Air Scoop February 2007

Highlights in this Issue

Advantages / Disadvantages of Legacy’s Daughters The Hungarian Low-Cost Market and its Limitations A Proposed Environmental Public Relations Strategy Ryanair and UK Minister: Face to Face TUIfly Aims To Become A European Leader

The Low Cost Carriers Analysis Newsletter

EDITORIAL

T

his month, Air Scoop has decided to launch several recurrent topics will be detailed issues after issues. Environment is definitely an important issue for LCCs in Europe which will deeply influence strategies of carriers but also habits of travelers in the future. European LCCs leader Ryanair has been “fighting” against British Environmental Minister over this problem (p. 11). We also provide you the first part of an exclusive Public relations strategy for LCCs about environmental issues (p. 10). After Carlos Munoz, CEO of Vueling (Read Air Scoop June 2006), we complete our analysis of Spanish market with the exclusive interview of Alex Cruz, CEO of ClickAir, who has accepted to answer our questions (p. 2). On the German market, after Air Berlin (Read Air Scoop January 2007), we complete our analysis of players on the German market with TUIfly (p. 12). IdeaWorks provides us this month with an analysis of Austrian Airlines declaring war against mediocrity by bringing full service back to economy class (p. 5). In our last issue, we had a global view of the Scandinavian, so now we have focused on FlyMe, the Swedish low-fare airline (p. 9). Central and Eastern Europe countries are not forgotten as we will provide you with complete analysis of each market of this area: We have started with Hungary (p. 7). Some legacy carriers launched their own LCCs to counter low-cost carriers on their market. This article analyzes advantages and disadvantages of being a legacy’s daughter (p. 4). In our next issue: Analysis of Delays in Air Transport…

p. 4 p. 7 p. 10 p. 11 p. 12

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Air Scoop - February 2007

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BIRD’S EYE VIEW Exclusive Interview of Alex Cruz (CEO of ClickAir) Could you please present ClickAir to our readers? What are your specificities compared to other European LCCs? What do you do better than your competitors? The clickair project has been operating since 1 October. In September 2006, the company became a public limited company known as Clickair SA, with its head office in El Prat de Llobregat (home of the El Prat Barcelona airport). The founder partners, each with 20% of the shareholders, are ACS (through its subsidiary Cobra), airline Iberia Líneas Aéreas, the tour operator Iberostar, the company Nefinsa (owner of Air Nostrum, the regional carrier) and the risk capital fund Quercus Equity (Grupo Agrolimen). The company’s Board of Directors consists of ten directors, two representing each partner. The operations base of ClickAir is the Barcelona airport of El Prat. The 2006-2008 strategic plan agreed by the shareholders predicts the development of more than 70 routes in 55 Spanish and European cities with a fleet of 30 Airbus 320 airplanes. The fixed objective by the end of 2008 is to transport around ten million passengers. If the current guidelines of air industry development are maintained, this will make ClickAir the second Spanish airline in volume of passengers and it will put it among the four greatest LCCs (low-cost carriers) in Europe. The company has committed a 120 million euro investment until the end of 2008 in order to start and consolidate the project, which will be reflected in the progressive creation of 1,000 direct jobs and between 8,000 and 10,000 induced jobs. With its hub in Barcelona, clickair will contribute to the Catalan tourist, economic and commercial development and

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Alex Cruz CEO of ClickAir

will support Barcelona in becoming the core of the Euro-Mediterranean region. ClickAir (www.clickair.com) is born from the will of its partners to create an European leading actor in the so-called “low cost” airlines category, currently the fastest growing commercial aviation segment in the world. The main reason for the success of this type of companies is, apart from the low fares, the optimization of the daily number of flights by airplanes, high levels of direct sales and a general structure of costs –except for safety and technical maintenance quality— sensibly inferior to the average figures handled by conventional airlines. Another important fact is operating in highly-demand routes, aiming at greater occupation of planes in each flight. These factors, and some others, eventually lead to provide the final customer –that is to say, the passenger– with a very adjusted price option which enables him/her to fly with safety, flexibility, reliability and to a variety of destinations. How do you analyze the competition in Spain with Ryanair, easyJet and Vueling? Which one is for you the main competitor? Our main competitor, without much doubt, is our own ability to keep costs down. If we are able to keep costs below the level of the lowest operator in our market, we will arm ourselves with multiple choices for routes and product. Having said that we have noticed that there is a strong focus in Madrid at the moment, probably facilitated by the new terminal and the extra capacity it has created. We understand that Ryanair, easyJet and Vueling have set up bases there. At this time, Madrid is not a market of interest to us

as a great deal of investment is being made by the other operators. We believe that there are significant opportunities to grow the Spanish domestic and international traffic from our main hub base, Barcelona, and from other Spanish regional airports. Why did you choose Barcelona as your base? What are the advantages to be there? Though initially triggered by the progressive withdraw of Iberia from many Barcelona-based routes, we see Barcelona as one of the biggest growth platforms in Spain. With its own brand new terminal ready to operate in late 2008, we would like to position ourselves as the airline of choice for the region, as well as expand to other bases within Spain and Europe. We currently see three types of route opportunities: - Domestic routes, principally connecting North-South and/or East/ West coastal cities - European and North African connections from Barcelona and some of the other coastal cities - Mid-haul routes from Barcelona: 34 hour flights, likely to be operated at night, which will maximise our aircraft utilisation and open up new routes from our bases 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?... Factors such as fuel costs or the com-

