Air Scoop February 2008

Highlights in this Issue

Did Ryanair Believe in its Gloomy Predictions? Investing in SkyEurope – a bottomless bag? Slowdown of LCCs Industry SWOT Analysis of Wizz Air LCCs Get Slammed Over Hidden Charges

p. 2 p. 3 p. 7 p. 8 p. 18

The Low Cost Carriers Analysis Newsletter

EDITORIAL

AIR SCOOP ANNOUNCEMENTS

Slowdown of European LCCs Industry: What Comes Next?

A Glimpse of Headlines News!

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hese weeks, analysts haven’t been really enthusiastic about the European low-cost carriers market. Investors decided not to take risks which resulted in a fall of most LCCs shares. By now, there is no doubt that European LCCs face an important economic slowdown; demand is naturally limited (p. 7). This recession combined with high oil prices and an average load factor could slash Ryanair’s profit by 50% next year. However, this is not the first time that Michael O’Leary announced such gloomy predictions; last June the Irish carrier announced a pessimist outlook to come, but 6 months later results published by the company were far beyond the initially pessimistic forecasts. Once again, Michael O’Leary could transform this threat into opportunity and launch a new attack on his competitors by announcing a global recession to come (p. 2). Two potential victims of this economic slowdown could be SkyEurope and Vueling. Facing competition with Ryanair, easyJet and clickair, Vueling faced many economic difficulties last year. To survive, Vueling needs to find new investors or to merge with another carrier. Rumors of mergers with Spanish competitor clickair are in the air… On Central and Eastern market, after a major restructuring process in 2007, SkyEurope is still not out of danger. Air Scoop realized a complete analysis of SkyEurope investors and their goals (p. 3). Main competitor of SkyEurope in this region is Wizz Air. To understand strengths and weakness of this carrier, we have realized the SWOT of Wizz Air (p. 8). Ancillary revenues represent a great amount of LCCs revenues, and could be a solution to compensate recession. Recently the number of charges on passengers has increased and requires travelers to jump through numerous hoops to avoid any additional fees. While consumers associations criticize LCCs over hidden charges (p. 18), many conferences about ancillary revenues will take place this year, like Ancillary Revenue in Travel 2008 in February in Dublin for instance.

Air Scoop - In the Air Flybe Target Of Buyout?

Clickair And Vueling Possible Fusion

Ryanair quarterly profit down 27% Ryanair posted a sharper than expected drop in third-quarter net profit today and warned high oil prices, an economic slowdown in the UK and weak sterling meant profits may fall by half next year. Europe’s biggest low-cost carrier said excluding a one-off gain from the sale of aircraft net profit in the three months to the end of December fell 27 per cent to €35 million as winter fares fell almost 5 per cent. Edgardo Badiali appointed as CEO, GoAir news Wadia Group-promoted, GoAir, has announced the appointment of Edgardo Badiali as the chief executive officer of the company. It said that Badiali, a senior aviation professional with over 15 years of senior management experience, would report to GoAir managing director Jeh Wadia. Badiali’s earlier assignment was with Italian low- cost airline, MyAir, as its CEO. Cheap air fares ‘killing British tourism’ Budget airlines are «squeezing the life out of British tourism» and the government is exacerbating the problem by promoting expansion of the aviation industry, MPs were told yesterday. Budget hotel chain Travelodge accused Ryanair and easyJet of driving an £18bn «tourism deficit» by drawing British holidaymakers away from Britain with low fares underpinned by state tax breaks. Vueling shareholder, Hemisferio, confirms in talks with Clickair Vueling Airlines core shareholder, Inversiones Hemisferio, with approximately 26% shareholding in the LCC, said it is in talks with various companies in the sector, including LCC, Clickair. However, the company stated no agreement or commitment with anyone has been reached. More on http://airscoop.blogspot.com

Air Scoop - February 2008

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BIRD’S EYE VIEW Did Ryanair Really Believe in its June 2007 Gloomy Predictions? UPDATE : As Ryanair just warned high oil prices could slash its profits by 50% next year, Air Scoop has decided to analyse another past gloomy prediction made by the carrier just 6 months ago, in June 2007. Will it be the same situation now? On June 5th 2007, Ryanair made an unusual announcement given its outstanding economic performances: the airline predicted a low full-year profit growth of “only” 5 pc for financial year 2007-2008. According to the company softening demand, rising interest rates and higher airport charges were the main reasons for this pessimism. But Ryanair quickly revised upwards its profit guidance. On July 31th, in its Q1 financial results, the airline reevaluated profit growth predictions to 10 pc, thanks to cost cutting and capacity reductions. Finally, in November 2007, H1 figures published by the company were far beyond the initially pessimistic forecasts. And the fullyear profit guidance was now pushed to 470 million €, +17.5 pc over the year. In retrospect, the cautious profit predictions on June 5th, 2007 are quite surprising regarding Ryanair’s previous results. In 2006, the airline made more than 400 million € net profit, about 30% more than in 2005! The Irish carrier is one of the most profitable airlines in the world. What is more, Ryanair’s strategy of strong and quick growth makes the airline not really familiar with gloomy financial announcements. So, why did the airline published such low projections on that day? Did it really had “no visibility”, as it pretended at that time? Did it really believed in a “very difficult” winter season? Or was this pessimism just intentionally exaggerated? There could have been several reasons for Ryanair to lower its financial prospect for 2007-2008. If the European leader makes poor predictions, the entire LCC business is hurt. Smaller competitors are weakened; their share value goes down, making them more exposed to takeover. And Ryanair can justify the launching of a harsh fare war, as it did this summer, putting all its challengers under pressure. Besides, O’Leary’s opinion on the market is not approved by all his colleagues: EasyJet boss Andy Harrisson, for example, rejected it.

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But one important reason for Ryanair’s pessimism may be that it helped lowering the airline’s own share value, in order to benefit from more attractive prices for a share buyback. In fact, on June 5th, Ryanair also announced a 300 million € share buyback, representing 3.5 pc of the share capital. On the same day, after the bad profit announcements, Ryanair’s share lost about 7 pc, and then continued to decrease slightly. From 5.4 € on June 4th, it fell to 4.95 € on June 26th, the day the airline began to buy shares back. At the beginning of August, Ryanair had bought back a total amount of 37.6 million of its shares (2.5 pc of the share capital), for approximately 187 million €, about 4.97 € per share. As Ryanair does not pay dividends “as long as I live and breathe”, as O’Leary said, the purpose of buying back shares is to increase the “earning per share” (EPS) ratio, for the benefit of shareholders. Ryanair established in its H1 report in November: “Profit upgrade and share buyback increase EPS by 19.5% in 08”. The EPS is also an indicator of a company’s profitability. The share value, however, was not significantly enhanced by this buy back operation. At the end of 2007, it was lower than 4.7 €, and even than 4 € in 2008. Ryanair’s intentions when it announced bad profit perspectives in June, which were then nearly quadrupled until November, cannot be established for sure. Was the airline sincere? Was this just a strategy to hit the whole European LCC business and lower share prices in prevision of the buyback? However, even if Ryanair predicts a downturn, it is the last company suffering from it, given the airline’s record economic performances. And it has the ability to finally take advantage even of poor forecasts.

