO EARTH

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BIRD’S EYE VIEW After the Takeover of Condor, Which Perspectives for Air Berlin? If one man believes in consolidation in the European sky, it’s him! After buying two of his challengers, DBA and LTU, in less than one year, Joachim Hunold, Air Berlin’s CEO, announced in September his intention to purchase the Thomas Cook affiliated charter airline Condor in 2009. This old German company, created in 1955 and operating 35 planes, is currently detained by both Thomas Cook (75.1%) and Lufthansa (24.9%). Air Berlin will first receive Thomas Cook’s shares, in February 2009, and then Lufthansa’s ones. In return, Thomas Cook will get 120 million Euros in cash, plus 380 to 475 million Euros of Air Berlin shares (29.9% of the airline’s capital). Air Berlin and the travel group Thomas Cook also signed a long-term commercial partnership. Condor carries 8 million passengers yearly to more than 70 destinations, including many « exotic » places like India, Kenya, Egypt, Thailand, the Caribbean, South America, Florida... Its network has many common points with LTU’s one, the other German charter airline Air Berlin bought in 2007. After this merger, yet to be approved by the German cartel office in 2008, Air Berlin will carry more than 30 million passengers yearly on more than 160 planes, not including those ordered. The company consolidates its third position on the European LCC market: EasyJet has about 170 planes and Ryanair about 200. Air Berlin may even begin to threaten Lufthansa, even if the German leader, with 400 planes and 50 million passengers yearly, is still out of reach: Lufthansa did not even try to block the sale of its 24.9% of Condor shares to Air Berlin. With this new takeover, Joachim Hunold sticks to his strategy of growing as big and as fast as possible. He also confirms his ambition to expand on long-haul flights, something never done by a European LCC before. Up to 2008, the airline will launch flights from Düsseldorf to the USA and China under the brand Air Berlin, with an improved business class, which makes long-haul flights so profitable. The takeover of Condor will also provide Air Berlin with important slots in Munich and Frankfurt. This intercontinental strategy, together with other factors - mid-level fares, low ancillary revenues, frequent flyer program, etc is also a sign of the growing « normalization » of Air Berlin compared to « genuine » LCCs like Ryanair and EasyJet.

companies - DBA, LTU and Condor - in a few years is a tough operation. The stock market reacted cautiously to the announcement of the deal: the Air Berlin share lost 5% the following day, and remains quite low since then. In November, the share was weaker than its 12 Euros issuing price in 2006. For some analysts, Air Berlin can even remind the Swissair frantic investing strategy in the 1990s, ending with a traumatizing bankruptcy in 2002, which had important consequences on the European air transport market. Big does not mean rich in the air industry... Of course, Swissair’s huge investments in about ten international companies, and the tremendous debts that followed, were far more important than Air Berlin’s purchases. But the more Air Berlin invests the less financial elbow room it has. Its 2007 financial results are quite deceiving. The airline has to hope that no important crisis will occur in the European sky, and that its promises of improved financial results in 2008 will come true. While concentrating on mergers and intercontinental expansion, Air Berlin also loses battles: in October, the airline suppressed its UK domestic routes from London-Stansted to Belfast City, Manchester and Glasgow, officially due to rising taxes. The Belfast route had just been opened one year before. At the same time, Ryanair just begins to fly from Belfast City, and EasyJet announces new routes from Belfast International! Is Air Berlin’s withdrawal in the UK a strategy - with its « mid-fare » profile, the airline may not be interested anymore in challenging the aggressive Islanders on their own British battlefield - or a clear defeat ? From a German point of view, the purchase of Condor could mean the end of the consolidation. After the announcement of the Condor takeover by Air Berlin, rumors said in November the two remaining German LCCs, Germanwings and TUIfly, could also merge. Both are too small to compete on the European market, and TUIfly, created earlier in 2007 from the merger of HLX and Hapagfly, is in quite bad economic health. As Germanwings belongs to Lufthansa, the German market could soon become a « duopole »: Lufthansa with Germanwings and TUIfly on the one side, Air Berlin with DBA, LTU and Condor on the other side. But then, who will offer aggressive fares to the customers?