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BIRD’S EYE VIEW plexity or emissions trading are commonly shared by all players in the industry. We hope to be active and smart players in dealing with those issues. However, the largest, perennial risk which our industry has always suffered from is the cyclical nature of the business: airlines do well, buy more aircraft, reach a point in which there overcapacity and are unable to fill them, consolidation and bankruptcies arrive, few players are left, who recover, they begin to do well, and the story repeats itself all over again. Only one airline in the world has been able to profitability break through these cycles in competitive environments: Southwest. Since airlines like Ryanair and Southwest were initially modelled after Southwest, and so long as they don´t grow overly fast forever, one should expect them to be survivors. It appears that we have seen signs of overcapacity in Europe. Recent M&A activity in the UK (Flybe/BA Connect) and Germany (LTU/DBA/Air Berlin, etc) would lead us to believe that those home markets are starting to reach capacity levels which require a significant slow down of growth. In Spain, we are not there yet, but we should reach this capacity level in late 2008, as we bring in another 25 aircraft (committed), Vueling places further orders, easyJet and Ryanair grow further in Madrid as well as, potentially, open other bases in Spain. We are ready for that challenge. We believe that the resulting marketplace in Spain 2008 onwards will be different and we will be leaders. Our investors are absolutely convinced that ClickAir is an excellent platform for European growth and are absolutely adamant, with the support of their large companies, that they make it happen. What are your expansion projects for the coming year(s)? We are mostly focused on the first two years of operations. 2007 will be

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a very high growth year for us. We are adding 16 aircraft and 500 staff to help us fly over 4,5 m passengers in 45 routes. Many LCCs look after extra-revenues to offset the low price of their tickets. What are the projects of ClickAir in terms of Extra-revenues? Ancillary revenues are crucial for us. We have three different categories of ancillary revenues planned at the moment: • Next week we will launch our nonair product offer in what will be the fastest ever launch of ancillary products by any airline ever. By March, we will complete this phase by adding some additional products which will make us the airline in the world with the largest number of travel-related ancillary products. In this area, we have been careful not just to add services, but to integrate them into our booking process in order to minimise and keystrokes and clicks by our users. • Flight related ancillaries include a number of on-the-day related services which will provide the customer with further comfort and options at the time of travel. From preferential boarding to Iberia PLUS frequent flier points, we expect to deliver differentiation and additional revenues. • New payment methods is our last category of ancillaries. Traditionally, airlines in Europe, LCC and otherwise, have “kidnapped” users forcing them to use credit or debit cards for purchases made online. We will not do that – we will unleash a collection of alternative payment methods which will address both ends of the internet-buyer spectrum: the risk adverse, and the frequent Internet shoppers. We want our travellers to have choices. Two of our passengers may be sitting next to each other on an aircraft having paid significantly different sums of money for their overall travel experience – we are convinced they will both be satisfied with the

services which each has paid for. 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? What´s clear is that there won´t be as many LCCs as there are today. The pressure that easyJet and Ryanair will impose in many carriers throughout the different regions will likely result in some losing the battle. I believe that there will continue to be gradual consolidation, not only throughout LCCs, but through traditional airlines of small and medium size. Are you worried about the shortage of pilots and crew hitting LCC market? Will you benefit from staff from Air Madrid? No. The first add from ClickAir in the Spanish press in May resulted in 997 CVs received in 3 days. Since then, we have received as many again. And yes, we will benefit from the very unfortunate collapse of Air Madrid. In two days after the official close down of the airline, we interviewed 110 pilots who came to our offices in Barcelona to learn more about ClickAir. Our growth plans demand a constant hiring process and yes, we will extend offers to some Air Madrid pilots. What are the options for ClickAir to transform its business model in order to make more costs savings? Our October-to-December CASKs place us right above Ryanair and well below Vueling and easyJet – we believe that this is an excellent base to start the operation. However, our objective is to go significantly further. We believe that we have some opportunities in cost reduction in several areas, such as further ground handling framework agreements for European operations, and internalizing some tasks which are currently outsourced. We have a benchmark to lower direct operating costs by a further 20% by 1 April.