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BIRD’S EYE VIEW Investing in SkyEurope – a bottomless bag? In 2007, SkyEurope underwent a major restructuring process. The business strategy of the company was significantly modified and the management board was renewed. Christian Mandl and Alain Skowronek, the founders of SkyEurope also had to leave the management. The reason for this turmoil was the constantly bad financial performance of the carrier, which threatened SkyEurope with bankruptcy. In spite of the daunting prospects of the company, certain investors did not refrain from investing in it. Since the low cost carrier became listed simultaneously on the Warsaw and Vienna stock exchange on 27 September 2005, the shares have been traded and exchanged among several investment funds. In this article,we attempt to analyze who invested in the company and we also try to explain the motivations and goals of those investors.

However, the financial downturn of the company soon became critical, as SkyEurope failed to improve its load factor in the first quarter of 2006 (compared to the previous year), thus operating loss further increased. In April 2006, Endavour Holdings decided to sell all the 2 668 546 shares it owned. These shares were bought buy institutional investors. As a result of the transaction, within weeks, SkyEurope’s share price soared to an all-time high of € 6.35 only to see the price plummeting in the following month down to € 1.42 in August, 2006. Within less than a year, market capitalization of SkyEurope fell from € 120 million to € 28.4 million. The decision of Endavour Holdings about the sale of the shares triggered a wave of sales, which resulted in the continuous decrease in the share price.

Before the initial public offering (IPO), the shareholder structure of SkyEurope was the following: Endavour Holdings (43.45%), Bank Austria Creditanstalt AG (39.83%) and Loryma Investments (16.72%) owned the assets of the company. The latter group, Loryma Investments was exclusively owned by Mandl and Skowronek. Within the group led by Bank Austria, several investment funds took their share, including East Capital Asset Management (16.72 % of total shares) and DWS funds (7.79 %), which is a member of Deutsche Bank Group.

In September, 2006 a new investor appeared on the horizon, York Global Finance II (York), which is an affiliate of York Capital Management, an international private investment fund group that manages over €7 billion of assets globally. York has built expertise in investing in undervalued corporations, such as SkyEurope, which seemed to qualify for this title. The agreement between the air carrier and York contained a considerable capital injection into SkyEurope. 10 million new shares were issued that were subject to purchase by existing and new shareholders at a fixed price of € 1.75. Moreover, York purchased an additional 8.99 million new shares also at a fixed price of € 1.75. This transaction made York the largest shareholder of SkyEurope, as it owned 23.06 % of the total authorized shares of which number increased to 38.99 million with this transaction. In addition to these, York also purchased bonds worth €6.7 million, which were mandatorily convertible to an additional 3.8 million new shares of SkyEurope. Upon conversion of these bonds to shares, York’s share was expected to rise to 29.9%. In sum, York invested approximately € 22.4 million in SkyEurope in order to become the largest shareholder and gain substantial control over the company. To reinforce its commitment to SkyEurope, York also agreed to purchase a further € 17 million nominal amount of nonmandatorily convertible bonds; therefore the total investment of the fund exceeded €38 million (€ 15.73 million of purchase of shares, €6.7 million of purchase of convertible bonds, € 17 million of nonconvertible bonds). Together with the issuing of 10 million new shares, this comprehensive equity and equity-linked financing package amounted to € 56.3 million.

The IPO price on 25 September 2007 was €6 per share, therefore the company was valued at €120 million at the beginning of the trading. In December, 2005 the 20 million authorized shares of SkyEurope were divided among Endavour Holdings (13.3%), Loryma Investments (8.8%), East Capital (8.4%), Merrill Lynch (6.5%) and Griffin Capital Investment (5.7%). The rest of the shares (57.3%) were on public float.

History of Sky Europe’s share price (Sep 2005 – Feb 2008)

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BIRD’S EYE VIEW Given that the IPO in September 2005 valued the company at € 120 million, York’s investment less than a year later can be considered a risky bargain. On the one hand it was a bargain, because control over SkyEurope was achieved with a relatively low volume of investment given the company’s miserable performance in the stock market, on the other hand, the risk was that if this investment had not been followed by significant changes in management and in the business strategy, SkyEurope’s bad performance would have continued. York’s commitment stabilized the financial situation of SkyEurope and thus, the air carrier regained confidence of the market. This is visible in the share price which began to increase again after the deal was arranged. However firm the financial situation of SkyEurope seemed to be in the fall of 2006, the problems which were rooted in the stuck-in-the-middle market position of the carrier still existed. The product portfolio lacked a clear focus, mainly leisure and business travellers were targeted on such routes that were characterised by high seasonality of demand. Moreover, the company expanded from its rather small home market too quickly and failed to compete on the most profitable British and German destinations, unlike its rivals, like Wizz Air. The operating lease agreements with GECAS (General Electric Commercial Aviation Services) for 12 brand new Boeing 737-700 NG aircrafts put a constant financial pressure on SkyEurope. Operating leases are a common form of financing airliners. They are popular because the lease term is short compared to the useful life of the asset (aircraft) that is leased. However, it assumes a payment of a fixed monthly amount of money, which is not subject to renegotiation, at least until the lease expires. This is the reason why SkyEurope has been losing cash and cash equivalents so dramatically.

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and flyNiki, a budget airline. Rumours were spread that a merger was prepared between SkyEurope and Air Berlin (a major stakeholder in flyNiki) and this way, Mandl and Skowronek could have saved their position at SkyEurope. Nevertheless, the planned merger did not occur and Pecik decreased its interest in the airline to 4.5% by March 2007. The sale of more than 4.7 million SkyEurope shares shook the share price again, which started to plummet for the second time within less than a year. York won the battle against RPR. In May, 2007, a major change in the management structure was announced. Mandl and Skowronek stepped down; Jason Bitter became the new CEO and Nick Manoudakis the new CFO. Changes took place in the Supervisory Board, too. Christophe Aurand and Jeremy Blank from York Capital, who became members of the Supervisory Board in September, 2006, reinforced their positions. In September, 2007 York converted its convertible bonds to shares on a conversion price of € 1.75, therefore the bonds were converted into 3.806 million common bearer shares. Following this transaction, York’s shareholding has increased from 23.06% to 29.9% and currently the investment fund holds 12 796 004 shares of SkyEurope. Under Austrian law, a direct or indirect controlling interest in a company is established by the ownership of more than 30 percent. If York exceeds this threshold, then, according to the law, it would be required from it to make a compulsory offer for the remaining shares of the issuer. Evidently, this will not be the case and this also implies that further issuing of new shares is very unlikely.