But there is no certitude Hunold’s coup will succeed. Even if his consolidation strategy is expected to generate important synergy savings, it costs Air Berlin a lot of money. Some experts expressed skepticism about this new acquisition, pointing out the fact that integrating three

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BIRD’S EYE VIEW EVENTS French Connect 2008 April 9 to 11 in Courchevel

Air Scoop is proud to be part of the 5th French Connect in Courchevel. For the 5th consecutive year, CEOs of French airports and European low cost airlines will gather for 3 days of debates and networking. French Connect, the only professional forum dedicated to low cost air traffic development in France, will take place in Courchevel, French Alps from 9th to 11th April 2008. Created in 2004 to respond to the specific needs of French airports, French Connect has become, in just a few years, a must-attend meeting and debating forum for French airports and low cost airlines. For 3 days, decision-makers will gather from over 20 low cost airlines and 50 French airports together with representatives from regional, national and European political institutions. French Connect 2008 is hosted by Grenoble-Isère and Chambéry-Savoie Airports, two airports managed by VINCI Airports and Keolis Airports on behalf of the Conseils Généraux (County Councils) of Isère and Savoie. Innovation and dynamism are the key words for next year’s event, which will be an exceptional opportunity to understand the issues of low cost air traffic development in France. To have more informations about last edition of French Connect in La Baule, read the full coverage in Air Scoop May 2007. For more information on French Connect 2008, visit www.frenchconnect.net

World Low Cost Airlines 2008 September 23 to 24 in London

Air Scoop is proud to be media partner of the World Low Cost Airlines 2008. Plans are starting to take shape for the World Low Cost Airlines Congress 2008. Earlier this year over 650 of you joined us in London for an action packed two days. To remind yourself of the day (or to see what you missed!) we have put together a short video of the highlights. To see it simply visit our homepage. (You’ll need to have flash installed on your computer.) Don’t miss out on next year’s event. To have more informations about last edition of the World Low Cost Airlines, read the full coverage in Air Scoop October 2007. For more information on the World Low Cost Airlines 2008, visit www.terrapinn.com

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DOWN TO EARTH

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

LCC Web Sites Under Investigation Recently, the EU Consumer Protection unit launched an investigation into improper displays on airline Web sites. After a ruling that forces airlines to advertise prices in full on their sites, airlines had to change the way prices, as well as terms and conditions, are displayed. Airlines also had to ensure that customers were not being “tricked” into purchasing products they otherwise wouldn’t. If airlines fail to comply with the EU directive, they could face fines or the closure of their sites. As Web sites are now the primary way passengers in Europe book tickets, such a closure would affect carriers dramatically. No airline has the resources to scale up call centers and airport ticketing operations quickly enough and any airline would certainly suffer if its Web site were shut down, even temporarily.

purchase unwanted items, and terms and conditions not translated properly into the language of the customer’s country of purchase or not given at all. However, the investigation did not publicly name companies, preferring instead to comment about its overall findings, though an EU spokesperson noted that in four months, they intend to “name and shame” the companies involved. Companies that are found to have violations will be contacted by local EU enforcement authorities to either delineate their stance on the violations or to rectify their sites. The EU has stated that they initially will impose monetary penalties on violators and only close sites as a last resort. The Rationale for Creating Violating Web sites

While some LCCs have recently made moves to diversify the number of booking outlets for customers (most notably easyJet’s decision to offer its fares over a GDS network), their Web sites are still the primary booking locations because they provide the lowest fares to customers, the lowest costs to carriers, and the most opportunities to generate ancillary revenue. The shutdown of the Web site of a major European LCC is very unlikely. The EU is giving carriers ample time to adjust their sites, and the EU plans on imposing fines before any site shutdown. The Scope of the Probe This most recent investigation by the EU occurred in late September, and focused on 447 airline and travel booking Web sites. Of the 447 sites investigated, 226 were found to be in violation of EU law. The results varied considerably depending on the country investigated. For instance, in Belgium, 46 out of 48 sites investigated were found to be in breach of the law whereas in Austria, none of the 20 sites investigated violated the law. The investigation, conducted by consumer protection organizations in each of the 27 EU member states and Norway, cited sites with unfair pricing, hidden charges, tick boxes checked by default, luring customers to