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BIRD’S EYE VIEW Advantages and Disadvantages of Being a Legacy’s Daughter At the beginning of the new millennium when low-cost carriers began to develop extensively, major airlines responded very differently to the challenges of such competition. Air France did not express then any intentions of launching its own low cost carrier, while British Airways, being the first legacy to create a LCC, had to sell its daughter company GO in order to avoid internal competition. BA’s European rival, Lufthansa, which initially decided to stay aloof from budget carriage, upheld Eurowings idea and initiated Germanwings. At the same time it was clear that Spanish Iberia would also attack the matter. Now, seven years later, we have three highflying and rather independent LCCs that are backed up by legacies: Germanwings – LH, Transavia – AF-KLM, ClickAir – Iberia. Being a parent for a LCC kills two birds with one stone. Not only legacies play effectively in counter competition but keep the brand. Differentiating themselves from subsidiaries, legacies don’t make much emphasis on their daughter LCCs allowing them to develop rather independently and thus keep on branding themselves as full service airlines only. Without parent companies being neither a limitation, nor a success assurance subsidiary LCCs have to develop more or less on their own. While GermanWings and ClickAir seem to enjoy the parent companies’ opportunities, Transavia looks more like an independent test-drive project. Operating under the slogan “You fly to the highest standard at an attractive price” GermanWings reminds of LH a lot. However, it is difficult to say whether it was LH’s financial background or the fact that GermanWings appeared to be the first German LCC ever that determined its great success. Apparently, it was both. Germanwings started to operate fleet of five A320s and brought the total fleet to 43 items in less than 4 years. In comparison to other LCCs GermanWings has the advantage of using LH training centre that involves both stuff educational training and aircraft maintenance. Extensive fleet enhancement, hubs close to major cities, flight operation to more 30 European destinations and

valuable LH experience – all that brought the company to record passenger numbers: more than a quarter of a million passengers a day. Obviously such positive return made just four years after beginning of operation induce LH to help its daughter to gear up expansion strategy. Long before its birth ClickAir attracted many considerable investors that resulted in initial capital of more than 120 mln. Euro. Considering relatively aggressive expansion strategy that ClickAir has chosen to follow it is evident that the carrier is well upheld by Iberia. The legacy is really interested in ClickAir’s development since Spanish aviation market was really threatened by LCCs, notably easyJet and Ryanair, which proliferated in the region and almost took over some European routes, leaving for Iberia long-distance, internal and business flights. Consequently, ClickAir can be regarded as Iberia’s respond to a shifted situation. No wonder it will be strongly associated with Iberia, and will try to take back those routes that were lost by the parent company and occupied by foreign LCCs. However, there is no guarantee for success since not only is it about financial matters but management and credibility that has to be built by ClickAir alone. Almost the same reasons predetermined Air France – KLM decision to establish their LCC based on existing transavia.com. This new budget carrier is supposed to operate flights to destinations that are traditionally popular among passengers, namely Morocco, Tunisia, Spain, Italy and Egypt. Witnessing how successful other LCC are Air France – KLM chose to take a crack at the market. Probably in case the try is successful Air France – KLM will go on developing Transavia attracting extensive investments otherwise the project would be terminated. Since the subsidiary is merely an extension on transavia.com brand it won’t be associated with Air- France – KLM holding and will develop rather independently. However, profitable LCC will strengthen legacies’ position and perhaps inspire other legacies to start an LCC too.

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 Austrian declares war against mediocrity by bringing full service back to economy class The Austrian Airlines press release proudly proclaimed its quality offensive with these carefully chosen words: “Delicious, Tasty, Refined, Fresh.” The airline has declared war on the LCC phenomena by appealing to traveler’s stomachs and not their wallets. On November 16, 2006, the airline started serving complimentary meals and snacks on all European services. Austrian claims the distinction of offering the only chef-inspired cuisine in economy class. In a nod to the service culture of yesteryear, Austrian even provides free snacks and drinks on “ultrashort haul” flights of 65 minutes or less. This strategy not only breaks from the practices of Europe’s legacy airlines, it also strives to differentiate Austrian from LCC competitors. Legacy airlines traditionally compete in low fare markets by shedding product amenities in an effort to lower their operating costs. For most passengers, free meals and drinks are a distant memory. Of course, recent history demonstrates this type of metamorphosis is difficult (and perhaps impossible) for legacy airlines to achieve. In reality, these efforts simply result in brand deterioration for the legacy airline and continuing losses in the markets where direct LCC competition exists. Legacy airlines often rely upon the cross subsidization provided by long-haul markets where LCC competition is largely non-existent. The recent efforts of transatlantic new entrants, such as Eos, MaxJet and Silver Jet, are likely testing the resilience of these reliable profit centers. Low fares and low costs are the obvious strengths of an LCC airline. But what are the strengths of a legacy airline? Traditionally these airlines have competed on the basis of flight frequency, customer service and product amenities. For many legacy airlines, the amenity component has largely disappeared from intra-Europe services. Meanwhile, these very same airlines continue to compete for long-haul business travelers on the basis of service and amenities. Consumers are likely confused by this split personality - - lavish service is promised on some flights, while a bare bones product is delivered on others. Austrian has consciously chosen to replace the ancillary revenue opportunity linked to onboard food and beverage sales with the expense of bundling these items in the price of an economy class ticket. In addition to “savory snacks” served by flight attendants from a basket on ultra-short flights, the airline is also providing a traditional beverage service of coffee and tea. This represents a meaningful