In 2006, SkyEurope attempted to search for other methods of expanding its fleet and signed a long-term loan contract with Halifax Bank of Scotland for 4 brand new Boeing 737-700 NG. SkyEurope thus directly ordered these aircrafts from Boeing and upon delivery, the airplanes will be owned by the air carrier.

In the meantime the new management decided on substantial modifications of the business strategy. SkyEurope abandoned the Hungarian and the Polish market and redirected its fleet to the remaining three bases. In Prague and in Bratislava the carrier deployed 4 planes while in Vienna it operates with 6. The new strategy is to increase frequency on most profitable routes; however, the Mediterranean destinations still outnumber the others, which are less exposed to seasonality.

York’s arrival suggested that changes in the management would be likely in the nearest future. However, an interesting battle for control over SkyEurope was developing in early 2007. RPR Privatstiftung, an investment group owned by former IT specialist, Austrian citizen Ronny Pecik, who became one of the leading European long-term industrial investors focusing on undervalued targets, obtained 16.55 % of the shares of SkyEurope by February, 2007. Pecik’s transactions caused SkyEurope’s share prices to soar once again to €6 per share. Niki Lauda and Ronny Pecik are good friends; moreover, Pecik is a sponsor of Lauda’s businesses, including Lauda Air, a subsidiary of Austrian Airlines

The drastic measures yielded certain results, however, the financial situation of SkyEurope is still far from convincing. For the first time in its history, in the fourth quarter of 2007 the company had a positive operating result of € 9.6 million and earnings before interest and taxes (EBIT) dropped from a negative € 55.9 million to € 20.9 million. At the same time cash and cash equivalents dropped to a mere € 11.579 million from the previous year’s € 41.789 million. It is not a coincidence that SkyEurope was forced to sell two of the Boeings before they were due for delivery. These airplanes are part of those four financed by a long-term loan provided by Halifax Bank of Scotland. Ci-

Air Scoop - February 2008

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BIRD’S EYE VIEW tigroup, which is one of the major shareholders of SkyEurope, purchased the two Boeing 737-700 NGs. In order to save SkyEurope for the winter season, York provided a € 15 million financing facility (loan) to the air carrier at the end of 2007. This amount of capital should be adequate for the forthcoming months but it is still disputable whether the carrier will individually survive in the long run. However, a merger with another air carrier is possibly the most likely outcome. York is specialized in mergers and acquisitions, thus the investments that they have made so far might prepare the ground for a sale to

another air carrier. Who can be the potential candidate? Air Berlin has expanded at a high speed in the previous months and may not stop at this point. Recently, a merger between TUIfly and Germanwings is being considered and SkyEurope might also be involved in this process. However, Austrian Airlines might be the most suitable candidate for a potential acquisition, given SkyEurope’s route portfolio and customers. The share price of SkyEurope is still around € 1.70, thus a relatively small investment could enable the purchaser to gain full control over the low cost carrier. Odds are high that SkyEurope will be acquired this year...

Air Scoop is proud to be Media partner of the Airline Payment Summit 2008. As airline yields come under downward pressure, Airline Payment Summit (APS) will examine leading-edge low-cost payment solutions within the landscape of traditional forms of payments such as credit cards. Delegates will not only hear about how to drive-down costs through the use of, innovative, non traditional payment methods, but also how to increase revenues with new payment options for the customer. A must attend for airline and travel (Hotel, Car Hire, OTA) executives interested in better managing payments and related costs. More on APS Website : www.airlinepaymentsummit.com

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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

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BIRD’S EYE VIEW Slowdown of LCCs Industry Although easyJet reported its load factor had fallen by more than 2%, the carrier took it bravely and announced that it was getting the necessary revenue. Investors, however, reacted differently and decided not to take risks which resulted in 13.9% loss in easyJet shares. The panic soon reached Ryanair’s investors and its shares have already lost 17% though the carrier did not report of any losses on its side. The question is whether the industry that seems to run ahead its customers is indeed facing a dramatic slow down or it is all about market psychology and investors worrying about low passenger numbers. There are at least two main issues which influence airlines earnings: fuel prices and capacity. As regards fuel prices, carriers are most likely to pass the additional cost to their passengers in one way or another. Although LCCs often claim to be less affected by increased fuel prices as they operate modern fuel-efficient planes, experts believe that rises in fuel price will do a lot to slow the entire industry. Filling seats is, thus, a key goal for airlines. This December the carriers saw the largest drop in demand whereas supply continues to grow. To artificially provoke demand the carriers will have to sell extra seats otherwise they might fail to cover the cost of new aircraft and new bases. Ryanair was the first to react and launched a major giveaway of seats for £10 each having excepted revenues from check-in fees, meals, hotel rooms, etc. Auxiliary profits is an important source of income yet the most sensitive and logically such sales cannot be introduced on a regular basis. What caused the decrease in load factor is obviously expansion that now seems to have been carelessly planned. The growth of routes and aircraft put under pressure other airlines and passengers. Having set up new bases in Continental Europe, easyJet and Ryanair introduced additional fees for baggage check-in which can now reach as much as £20. Nevertheless, investors have raised big concerns over ticket revenues arguing that profits generated from additional charges won’t be enough to hold yield at the sufficient level. Slow down in consumers demand as the determinant factor for ticket revenues was probably the main argument for the analysts who recommended ‘to sell.’ LCC themselves ascribed the slump to weak national economies and seem to stay calm. In a situation like this it is difficult to except any shares price recovery unless LCCs develop new strategies to attract back both investor and passengers. The recent decline in the number of passengers does not really indicate that LCC are no more popular. It simply proves that demand is naturally limited.