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As fuel costs rise for LCCs, increases in fares are often not keeping up with the added costs. As a result, LCCs have increasingly sought to grow their ancillary revenue streams. Most of these Web site violations stem from pressures to grow ancillary revenues by tricking customers into purchasing services that they do not necessarily want. For example, many of the violations occurred when airlines pre-selected travel insurance for their customers, a violation of the EU’s policy that customers must select the product, not the other way around. Since travel insurance is a very profitable product for LCCs, this has helped airlines increase ancillary profits. Another common problem was either misstated or missing terms and conditions. This is especially a problem on LCCs that have strict ticket reissuing and baggage policies, since passengers are likely to look to the airline’s terms and conditions on those two issues. For instance, buried in Ryanair’s terms and conditions is the mention that passengers who check bags will be charged an excess baggage fee if any single bag goes over the 15 kg limit, even if the pooled baggage weight among a group of passengers totals less than 15 kg per bag. Ryanair has been very successful at charging excess baggage fees to passengers who don’t carefully read their

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BIRD’S EYE VIEW terms and conditions, making it one of Ryanair’s leading ancillary revenue streams. Other LCCs have engaged in similar tactics. If the EU has found that Ryanair or other LCCs have improperly displayed terms and conditions, then it could expose those carriers to considerable penalties. If restricted in these ancillary product offerings, LCCs will likely see slower growth in this revenue stream, since a significant percentage of ancillary revenue is generated from customers who unwillingly purchase the product. Moreover, as LCCs know, price is everything, and some carriers may have been deliberately slow to transition to all-inclusive pricing. With a lumbering EU bureaucracy, carriers that continue to advertise fares without taxes don’t have any immediate threat of sanctions, and so if they can make their fares appear cheaper than their competitors’ for a few more months, it helps them gain a competitive advantage. It’s probable that LCCs that operate in more countries and which have more complex Web interfaces are more likely to be subject to penalties. Therefore, I suspect that easyJet and Ryanair are most likely to have violations. EasyJet currently automatically selects and prices a customer’s flight with a hold bag and travel insurance included. Customers must remove these items to receive the price of their ticket only, something the EU prohibits. EasyJet will need to change this practice in the near future to avoid penalties. Ryanair currently advertises flights on its home page with taxes and fees included, but when a customer goes to book that flight, he or she may see a price much lower than that, as low as .01 EUR. Ryanair then adds the taxes and charges on the following page, possibly misleading customers who thought that the flight cost .01 EUR, and a potential violation of the EU policy.

The effects would be immediate and dramatic, and even with a temporary site closure, the effects could last for months: A carrier could see lower load factors months after a Web site closure. Moreover, the airline’s reputation for quality would likely suffer if its site closed, leading to suspicions about other areas of the airline’s operation. Yet the possibility of an airline’s Web site being taken down is very real, even if a rogue hacker succeeds where the EU doesn’t, and needs to be taken more seriously by carriers. As the expression goes, “Don’t put all your eggs in one basket”. LCCs put all their eggs in one basket in a number of facets of their operations, including fleet makeup (since many LCCs operate only one type of aircraft, and most operate no more than two) as well as distribution method (since many LCCs sell virtually all of their tickets through their Web sites). Putting their eggs in one basket has led to enormous efficiencies; however, consolidating baskets also increases risks for carriers if their basket breaks, leaving carriers exposed and vulnerable. In this ultra-competitive marketplace, just a few things have to go wrong to lead to disaster. The EU probe will likely succeed in forcing LCCs to make the necessary changes to their Web sites to make their sites more transparent, easy-to-use, and consumer friendly. These changes will cost LCCs some ancillary revenue, but they will also help make LCC sites more attractive for consumers, helping to build brand loyalty and strengthening the ability of LCCs to generate repeat business. Remarks, questions… Join Sam on his website to comment this article… http://www.airlinebulletin.com .

The Potential Effects on LCCs Obviously, a Web site shutdown would have disastrous consequences for any airline, not just an LCC. Since many LCCs do not offer tickets through travel agencies, passengers would have either the option of booking via phone or booking at the airport, neither of which are very convenient or desirable for either airlines or passengers. If its Web site closed, an LCC would quickly lose market share and money, as it could not arrange bookings for enough passengers to fill its airplanes.

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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.

Air Scoop is a Registered Trademark of Global Wings Publications. Subscription to Air Scoop: 290 euros for 1 year (10 issues) Copyright 2006-2007 - Unauthorized distribution or reproduction is forbidden. http://www.air-scoop.com ; http://airscoop.blogspot.com (free portal news)

Air Scoop - December 2007

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