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‘‘IDEAWORKS AISLE’’

by Jay Sorensen (President of IdeaWorks)

www.IdeaWorksCompany.com

change; Austrian’s primary catering vendor estimates the new economy product will add an annual expense of 4.5 million meals. But it is on longer flights of 65 to 150 minutes where Austrian is measurably better than other airlines. On these international flights Austrian offers a freshly-prepared breakfast or a new Austrian snack box during other meal times. The airline has partnered with a well-known chef in its hometown of Vienna to provide inspiration for its economy-class cuisine. Choices include classic Austrian salads with beef, ham or poultry, and tasty Austrian sweets such as apple strudel, Punschkrapfen (punch doughnuts), baked cheese slices, or Kardinalschnitte cream cake. The airline’s promotional materials promise a rich and varied food experience with a menu that is changed on a regular basis. The new snack service has even inspired a unique marketing component. The lid of the snack box can be removed and used as an Austrian postcard. When completed on board and handed to a flight attendant, the postage is paid by Austrian Airlines. This innovation uses viral marketing to spread the word about the new economy class product through the postcard greetings sent by those onboard. The airline reports passengers completed several thousand postcards during the first few days of product launch. But perhaps the true benefit of Austrian’s enhanced economy class is the carrier’s newly found ability to credibly promote “quality” as an overall theme throughout its entire network. In the same press release announcing the new economy class service, the airline promoted its lie-flat sleeping seats in the business class of its long-haul flights. This type of product purity - - from short-haul coach to long-haul business - - is a rarity in today’s airline business. Austrian has clearly defined its mission to offer a high quality coach product on its intra-Europe flights. Its network-wide quality consistency can become a power-

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BIRD’S EYE VIEW ful brand attribute, whereas the quality “inconsistency” of other legacy airlines contributes to brand confusion. Austrian bundles seat assignments, checked baggage, food service, beverages, and frequent flier benefits into the price of economy class ticket. Ryanair, and other LCCs, do the opposite by charging fees for these services.

what they do best. The marketplace will determine if demand for a fully-bundled product is sufficiently large to reward Austrian with attractive profits. IdeaWorks cannot guarantee, and assumes no legal liability or responsibility for the accuracy, currency or completeness of the information.

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Ironically, Austrian’s dedication to a fully-bundled product is a pure as Ryanair’s dedication to a fully-unbundled product. Each airline is to be congratulated for knowing

ANALYST PORTHOLE 2007 in the Air: The Year Ahead Air transport in the UK last year was somewhat overshadowed by the events following the terror alert in August and the stringent security measures that followed. But some truly exciting developments were also announced, many of which promise innovations for air travel this coming year. What does 2007 hold in store for the flyer? In-flight Mobile Use One of the more controversial advancements, mobile phones will become airbound in 2007 as a number of airlines introduce in-flight use. Ryanair was the first airline to announce the use of the technology to allow passengers to use their phones on planes, which will be in place by summer 2007 on 50 of the airline’s fleet. But is it good to talk? The announcement has been met with strong disapproval from many quarters. Cheapflights conducted a user poll to discover whether the service would be welcomed by flyers. The results showed that a hearty 66 per cent were against the idea. Long-Haul Low-Cost? We’re completely used to getting low fares on short-haul European flights by now and 2006 saw steps towards budget flights to far-off destinations as well. The much publicized arrival of Oasis-Hong Kong Airlines, which flew from London to HK for as little as £75 one-way excluding taxes, was accompanied by a quieter continuing expansion from Zoom Airlines, a budget UK-Canada airline, flying transatlantic for starting prices of £99. Oasis-Hong Kong is reportedly in talks with easyJet about a tie-up operation to offer passengers budget flights to multiple destinations worldwide. Even more recently, Richard Branson announced that a possible global low-cost airline could offer flights to Malaysia for just £43.

reduced - but well-prepared travelers don’t have to face massive queues at airports. Where’s New? There is always a host of new routes at any given time of year. Expansion from easyJet at Edinburgh, to include regular services to Madrid, Milan and Palma; new links to popular holiday destination Croatia from Flybe; and a major expansion from Birmingham Airport by bmibaby to numerous European destinations. Gibraltar is likely to be the new destination, after Spain opened up air routes to the country for the first time in ten years, many UK carriers announced additional routes and a new low-cost airline, FlyGibraltar, announced plans to start flights from March. «Greenwash»? 2007 will also be the year of increased air passenger duty (APD) as the rates double in February. The increase was condemned by airlines and green campaigners alike and led many airlines to pull out of a previous agreement with Defra to reduce emissions from planes.

Security Last year was a tense one for air travel after August. Security measures remain stricter than this time last year - liquids allowances and hand luggage size are both still

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BIRD’S EYE VIEW Restricted Growth: the Hungarian Low-Cost Market and its Limitations Many experts involved in the airline business are concerned that in Central and Eastern Europe the growth potentials are huge as this regional market is still underserved in comparison with the Western European market. Opportunities in this region are reported to be especially significant for the low-cost carriers (LCCs). However, any further expansion may be constrained by the limited capacity of the airports or by the limited number of potentially profitable destinations. Hungary is one of those few European countries where the growth of the LCC market was lagging behind the European trend: in the first half of 2006 the local low-cost market share reached only 15.6% of total flight movements (excluding overflights) and this share has not exceeded 17% by the end of the year. In other words, the growth of the Hungarian LCC market has not been as dynamic so far as one might expect. In this analysis we try to highlight some of the potential causes of this somehow surprising fact.