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BIRD’S EYE VIEW SWOT Analysis of Wiiz Air Introduction The global airline industry is going through a difficult period which is bound to continue throughout this year 2008. The major factors contributing to this are: a) Slowdown in the US economy; b) Reduction in consumer spending in H2 of 2007; c) Increase in the fuel prices; But the impact of the above factors on European airline industry is predicted to be less intense as the Euro has remained strong against the relatively weaker Dollar. The coming few years will be a scene of not only intra-Europe airline industry consolidation, but it will also witness many international mergers and acquisitions due to the ‘US Open Skies Agreement’ coming into effect this year. This will be aided by the slowdown in US economy and the weakening of the Dollar. Eurocontrol had recently revealed that the number of flights in Europe surged to approximately 10 million in 2007, an all-time high and an increase of 5.3% on 2006. Average daily traffic was 27,676 flights last year compared to 26,286 in 2006. Traffic growth was strongest in Eastern Europe, with several states seeing growth near 20%. Growth was driven mainly by low-cost carriers (up 25%) and business aviation (10%), which together accounted for nearly all the net new flights. The number of flights in 2008 is expected to rise 4.2%. For the first time, 20% of all flights are expected to be operated by LCCs. Traffic growth is expected to be strongest in countries along the Adriatic coast and in Poland and the Baltics. May 1, 2004, saw the simultaneous accession of 10 new members into the EU of which eight are CEE states: Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovak Republic and Slovenia. Two more CEE countries, Bulgaria and Romania, joined in 2007. No-frills air travel in CEE is blossoming, primarily from the new EU members, as their entry allowed carriers to operate freely among all 25 member states without the restriction of bilateral agreements limiting the number of flights and favouring national airlines. In the New EU member countries, current market share stands at 80% traditional carriers, 20% LCCs, and by 2010 it is predicted that LCC market share will grow by 8% to 28%. Forecasts by IATA for airline traffic among the nations of Central and Eastern Europe are very good with Poland, the Czech Republic and Romania featuring in IATA’s worldwide list of the top 10 countries with the highest average annual growth rates in passenger traffic for 2005-09. Po-

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SWOT TEAM land leads the group with an AAGR of 11.2% while the Czech Republic is third at 9.5%. This compares with an overall industry AAGR of 5.6% for international passenger traffic between 2005 and 2009, and 5.1% within Europe. «We believe that the boom in passenger traffic in the CEE region is the result of EU enlargement, strong economic growth and the ongoing liberalization of civil aviation in the region. While the EU enlargement and the strong economic growth have vigorously increased demand, the liberalization and privatization of civil aviation has resulted in improved supply coupled with a reduction of costs and prices,» says IATA Aviation Intelligence Assistant Director Charles De Gheldere. But the European low cost industry could still experience an overhaul due to the increasing fuel costs, excessive capacity, green taxes, tough competition and lower consumer spending which negatively impacts leisure and business travel. The effect has already been felt by lower load factor and fall in share prices of leading players. This is bound to lead to a price war and consolidation of markets sooner than later, as the players scuffle for survival. Analysts have also predicted that Eastern European LCCs would need strong balance sheets to compete with deeper-pocketed rivals such as Ryanair and EasyJet. The Hungarian LCC Market: Hungarians are the second most frequent users of low-cost services after the Poles in Central and Eastern Europe, a survey released recently by easyJet said. According to the survey, 63 percent of Hungarians prefer to fly with low-cost airlines, the poll of 500 passengers showed. (The corresponding Polish figure is 77 percent). Cheap fares are the main motivating factor for Hungarians but e-ticket and 24-hour on-line ticket booking options are incentives too, the survey said. Ryanair, easyJet, Wizz Air, Germanwings are some of the major players in the Hungarian market. However, Hungary is one of those few European countries where the rate of growth of the LCC market has fallen behind the normal growth rate of European markets. The number of flights to the UK is surprisingly very low compared to those from Poland and other European countries. The reasons for this slow growth has been attributed to lesser number of airports in the catchment areas and expensive airport charges which discourages low cost carriers like Wizz Air from increasing the number of routes and capacity which is not the case with the Polish market. The Polish LCC Market: Among the Eastern European countries, Poland maintains strong growth and now has the 4th highest low-cost market share with 21%. The International Air Transport Association had forecast that, during

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BIRD’S EYE VIEW 2005-2009, Poland would become the fastest-growing air transport market in the world. Its average annual growth in passenger numbers was expected to be 11.2 percent over that period. The top-10 air carriers now include five budget airlines: Hungary’s Wizz Air, Britain’s easyJet, Ireland’s Ryanair, Germany’s Germanwings and the beleaguered LOT Polish Airlines’ own Centralwings. The boom in Poland’s low-cost carrier business is reflected by the development of air transportation between Poland and the UK, a result of the British and Irish labour markets opening up to Poles following EU accession. Many carriers have chosen Poland, as it is the only country with a sizeable population and one with extremely poor road infrastructure. Before EU enlargement, passengers could fly directly to the UK only from Warsaw and Krakow to London or Manchester. But now short-term migrants such as plumbers or builders are routinely flying to Britain and Ireland from almost every Polish airport. A research study has indicated that, in 15 years, the number of passengers served in Poland could reach 39 million, rising to 63 million by 2030. Romania and Bulgaria: Romania has seventeen commercial airports. The busiest is Bucharest Henri Coanda (formerly Otopeni), which handled 3.5 million passengers in 2006. The second busiest airport is Timisoara which handled 608,000 passengers during the same period. The third busiest is Bucharest’s second airport, Aurel Vlaicu (formerly Baneassa) which processed 386,000 in 2006. Blue Air is Romania’s first home grown low-cost carrier which was created in 2004 and is based in Bucharest and is a strong competitor to Wizz Air. The growth of low-cost service from Romania’s second Bucharest airport at Baneasa has been impressive, increasing from just five routes in April 2006 to 22 in April 2007. Passengers wanting to travel from Bucharest to London and Paris have a good choice of LCCs from this airport namely Blue Air, MyAir and Wizz Air. In the first two months of 2007 traffic between the UK and Romania was up 87% on the previous year. In Bulgaria the principal airports are Sofia, the main international gateway, Bourgas and Varna. These airports account for the vast majority of passenger traffic in Bulgaria. Sofia is the busiest airport, handling 2.2 million passengers in 2006. (till Jan. 2007). Although Bulgaria does not yet have its own low-cost airline, LCCs such as Germanwings, MyAir and Wizz Air operate to and from Sofia and Scandinavian carriers Sterling and Norwegian fly to the summer resort areas around the Black Sea. In the first two months of 2007, traffic between the UK and Bulgaria was up 83% on the previous year. Wizz Air: Wizz Air is a Polish/Hungarian low-cost airline focusing on the markets of Central and Eastern Europe. Its main bases are Budapest Ferihegy International Airport