Contrary to Balaton, Budapest is not only a popular tourist destination all year round, but as the capital of Hungary, the city is a regional financial and economic center as well. In this respect, LCCs can expect a relatively stable, less volatile demand for air traffic, therefore the city should have become a top destination of European low-cost carriers. However, as Figure 1 shows, a relatively few number of LCCs are present at Budapest Airport and only seven of them fly to Terminal 1, which was specifically rebuilt for serving low-cost flights. Why is there a relative lack of low-cost carriers? The answer to this is the high airport charges which makes Budapest Airport the most expensive airport in Central Europe. Since in the proximity of Budapest there is not a single secondary airport which is suitable for serving international flights, LCCs do not have an alternative option to choose. A comparison of airport charges between the Etiuda Terminal of Frederik Chopin Airport of Warsaw and Terminal 1 of Budapest Airport illustrates the major difference in prices. We chose two low-cost carriers, Wizz Air and Sky Europe for the sake of the demonstration. The calculation displayed in Figure 2 was based on a load factor of 80 percent, when take-off takes place during daytime. Consequently, we considered 144 passengers for the plane of Wizz Air and 119 for Sky Europe’s. In order to calculate landing/take-off charges, the maximum takeoff weight of the aircraft had to be accounted for. Based on the data provided by the airlines, this figure for the A320-200 is 71.5 metric tonnes while for the 737-700, it is 63 metric tonnes. The calculation of charges only includes the lan-

Currently there are only two airports in Hungary which are served by LCCs. One of them is Budapest Airport, the other is Sármellék, a small airport near Lake Balaton, the popular tourist destination. However, these two are hard to compare to each other. Lake Balaton is rather a summer resort, thus air traffic is highly seasonal and almost exclusively restricted to Western European tourists as the local population is not big enough to generate substantial demand. In spite of this, Ryanair flies to Sármellék from London and from Frankfurt three times a week also during the winter season. This may be due to the fact that in the neighbourhood of the airport the unique thermal resorts of Hévíz, Bük, Sárvár and Zalakaros are targets of significant spa and health tourism, therefore there may be demand for offering flights off the peak season. Nevertheless, Germanwings and Helvetic Airways fly to Sármellék only in the summer.

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BIRD’S EYE VIEW ding/take-off charges, passenger charges, the noise charge, security charge and parking charge. Groundhandling charges and other relevant expenses like fuel charges were not taken into account. Consequently, as the results indicate, one flight movement in Budapest (with a load factor of 80 percent) costs approximately 4 euros more per passenger than the same movement in Warsaw, and we did not even calculate the full amount of airport charges! In the LCC business where cost is the major factor of competition, it is not surprising that several airlines have already complained about the high charges of Budapest Airport. This was a major reason why Ryanair refrained from serving Budapest, and this may be a reason why LCCs already present there do not raise their offered capacity as much as the inherent potentials of the Budapest market would enable it. To bring an example, Wizz Air is negotiating with other regional airports and is considering withdrawing its capacity from Budapest if the airport does not lower its prices. Even though a 5 % decrease of charges was announced last year, Budapest still remained the most expensive airport in the region.

However, the lack of adequate alternative airports puts Budapest in a quasi-monopolistic position of which the airport takes advantage. The threat of withdrawal posed by some of the LCCs can not be taken realistic as long as a significantly cheaper airport is not built in the neighborhood. Since the cathchment area of Budapest includes basically the whole country (10 million people), there is not much opportunities left for an alternative airport. Even if only the population of the city and its broad agglomeration is regarded, approximately 4 million people fall within the

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catcthment area of the airport. Conseqeuntly, potentials of locally generated demand may also be high. This is not the case with Debrecen (220 km from Budapest to the East), the second largest city of the country, which also possesses a recently built international airport. At the moment, Debrecen (205 000 inhabitants) could be the only alternative target of LCCs but its catchment area can not be compared to that of Budapest. The population which might be attracted by this airport does not exceed 1 million people at best. Furthermore, although this part of the country also offers some famous touristic attractions (like the plain of Hortobágy), it is highly uncertain how much local demand could be generated by a presence of an LCC. Considering the Western part of the country, the proximity of the airports of Bratislava and Vienna prevents the emergence of a new international airport especially in Northwest-Hungary. Consequently, Budapest is likely to remain the single biggest airport in a monopolistic position for many years to come.

It is also worth taking a look at the destinations which are served by low-cost carriers from Budapest (Figure 4). Among the currently available 62 destinations (based on the summer and winter timetable of 2006), more than a quarter of them is located in Germany. Figure 4 does not show the share of offered capacity (in terms of offered capacity per country, the picture would be different) but gives an impression about how well a country is served or underserved from Budapest. It is interesting to note that only 40 % of the total routes are served by at least two LCCs, therefore on the majority of the routes there is no competition between low-cost carriers. Moreover, only 3 routes (Budapest-London, Budapest-Paris, Budapest-Copenhagen) are served by more than two LCCs, so fierce competition takes place only on these routes. What is most striking is that countries like Poland, Czech Republic or Ireland are not in the top 12 in terms of destinations, but the small share of France (2 destinations), Spain (4 destinations) and the UK (4 destinations) is also surprising given the size and market potentials of these countries. All in all, there is considerable room for expansion and for opening up new routes to and from Budapest but the profitability

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BIRD’S EYE VIEW of these routes may be the biggest concern of LCCs, especially if airport charges remain at the current level. It is not a bold consequence to draw that the future of the Hungarian low-cost market partly lies in the hands of the decision-makers at Budapest Airport.

Flybe, BA Connect and Consolidation…

(1) Excluding groundhandling costs. Source of data: www. bud.hu/b2b/repuloteri_dijak (Budapest Airport Charges) and http://www.lotnisko-chopina.pl/katalog/oplaty/en/ pliki/2005_11/warszawa_airport_charges.pdf (Airport Charges at Warsawa Airport)

IN BRIEF

Flybe has just realized another consolidation in the airline industry by acquiring the British Airways’ subsidiary BA Connect. Subject to regulatory clearance, this new entity should create Europe’s largest regional carrier. However the deal is not signed yet. While some rivals and analysts warned that Flybe acquiring BA Connect would take a lot of time and investment to get right. Job cuts are also looming with 250 of BA Connect’s staff to be made redundant. Jim French, Flybe’s chairman and Chief Executive, would walk away from the deal if negotiations with the unions failed. “There is no point in having a reluctant bride. If the staff are not with us then it won’t happen.” Flybe appears protected from takeover by a shareholder structure that is 82% controlled by Jack Walker trust. Even if its stake will be diluted by the 15% BA shareholding, the carrier should stay independent if the trust holds firm against any predator. Finally, the flotation of Flybe is due in 2008 and should give the financial asset it needs to develop.

AIRWAY MARKERS FlyMe: On its Way to the Moon On Monday morning 1st March, 2004 FlyMe fleet took off from Stockholm (Arlanda) to Gothenburg (Landvetter) and Malmö (Sturup) for the first time. Since then the airline puts its strong foot down the Nordic and European sky. In less than 2 years FlyMe opened 16 new routes and is likely to expand even further. FlyMe, Swedish low cost carrier, consists of two partner companies which are FlyMe Europe AB and FlyMe Sweden. Whilst FlyMe Europe AB is listed on Stockholm’s stock exchange Nya Marknaden and is responsible for publication of news and economic information, FlyMe Sweden is the company that is in charge of flight operations. FlyMe has not only revolutionized the very view of budget travel in Sweden but already enlisted governmental support being, according to a contract signed between the company and the government, the sole carrier that operates governmental flights to destinations it serves. Year 2006 brought the most significant advances the company had ever experienced. Apart from certain infrastructural changes, FlyMe was able to activate extensive investments and in just a few weeks shifted from a regional company to a serious international carrier with its hub in Gothenburg. Hardly any airline that is only 2 years old would open eleven new destinations at once, which are not only major European cities but popular tourist destinations (London/Stansted, Paris/Beauvais, Nice, Amsterdam/Schiphol, Rome/Ciampino, Prague, Malaga, Alicante, Palma de Majorca, Crete/Chania and Rhodes) and thus challenged the two biggest carriers: Ryanair, serving

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the route to London, and Sterling, serving destinations in South Europe. The choice of destinations was no surprise since it is those routes that have shown stable growth in Swedish aviation market over the past years. The new strategy that was chosen to follow also implied increase of aircraft utilization from 4 hours to about 11 hours per each aircraft. Within the framework of the same expansion strategy that was adopted in the beginning of 2006 FlyMe initiated an acquisition project of the majority of shares in FlyLAL (Lithuanian Airlines). Though the project was terminated in September, FlyMe managed to take over another airline which is British charter airline Astraeus with hub in Gatwick Airport. This kind of acquisition not only enables FlyMe to use combined fleet of 15 aircraft but brings the company closer to its rival, Ryanair. The end of the profitable year was celebrated with three new routes to Istanbul, Marseille and Rimini. Since the first take-off, FlyMe has been building a trademark that is to be associated with ambition, determination and challenge. Effectively involved capital and timely implemented expansion strategy allows to assume that the company will experience positive results and probably fly us to the Moon…