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(Hungary), Katowice International Airport (Poland), Warsaw Frederic Chopin Airport (Poland) and Gdansk Lech Walesa Airport (Poland) with hub at Sofia Airport (Bulgaria). Wizz Air Ltd. is a London-registered company, with subsidiaries in Hungary, Poland and Bulgaria. London, according to its CEO Jozsef Varadi, provides easy access to capital markets. The holding company controls Wizz Air Polska and Wizz Air Hungary, a legal entity licensed by the Hungarian CAA. Jozsef Varadi, alongwith five friends, launched Wizz Air in September 2003. The airline was launched to coincide with the EU accession of 10 new countries in May 2004. On May 19, 2004 the first Wizz Air flight took off from Katowice International Airport in Poland and since then the carrier has transported 6.6 million passengers and become the leading low fare airline in Central and Eastern Europe. Wizz Air flies a young fleet of 13 Airbus A320 aircrafts with 180 leather seats on board. These are maintained by Lufthansa Technik and SAS Technical Services. Wizz’s fleet will reach 19 A320s by next summer, and this will grow to over 50 aircraft by 2012. In summer 2007, Wizz Air offered flights to 48 European airports on 90 routes covering 17 countries, and carried around 4.5 million passengers through the year. It is currently the largest low cost - low fare airline in Central and Eastern Europe. «We look forward to becoming the single largest airline of all carriers in Central and Eastern Europe in 2008», said Jozsef Varadi Awards: During 2007, the readers of pasazer.com - the largest polish travel-news portal, voted Wizz’s Airbus A320-200, boarding at Aurel Vlaicu International Airport for London Luton Airport, as the best low-fare airline in Poland. In January 2007, the CEO and Chairman of the airlines József Váradi, was awarded the Ernst & Young Award of the ‘Brave Innovator’ for Wizz Air’s business model, business conduct and its breakthrough performance in the airline business in Hungary and the region. Wizz Air was chosen as the favourite discount airline in Hungary in April 2005, by the readers of Budapest Business Journal (BBJ). Overview of Wizz Air History: The plan to launch a new Central-European low fare – low cost airline, was conceived in June 2003 by Jozsef Varadi, Chief Executive Officer. Together with 5 friends and airline experts, he founded Wizz Air in September 2003. After researching the business models of established low-fare leaders such as Ryanair in Europe and JetBlue in the United States, Varadi chose to go with a low cost business model similar to that of Ryanair. Since

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BIRD’S EYE VIEW Western Europe was already too crowded with low-fare airlines, Varadi selected Central and Eastern Europe as the home ground for Wizz Air’s operations. Katowice and Budapest became the airline’s first bases. According to the CEO, the reasons behind choosing Poland and Hungary in 2004 were their impending accession into the EU and that they were the biggest countries in terms of population. In its first four months of operations, it introduced six 180-seat A320s. All were leased. In July, Wizz Air signed an LOI with Airbus for up to 24 V2500A5 powered A320 family aircraft. Wizz Air secured up to zl.231 million ($60m) of venture capital funding from American and European institutional investors. The board of directors included Lynn Wotherspoon, former COO of Buzz (the former low cost arm of KLM), and high-ranking employees of regional branches of Procter & Gamble and The World Bank. The company funding in the first year amounted to E34 million, with some 20 high net worth individual investors from 10 European countries providing the start-up cash. The leading investor in the company is an American private equity firm - Indigo Partners that specializes in transportation investments. Indigo Partners is also an investor in Singaporebased LCC - Tiger Airways. The biggest challenge for LCCs based in Central or Eastern Europe was to be able to convert passengers from their basic travel methods into using air travel. Apparently, only 3%-5% of the population in Poland and Hungary used air travel. Residents in Central and Eastern Europe are constrained by budgets, as the average income per person in the region is much below the EU average. The competition in these markets is not with incumbent carriers but with coach services, train services and personal travel modes, limiting the yield for the LCCs. Wizz Air had been quite successful in stimulating the market; 40% to 50% were first-time fliers. Growth; Wizz Air’s start was strong, with 1.2 million passengers carried at an average load factor of 60% in its first full year of operations to May 19, 2005. Revenue in its first financial year, which covered the 11 months to March 31, amounted to E60 million. For the financial year of 2006, it had set the goals of carrying 2.2 million passengers and generating 150 million Euros in revenue, while for the year beginning April 1, 2006 it intended to nearly double those figures to 3.5-4 million passengers and earn revenue of about E250-E300 million. It also expected to post its first significant profit in FY07. In January 2005, Wizz Air launched a new scheme to attract corporate travellers and Government officials called ‘Wizz Biz’. The airline had also launched some new routes in March to fill gaps in the market left when Air Polonia

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collapsed. These routes included flights from Warsaw to Paris, Frankfurt, Stockholm and Barcelona. The Polish national airline LOT launched a no-frills airline called Centralwings in February 2005, while Irish low-cost giant Ryanair entered the Polish market in March 2005 with flights from Wroclaw to its London and Ireland bases. Wizz Air had started operations in Lithuania in December 2005, offering flights from Kaunas to the Polish capital, Warsaw, with connections to major European cities. In April 2006, Wizz Air CEO, Jozsef Varadi, had predicted that only one airline from Central Europe will survive to wage the looming competition with Ryanair. Both Wizz and chief rival, SkyEurope, had yet to attain profitability, but both had predicted an operating profit in 2006 and a net profit in 2007. According to figures published by the Polish Civil Aviation Authority, Wizz Air has strengthened its position as the largest LCC and the second largest airline in Poland. Wizz Air carried 15.5% of the total passenger traffic to/ from Poland in 1Q06, compared with 11.7% for the same period last year. In the first half of 2006, Ryanair had quickly achieved 12 per cent share of the Polish airline market, flying to nine airports there, up from almost nothing in 2005. It now flies to most of the countries that most recently joined the EU. In 2006 April, Wizzair had 38% share of the low cost airline market in Poland and 26% share in Hungary. Mr Váradi has stated that, like Ryanair, Wizz Air is more focused on keeping costs low, an approach that has already generated an operating profit — although the closely-held company has not given out any details. The airline’s first flight from Cork took off on July 14th, 2006, to Katowice in Poland. The airline has carried over 70,000 passengers between Cork airport in Ireland and Poland (Gdansk and Katowice) since it commenced operations in July 2006. Current Status: (2007-2008) In January Wizz Air, offered free tickets (only taxes and charges to be paid) to stranded passengers of SkyEurope following SkyEurope’s cancellation of its flight between Bucharest and Budapest until 25 March 2007, starting on 16 January 2007 along with 7 other new Romanian routes. It also announced plans to open a base in Romania in May. According to a news report published in April, Wizz Air, the Hungarian budget airline was planning to float on the London Stock Exchange in a listing that could value it at £400m-£500m, reports The Daily Telegraph(April 2007). Chief executive Jozsef Varadi, was to select one from among six investment banks interested to assist it in its IPO. The company hoped this issue would include as much as £200m in fund-raising to finance expansion. The