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

A Proposed Environmental Public Relations Strategy for LCCs All European airlines face immense challenges in combating negative publicity over their impact on climate change. Many European LCCs can positively contrast their more eco-friendly tactics with LCCs in the ecologically challenged States. In order to sway public opinion, LCCs need to emphasize their environmentally friendly policies while at the same time solidifying and strengthening their stands on complex issues such as the EU Emission Trading Scheme and “green” taxes. For European LCCs to effectively communicate to passengers the effects of intra-Europe air travel on the climate, they need to give passengers the requisite facts about the effects of aviation on climate change, and the steps they are taking to minimize their impact. Many consumers believe that LCCs are environmentally unsound businesses because they believe the two primary criticisms of how LCCs exacerbate climate change: • First, unlike legacy carriers that have taken decades to build large fleets and complex route networks, LCCs have grown extremely quickly. So while legacies still account for a majority of aviation-produced pollution, the share of pollution contributed by LCCs is growing rapidly. • Second, most travelers who fly on LCCs are taking discretionary trips that can be minimized or eliminated. This is evidenced by the high concentration of LCC flights to vacation destinations such as the Balearic Islands, Malaga, and the Canary Islands. Many people fly more often than they otherwise would because LCCs price these flights so inexpensively. If European LCCs want to create a balanced dialogue with consumers, they must effectively communicate the steps they have taken to make their businesses environmentally friendly. Customers must understand that many of the measures LCCs take to lower fares also help to minimize the environmental impact of air travel. Also, consumers may find satisfaction that as a result of these measures, European LCCs pollute less than their counterparts in the States.

Some of these measures are listed below: • European LCCs are not only fitting more seats into aircraft than LCCs in the States, they are filling them with load factors that are on average 5-15 points higher. On their A319s, easyJet has a full four rows more than the A319s of Frontier Airlines and last year, easyJet’s load factor was over eight points higher than Frontier’s. More passengers and higher load factors yield less pollution per passenger. • European LCCs have also been more effective than American LCCs at reducing aircraft weight, primarily through stricter baggage policies. These policies are effective at reducing what customers carry and reducing the environmental impact of air travel. But the grandfather of LCCs, Southwest, still has an archaic policy which allows customers to check up to three 50 lb bags for free. This leads to heavier aircraft that consume more fuel and spout more emissions. • Europe’s largest LCCs including Ryanair, easyJet, and Air Berlin all use new aircrafts that are cleaner than older aircrafts. Many of these aircrafts are also equipped with fuel-saving technology such as winglets, giving them an ecological. Most LCCs in the States are also using newer aircraft, one of their few cost advantages over legacy carriers. • Many European LCCs are strictly point-to-point airlines which helps cut the distance a passenger flies to his or her destination, reducing their impact on the environment. Legacy carriers around the world operate hubs that are efficient, but nonetheless require passengers to travel farther than they would on a point-to-point flight. Most US LCCs are at least partly hub-and-spoke. Read more Air Bulletin’s analysis on LCCs and Environment Issues on our next publication...

Sam Sellers provides analysis and commentary on the airline industry at his website, www.airlinebulletin.com. He 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. The ebook provides step-by-step instructions that readers can use to purchase the cheapest airline tickets. It can be purchased for $10 at http://www.takecontrolbooks.com/airline-ticket.html

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Air Scoop - February 2007

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DOWN TO EARTH Ryanair and UK Minister: Face to Face Environmental issue is one of the main points that is appearing on the headlines of today’s newspapers and seems to be a concern of some politicians more frequently than before, and the aviation sector seems specifically to be targeted and highlighted. Airlines, but above all low cost airlines, are treated from the political point of view as one of the most contributory factor to the negative environmental effects in the future. British environment Minister Ian Pearson has accused Ryanair (and some other airlines) for not taking climate change seriously. Mr. Pearson said that “when it comes to climate change, Ryanair are not just the unacceptable face of capitalism, they are the irresponsible face of capitalism”. Air Scoop has investigated the extremely serious allegation and asked Ryanair for its statement. The respond of Ryanair was as follow: Ryanair considers itself as the Europe’s largest low fares airline, which is also Europe’s greenest airline. Ryanair rejected the foolish and ill informed comments of UK Environment Minister, Ian Pearson. Laughing off Mr. Pearson’s attacks, Ryanair’s CEO, Michael O’Leary said: «Being attacked by Minister Pearson (reminds me of Denis Healy’s famous quip) .... is like «being savaged by a dead sheep». It is clear that Minister Pearson hasn’t a clue what he’s talking about. 1. The recent Stern Report confirmed that the airline industry accounts for just 1.6% of global greenhouse gas emissions. Airlines are neither the cause nor the solution to climate change. 2. Mr. Pearson has nothing to say about road transport, which accounts for 18%, or the power generation industry which accounts for over 25% of CO2 emissions, despite the UK Government’s abysmal record on tackling polluting power stations, many of which his own Government owns. 3. Ryanair is Europe’s greenest airline. We have spent in excess of $10bn. over the last five years in acquiring a fleet of brand new Boeing aircraft which have reduced our fuel consumption by 45%, and our noise and CO2 emissions by 50% per seat.

«Like most politicians, Minister Pearson talks a lot but does little. Unlike politicians, Ryanair has spent over $10bn. to become Europe’s greenest and cleanest airline, a fact recently recognized by the Dutch consumer organization“. «At a time when aviation generates just 1.6% of greenhouse gasses, isn’t it time that Minister Pearson and other equally foolish politicians actually tackled the real causes of climate change which is road transport and power generation“. «In the meantime, Ryanair will continue to be Europe’s greenest airline while opposing these so called «environmental taxes» which is just another way of greedy politicians grabbing more money from ordinary passengers while doing nothing at all for the environment.” After analysis of the Ryanair statement, Air Scoop asked the British Department for Environment for its comments to the Ryanair respond. The answer was as follow: «Urgent progress is needed to ensure that aviation addresses its climate change impacts. The UK has led the debate within Europe to include aviation in the Emissions Trading Scheme and the recent announcement by the Commission is a step forward in ensuring the environmental costs of aviations climate change impacts are taken into account». «We must work urgently with the aviation sector, the European Commission and other governments to put in place an ambitious scheme that is environmentally effective and one which is implemented as soon as possible, driving down emissions further and faster.» «The Government’s view is that aviation is an important part of the UK economy and that it has an important role to play in the battle against climate change». «The Government’s policy is to support a sustainable aviation industry consistent with its environmental responsibilities, including through the EU Emissions Trading Scheme. The Government’s policy was most recently set out in the statement by the Secretary of State for Transport in December, which was agreed across Government». Some sectors of the economy are part of the EU Emissions Trading Scheme, but the aviation sector is not yet. As the airline sector is the one of the fastest growing industry, it has therefore been identified in terms of an environmental trouble and financial contributor.

4. Mr. Pearson is a Minister of a Government which has like Scrooge this Christmas doubled the air passenger tax on tickets from £5 to £10, grabbing another £1bn. in taxes without doing anything whatsoever to invest this money in the environment.

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Air Scoop - February 2007

Michael O’Leary

Ian Pearson

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BIRD’S EYE VIEW New German Airline TUIfly Aims To Become A European Leader Since January 15th, the German air transport market has a new competitor: TUIfly. The company was born from the merger of HLX and Hapagfly, the two German airlines of TUI, the European leader in tourism. In the past, HLX’s yellow planes were more focused on German internal flights and « city-to-city » flights in Europe for individual customers, whereas Hapagfly’s blue planes were mainly known as a charter holiday airline. The new company’s airplanes will all be painted in bright yellow. TUIfly operates 56 planes to 75 destinations in 17 countries, mainly Germany, Southern Europe, Turkey, Marocco, Egypt... But not to Eastern Europe. The two companies together carried more than 11.1 million passengers in 2006 (4.4 million for HLX, increasing by 22%, and 6.7% for Hapagfly). TUIfly plans to reach 13.5 million passengers in 2007. This would be a 22% boom. Today, TUIfly is already number three on the German market, behind the national leader Lufthansa and its low-cost challenger Air Berlin / DBA (19.7 million passengers in 2006, +12.6%, the third low-cost company in Europe).

director, to the German newspaper « Die Welt ». The new company hopes to become a leader in Europe. And until 2008, its profit is expected to rise by 60 million Euros. Secondly, the creation of TUIfly aims at helping TUI to develop its business on the Internet, one of the firm’s weaknesses. TUIfly’s website (www.tuifly.com) is conceived not only to sell tickets, but also other TUI touristic services for business or leisure trips. TUI also plans to progressively market its six other European airlines (Thomsonfly, Jetair, Corsair...) through this website. It is already possible, on tuifly.com, to buy a combined ticket from Stuttgart to Paris with TUIfly, and then from Paris to the Carribean Sea or Kenya with Corsair. In the future, those other TUI national or regional airlines could be mergered into TUIfly too. Partnerships with other European companies are also part of the plan. After the buying of DBA by Air Berlin in September 2006, the birth of TUIfly is another episode of the consolidation movement occurring on the German LCC market. And a condition sine qua non for TUI to compete on the continental air transport market.

The creation of TUIfly is one of TUI’s strategic operations to regain economic health. In 2006, TUI faced a harsh crisis, with important financial losses and probably almost 4000 jobs to be cut. TUIfly as a double goal: First, strengthen TUI’s position on the European LCC market; the company wants to develop European destinations and inter-city flights, especially for individual customers. « We want to make attractive offers in each EU-country on mid-distance flights », said Christoph Müller, TUIfly’s

BLOGS TREND Ryanair’s Battles Equal Blog Coverage Even if easyJet gets closer to Ryanair weblog coverage, the orange carrier is still number 2. The highest peaks of Ryanair match with the numrous clashes with Ian Pearson, the UK Minister, and David Taylor over the month. With «the irresponsible face of capitalism» and «the Al Capone of the aviation industry» on one side, and «foolish and ill-informed» and «It is clear that Minister Pearson hasn’t a clue what he’s talking about» on the other side, the battle is not over yet… Ryanair also had to face stock issues when ABN Amro downgraded Ryanair to ‘sell’, citing concerns about fuel hedging, airport charges and high existing margins. Since then relations between the companies have been frosty and Ryanair refused to have any direct contact with ABN Amro analyst.

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Air Scoop - February 2007

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