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BIRD’S EYE VIEW banks include the trio behind the successful flotation of Spanish low-fare airline Vueling: Goldman Sachs, JPMorgan and Morgan Stanley besides UBS, Credit Suisse and Citigroup. The float was planned before the year end of 2007 and Wizz Air was expected to have a higher market worth than Vueling, currently valued at €640m (£435m), also including the new money raised. But the listing seems to have been postponed. According to last year news reports, Wizz Air’s Chief Executive, Jozsef Varadi, had said that the airline was «years away» from a listing. In April 2007, Wizz Air, reached the six million passenger figure since its May 2004 launch. Within one year the carrier had doubled its passenger numbers and had now outperformed its competitors. As a part of its Eastern European expansion, this summer the airline started flights from Croatia (Zagreb, Split) and Slovenia (Ljubljana). In May, Wizz Air took delivery of the first of 32 directly purchased A320s, featuring the all new A320 Family new cabin, giving passengers more space and a quieter travel experience. The latest A320 models also feature additional advanced aerodynamics helping reduce fuel burn even further. It also extended its catering agreement with gate Gourmet for another two years after a successful, initial three-year term. In June the airline inaugurated its sixth operational base, at Bucharest Baneasa Aurel Vlaicu International Airport. The decision was determined by the company’s ambitious growth plans for the country. Wizz Air had begun to operate flights from Tirgu Mures in July 2006 and from Bucharest in January 2007. The operational base would function inside the Henri Coanda airport until the reopening of the Bucharest Baneasa Aurel Vlaicu International Airport and would host a new Airbus A 320 aircraft with 180 leather seats. The aircraft would be flown by a Romanian team of pilots and cabin crew already hired. “By summer 2008, Wizz Air will become the largest low cost airline in Romania.” stated József Váradi, Chief Executive Officer of Wizz Air. Wizz Air had also announced that it would establish its 7th operating base in Poznan airport starting in January 2008. The airline had also revealed the launch of four new routes from Poznan; Doncaster-Sheffield, Prestwick-Glasgow, Malmo-Copenhagen and Oslo-Torp (from 31 January 2008), complementing its existing services to LondonLuton, Stockholm-Skavsta and Dortmund. In July, Hotelopia, the online hotel booking specialists, today 30, launched its partnership with Wizz Air, to supply accommodation services on wizzhotel.com to the airline’s 47 destinations which included: Budapest, Warsaw, Gdansk, Bucharest, Sofia and Katowice UK, Ireland,

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France, Spain, Italy, Scandinavia, Germany and Greece. During October 2007, SkyEurope withdrew its operations from Poland and Hungary, having decided to focus on Slovakia, Austria and Czech Republic. This partially fulfilled Jozsef Varadi’s prediction the previous year that ‘only one major player from Central Europe would survive to compete with Ryanair’. During October 2007, Wizz Air placed a new order for 50 A320 family aircraft. It had been aggressively gaining markets, by focusing on Poland, Hungary, Romania, and Bulgaria, while keeping out of Austria and the Czech Republic. In October Wizz Air announced that it would operate all of its flights serving Transylvania in Romania from ClujNapoca International Airport and would cease flying from Tirgu Mures Airport. Wizz Air started flying from Tirgu Mures in July 2006 and since then severe weather conditions combined with the airport’s inability to improve low visibility operations had been continuously jeopardizing the airline’s on-time performance causing delays and forced cancellations. On the contrary Cluj Airport had already got more advanced operational capabilities as well as adequate development plans in place to accommodate Wizz Air’s growth by ensuring a smooth operating environment. Wizz Air later declared plans to open its 8th operating base in Cluj, Romania with one new A320 aircraft and local crew in May 2008. In December Wizz Air further enhanced its operations by scheduling 35% more flights for summer 2008 from its bases in Hungary and Poland. It planned to add 15 new weekly flights compared to summer 2007 or 27% more capacity. The airline will increase frequencies on most of its current routes, add Goteborg, Oslo-Torp and Venice-Treviso to its Budapest network and reintroduce the popular summer seasonal flights to Bulgaria (Bourgas and Varna), Spain (Barcelona-Girona and Palma de Mallorca) and Greece (Corfu, Rhodes and Heraklion). Finavia, the governing body of Finnish airports, has introduced a “low cost” concept at Turku Airport in Finland. The previous, maintenance building would become a passenger terminal at the beginning of April 2008. The terminal would have capacity for 10 to 12 flights per day. The first airline to take advantage of the concept would be Hungarian Wizz Air, which will start operating international flights between Turku and Gdansk, Poland. Overall, in 2008 both Hungarian and Polish markets would see a significant network enhancement from Wizz Air resulting in the largest choice of low fare routes from its bases and further strengthening its leadership on the market. Wizz Air remains the largest low cost airline in Poland. In 2007 the airline carried 2.8 million passengers on its

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BIRD’S EYE VIEW Polish routes, 33% more that in 2006. Wizz Air is the lowcost leader in Poland with a 35 percent share in the Polish low-fare market. Ryanair controls 26 percent and Centralwings 24 percent. The airline offers flights from Poland, Hungary, Bulgaria, Croatia, Slovenia and Romania. Wizz Air accounts for 15% of the total airline market in Poland, 3 percentage points up from last year’s 12%, while Ryanair accounts for 11%. In Hungary Wizz Air had carried 700,000 passengers on its Budapest flights, 14 percent more than in 2006, Varadi said, adding that the limited increase was due to the high fees Ferihegy international airport operator Budapest Airport charged. The low-cost airline, the largest in Hungary with a 34 percent market share, expects to carry 6.3 million passengers on all of its flights next year, about 45 percent more than in 2007. The airline’s market share in Bulgaria, the airline’s new market, reached 52% just six months after its launch in the country. Wizz Air, which entered the Romania in 2006, has stated its intention to provide transport services for one million passengers, to and from Romania in 2008, by increasing the number of weekly flights. Representatives of the Hungarian company say the company intended to become leader of the local low-cost market in 2008 ahead of Blue Air. In Januay 2008, Wizz Air and GECAS announced a sale and leaseback transaction covering six A320s scheduled for delivery in 2009 and set to be leased for 11 years each. The companies have similar deals covering eight additional A320s to be delivered over the next two years. Wizz’s fleet is expected to reach 19 A320s by next summer, and this would grow to over 50 aircraft by 2012. “We fly to almost all European countries and we follow the low-cost model, so we prefer secondary airports,” says Varadi during Q4 of 2007. Wizz is a privately-held company and Varadi declined to provide details of its financial performance, except to say that “given our growth rate and the size of our operation, financially we are doing fine”. He added that the carrier “continues to look at [its] options” regarding the possibility of launching an initial public offering some time in the future, but stresses that no decision has yet been reached. Issues/Challenges 1. Can Wizz Air maintain its position as a niche player within the CEE region in the face of competitive assault from the leading low cost airlines like Ryanair? 2. Will organic growth be a sustainable strategy in the long term? 3. In the face of rising fuel costs, falling dollar value and economy slowdown, will Wizz Air continue to attract the budget-constrained consumers of CEE region? 4. What could be the right time to go for the IPO?

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Business Model of Wizz Air Wizz Air has built its business mainly by shuttling Polish and Hungarian workers between eastern and western Europe using 180-seater A320 aircrafts. The carrier follows the LCC model of single aircraft type and secondary airports (e.g., London Luton, Paris Beauvais, Frankfurt Hahn), but prices itself at higher fares than some budget carriers, and offers some comfort features for business travellers, Wizz Bizz. Around 85% of its sales come off the Internet. Home Internet penetration is low in Central/Eastern Europe (at about 20%). Wizz Air also sells through call centres and travel agents. Wizz Air’s business model is based on cutting out any ‘frills’ from its service and working with simple, standardised, automated back-office processes. It operates a ‘lean and mean’ organisation where streamlining business processes is critical. The organisation focuses on constant improvements in optimising process cycle times and seeking new operational efficiency as it grows by adding new routes, services, and markets. It has been designed to be ultra-low cost with the following elements: efficient, young Airbus A320; over 13 hours aircraft utiliza¬tion; use of secondary/regional airports; point-to-point flights; high internet sa¬les; highly efficient organization (7500 pax/employee/ year) and best operating practices. Main features of the business model are: 1. Wizz Air website: The website of Wizz Air is well presented and quite clutter-free. All the information has been clubbed under different headings on top of the web page. It also provides a clear route map giving the names of the destinations. Ticket booking section is on the left side and easy to follow. 2. Booking of tickets: Ticket booking can be done online or through call centres or through travel agents. There is a credit card handling charge and an accurate breakdown of all costs related to the total cost paid is provided. No paper tickets are provided by the Wizz Air. Passengers are provided with a confirmation code at the time of booking a ticket. Changes in bookings can be made 3 hours before take off at an additional cost and the payment of the difference in fares. No refunds on cancellation. 3. Check-in and Boarding: There is no assigned seating but priority boarding is provided at an extra fees. Check-in desks close 40 minutes before departure and open 2 hours prior to it. There is also a facility to book a seat with extra legroom at an additional price. 4. Baggage: One piece of hand baggage per person with a total dimension of 115 cm (55x40x20) weighing up to 10 kg can be carried on board. A smaal size handbag or coat is allowed with it. Excess weighing bag will be checked-in. Every checked-in baggage is charged and maximum weight allowed per person is 20kgs. There is also an excess checked-in baggage charge.

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BIRD’S EYE VIEW 5. Special need passengers: The number of disabled passengers allowed per flight is 10. The customer must notify his/her condition at the time of booking and also present a medical certificate or doctor’s approval to travel. 6. Delays and cancellations: When the delays go beyond a time period (2 to 3 hrs.), compensation is provided either in the form of refreshment/meal voucher and two telephone calls and for even longer delays the passenger can claim refund. 7. WizzPlus: This scheme enables Wizz Air frequent flyers to purchase Wizz Air’s services at a discounted price, the discount being dedicated to the individual passenger through the Passenger Registration process. WizzPlus is a passenger’s personal refillable account with Wizz Air. By transferring a set amount of money to his/her account, he/she can automatically receive 15% or 25% bonus. One can use the accumulated credit to book any seat with Wizz Air - including promotional ones. 8. Wizzit: This is an in-flight magazine of Wizz Air that contains information about new route, travel places, food and other attractive features. 9. Health & Safety: The Wizz Air website provides a very interesting and informative page under the section ‘Health & Safety’. This provides safety instructions, do’s and do not’s on the flight, how to cope with air pressure changes on flight so on, so forth. This seemed to be a real customer-friendly feature. 10. Other Services: Travel insurance package, coach transfer service from London Luton airport to Victoria station, free travel on Airport Arrow Bus (707), operating between Doncaster Interchange and Robin Hood Airport are some of new enhanced services being provided by Wizz Air.

SWOT Analysis Aim and Objectives: Our aim is to make flying affordable to the citizens of CEE, as well as to provide a new travel experience to all travellers in the EU. The latest technology is deployed to ensure that the “Wizz Air experience” is outstanding in terms of service and value for money. We are committed to our guests, to accessible prices, and to reliable, comfortable travel- said József Váradi the CEO of Wizz Air.

Ancillary Sources of Income 1. Payment handling fee using credit cards 2. Flight change fee 3. Check-in baggage fee 4. Excess baggage fee 5. Special baggage fee 6. Excess fee for Sporting equipment weighing more than 15kg 7. Extra-legroom seat fee 8. Pre-boarding fee(bus & aircraft) 9. Infant fee 10. Call centre booking fee 11. Name change fee per flight per passenger 12. Invoice change fee 13. Missed flight fee per flight per passenger 14. Hotel booking 15. Car rental 16. Insurance 17. Airport transfer 18. Wizz cafe & Wizz boutique

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BIRD’S EYE VIEW

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BIRD’S EYE VIEW Recommendations

Conclusion

1. Wizz Air can definitely continue growing as long as it keeps expanding rapidly, preventing the competition from catching-up. It has to reinforce its leading position in the CEE region by means of collaboration or acquisitions. It also needs to adapt to the changing dimensions of the dynamic aviation market. 2. Organic growth is suitable for expanding in smaller markets, but as the airline moves into larger markets, the rule is ‘survival of the fittest’. As Jozsef Varadi has predicted, consolidation is imminent. Supply is greater than demand and therefore smaller/weaker players will be overpowered by the stronger and larger players. 3. Based on IATA and Eurocontrol predictions, the Polish aviation market is expected to have the highest growth rate followed by the Baltic state. Therefore any airline that is currently entrenched strongly in these markets would be difficult to uproot. Therefore Wizz Air’s outlook looks strong as it aims to achieve 20-30% annual traffic growth over the next few years. 4. Growth and rapid expansion need large funding for which any dynamic company would eventually go to the capital markets. The timing for this may be decided by observing the market performance of leading players in this difficult period (2007-2009) of economic slowdown.

Many airline CEOs have predicted that in the next 5 to 10 years there will be only few low cost airlines in the open skies. So from where will these winners emerge? Only time will tell. But the players need to keep moving forward quickly in order to win the race. Those companies that are proactive and have a flexible approach will most probably be the winners. So watch the skies!

EVENTS

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

LCCs Get Slammed Over Hidden Charges Recently, the consumer watchdog group Holiday Which? released a report criticizing low-cost carriers for levying an increasing number of charges on consumers and requiring travelers to jump through numerous hoops to avoid any additional fees. Holiday Which?’s main culprit was Ryanair, which charges consumers extra for virtually any service outside of the flight itself in a manner that makes it difficult for customers to avoid the charges. While the carrier refutes Holiday Which?’s criticism, it’s undeniable that LCCs have increasingly resorted to the “unbundling” of the flight cost in order to advertise lower ticket prices and raise revenues. By separating all the extras from the cost of the flight, passengers can choose what services they need. But passengers are finding that in fact, they aren’t able to choose at all, instead they get misled into accepting charges they do not want, or pay more than they intended because they failed to read the fine print. These charges may ultimately hurt traffic numbers at a time when LCCs are expanding like wildfire across Europe. Moreover, they could damage the ability of carriers to attract business travelers, which many LCCs are counting on to grow their traffic bases and increase yields. If carriers take a more proactive approach to informing consumers about these charges, then they can improve their customer service reputations by preventing surprises at the airport, while at the same time demonstrating to customers that, in fact, their prices are lower than legacy carriers’ even if a customer pays extra for certain services. Traffic Issues: As LCCs begin to add more and more extra charges for services, the media will increasingly deride them for doing so, and contrast them to legacy carriers, which don’t engage in these practices. This hurts the reputation of low-cost carriers, which are dependent on budget-sensitive travelers and who will suffer if these travelers decide to take their business elsewhere. While some passengers will inevitably be lured by the promise of cheap fares at Ryanair and other LCCs, an increasing number will go elsewhere, especially if it appears to customers that legacy carriers offer a better value, even with a higher ticket price. A litany

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Air Scoop - February 2008

of extra charges could become a customer service and an image issue. For carriers that don’t have strong customer service reputations (such as Ryanair), levying additional charges may not hurt the company as much as it would an airline with a stronger customer service reputation (such as easyJet). LCC traffic and growth patterns are already starting to show some weakness. As LCCs struggle to add capacity into an increasingly saturated market, one that is weakening as the economy weakens, load factors will inevitably decrease. Middle-income consumers, which budget carriers depend on for traffic, could cut back on their holiday spending. Unfortunately, for low-cost carriers such as Ryanair and easyJet, recent load factors have declined to around 80%, making it harder for these companies to meet profit expectations, and these figures could head downward further still. With a load factor decline, carriers have been motivated to start charging more for additional services to make up for the lost revenue, which could merely accelerate the problems the carriers are having, if these additional charges generate additional negative media coverage. For instance, Ryanair recently raised its charges for some ancillary services, subjecting the carrier to a new barrage of criticism over its pricing. How to win over business travelers: If fewer and fewer holiday travelers use LCCs due to the slowing economy, the gap may have to be filled by business travelers. But with increased negative publicity surrounding these carriers, many business travelers could be reluctant to fly LCCs. This would be a problem for both Ryanair and easyJet. Ryanair is trying to nearly double its passenger totals to over 80 million by the year 2012 and is relying increasingly on business travelers to accomplish this. EasyJet already has a higher market share among business travelers than Ryanair, even though it’s a smaller carrier, and that’s in part because easyJet has fewer surcharges for certain services than Ryanair does. However, the increasing tendency of both carriers to “nickel-and-dime” passengers could make Ryanair and easyJet less attractive for business travelers who are not used to unbundled ticket prices, and who prefer the amenities that legacy car-

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BIRD’S EYE VIEW riers offer. While Ryanair and EasyJet may never offer the frequent flyer programs or the first class seating that these business travelers desire, they can offer these travelers a travel experience that offers a simplified means of travel, and prevents them from facing a litany of extra charges. To this end, LCCs should start offering different fare types that are not based on the flexibility of the ticket, but rather on the kinds of charges that travelers would face. For instance, a business traveler who purchases a more expensive, but more amenity-laden ticket could receive many services LCCs separately charge for in an “all-inclusive” ticket price. Airlines could bundle into one ticket for premium customers services such as free priority boarding, a free checked bag allowance, the ability to check-in how they want and when they want, a free coupon for food and drinks on the aircraft, and other services. This would offer a level of convenience to business travelers who would receive these amenities without having to pay “extra” fees in addition to the ticket cost and still likely pay a lower ticket price than for comparable service on legacy carriers. How to help consumers understand the extra charges levied against them: Increasingly, passengers are complaining about additional charges being levied against them, which is understandable. But instead of merely criticizing airlines that try to find new sources of revenue, consumer groups like Holiday Which? should be acting more proactively to develop consumers’ knowledge of the products they buy. And if LCCs really believe that they offer the best value to consumers, then they should help groups like Holiday Which? educate consumers. The most important action that consumer groups and airlines can take is to get customers to read the fine print. All too often when making online purchases (including the purchase of an airline ticket), buyers will agree to a set of terms and conditions that they have not even read. In doing so, they sign a contract, whose terms they agree to abide by, though they are often unaware of it. They should, therefore, not be shocked when the terms and conditions discuss the extra charges that may be levied on passengers. For instance, Ryanair’s terms and conditions explicitly lay out what extra charges the carrier will levy:

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• Each passenger is permitted to check in up to a maximum of 3 bags combined weight of 15kgs subject to the payment of the applicable checked baggage fees. Checked baggage booked online is charged per bag/per one way flight at a discounted rate of £6/€9 for the first bag and £12/€18 for each additional bag/ per one way flight… • No pooling or sharing of baggage allowances is permitted, even within a party travelling on the same reservation. • Any passenger exceeding their 15kg personal checked baggage allowance will be charged for the excess at the currently applicable rate of £7.50/€10.00 per kilo (or local currency equivalent). This text makes it explicit to passengers what charges they will face for checked baggage, yet all too often, passengers agree to these terms and then become irate at the airport when they are confronted with them. By helping consumers understand the terms they agree to, LCCs can become more transparent, and will likely face less scrutiny from consumer groups, government, and the media, because passengers will have less to complain about. Ancillary charges are an important source of revenue for LCCs and will continue to be so for the indefinite future. But LCCs need to look at these charges in new ways in order to better serve the needs of a shifting customer base, as well as to respond to the concerns of interested third parties. Remarks, questions… Join Sam by email (samsellers@ gmail.com) or on his website to comment this article… http://www.airlinebulletin.com.

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 2006-2008 - Unauthorized distribution or reproduction is forbidden. http://www.air-scoop.com ; http://airscoop.blogspot.com (free portal news)

Air Scoop - February 2008

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