Air Scoop July 2006

Conference Air Transport Summit Essential Ancillary revenues for Ryanair SkyEurope: New Share Issue to Get Cash Deregulation of LCCs European Market Strategies to respond to rising fuel costs

The Low Cost Carriers Analysis Newsletter

EDITORIAL

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he current playground of European LCCs is no longer sufficient to bear their development. New routes are still available inside Europe, but they are not profitable enough. Indeed, profits drive routes’ opening. Thus, LCCs look for further markets to open routes, such as in North Africa, Middle East or Eastern Europe. Recent bases opening of LCCs leaders reflect this need to constantly keep growing in order not to collapse. For instance, Ryanair announced it would launch up to 20 routes in Morocco in the coming 5 years. The base opening in Marseille was an interesting signal for further expansion of the airline in North Africa. Air Berlin, with the support of Nikki, definitely looks at the Eastern markets and Russia… To have the opportunity to serve these new markets, LCCs face many restraints: longer distance between airports, problems due to non-EU countries, longer turn-over on the ground, loss of time during security checks… Distance and time are important challenges to current business models. Indeed, most aircraft types used by LCCs can’t fly routes longer than four and a half hours. This implies they will have to settle their future bases outside Europe in order to develop an inter-area network (Europe, Scandinavia, Africa, Middle East, Russia, Asia…). They will then face specific restrictions in these countries, like in airports (Casablanca in Morocco…), PSO (Public service obligations)… LCCs systematically promote deregulation of the markets, in particular through ELFAA, a low cost carriers association lobbying in Brussels. Another solution to avoid restrictions will be to register new companies under local jurisdiction. In a different way, but seeking same goals, easyJet has envisaged a franchise with partners in Middle East, an area highly regulated.

Highlights in this Issue p. 4 p. 7 p. 9 p. 11 p. 14

AIR SCOOP ANNOUNCEMENTS AIR SCOOP is proud to be an Official Media Partner of these LCCs events

Sky Full of Possibilities Bratislava, 26 May 2006

The Low Cost Air Transport Summit London, 12-13 June 2006

The World Low Cost Airlines Congress London, 11-13 September 2006

Air Scoop Recruits! We recruit more “correspondents” over Europe to cover regional news and analysis. Your role will be to cover the Low Cost Carriers market in your country and near area. You will write about specific topics and propose your own articles. We may ask you to attend special events concerning the LCCs market occurring in your country or near area. It is a requirement to be a fluent writer in English. Join Air Scoop Team by sending us your CV and a covering letter by email to: [email protected] We look forward to seeing your application soon.

Evolution of Low Cost Carriers Compared to other Aviation Segments

Air Scoop - July 2006

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DOWN TO EARTH Interview of Maunu von Lüders (CEO of FlyNordic)

Air Scoop: Could you please present FlyNordic to our readers? What are your specificities compared to other European LCCs? What do you do better than your competitors? Maunu von Lüders: We do not call ourselves a low-cost carrier anymore. We are a ‘3rd generation airline’ which combines the best from the low-cost and the traditional airlines in such a way that our model will satisfy the Scandinavian market in the best possible way. In order to do this we must be better than or at least as good as the dominating traditional airline in the most important service elements but at a lower cost to our customers. We do not want to humiliate our customers by depriving them from service or ignoring their expectations just because our fares are low. We also do not want to rob our customers by charging a lot for features that are indeed traps created by a monopoly situation. We simply try to satisfy the most important customer needs at a reasonable cost. You already cover most of the Scandinavian market; are there sufficient population catchment areas to open new routes in Scandinavia? If not, towards which market do you tend to? The frequency of travel is very high in Scandinavia. Distances can be great and travel times with other means of transportation very long which should create a favorable situation for airlines. But even though exceptionally many people travel by air within Scandinavia and business should be good, there are too many players in the field which results in

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Air Scoop - July 2006

Maunu von Lüders , CEO of FlyNordic

destructive overcapacity. The market is quite saturated and all viable routes have already been exploited. FlyNordic has been successful on routes between Stockholm and Northern Sweden and also between Stockholm and the other Scandinavian capital cities. We can be even better in these markets as we are developing a concept of exceptional value. Is there many low cost carriers serving the Scandinavian market? Who are your most dangerous competitors: local LCCs or “Islanders” (Ryanair, easyJet)? The low-cost segment is growing fast in Scandinavia. There are quite a few low-cost carriers and more will come. We do not consider the other low-cost carriers as our most obvious competitors. We target other markets as we are predominantly offering suitable services for business travelers within Scandinavia from primary airports with a morning – evening concept. We are in direct competition with the likes of SAS rather than other low-cost carriers. 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? ... You mentioned indeed in your question two serious threats. As costs are rising and the price elasticity remains high it will be more difficult for the low-cost carriers to stimulate profitable growth. Consolidation is an inevitable development as there will

be many troubled carriers without a chance to manage the equations between rising costs and diminishing revenues. I do not see consolidation as a threat but a natural way of making the industry more effective. The weakness of consolidation is the common misfit between different corporate cultures which often results in long term corporate turbulence and ineffectiveness. Some real threats to the low-cost segment are the prevailing protectionism in favor of the “flag carriers”, predatory pricing and other hostile actions by the large incumbents and a tendency to re-regulate through various taxes and other restrictive measures. You have adapted your flights according to your passengers: Morning and evening flights for business routes, daytime for leisure travelers and week-ends with charters. How do you manage such an adjustable model? It is quite easy logistically. The segmentation of customers is only a factor regarding schedules and destinations. The rest is pretty much the same regardless if it is a business flight, leisure flight or a charter. The distribution mechanism and the fare concept serve all scheduled traffic whereas charters are sold by tour operators. Catering and some other service features may vary on charter flights based on what the customer requires but that too is easy to handle. The main thing is to have the aircrafts and crews in the air serving all our different customer categories as well as they can.

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BIRD’S EYE VIEW Do you believe that consolidation of the market will lead to 2-3 main LCCs in Europe, or do you think there will always be many LCCs on niche markets? I do not think that consolidation will result in only 2 or 3 large low-cost airlines. There are more variations among the low-cost carriers than among the traditional airlines. This variation has developed out of a need for different concepts in different markets. There will always be a need for various niches. A niche carrier can however never expect to grow large because then it no longer serves a niche.

Are you worried about the shortage of pilots and crew hitting LCC market?

What are the options for FlyNordic to transform its business model in order to make more costs savings?

I am not worried but one must all the time keep an eye on the situation. The market for pilots is very much a local matter. Pilots are people with homes and family and not members of a highly mobile workforce. A well-run airline should be an attractive employer. If you stick to one aircraft type and offer a good and rewarding working environment you should have a better chance to recruit and maintain a good pilot workforce.

We are pretty close to have explored most of the cost saving areas. There are naturally some savings to be gained regarding service providers. Our own organization is as small and effective as it can ever be. If we can maintain our cost structure but increase our earning potential through customer oriented and innovative product features, we should be doing OK.

Munich or Nuremberg as 5th Germanwings base?

Low Cost Market Share – Monthly Frequencies (June 2006) To/From Germany (in percentage) Source : OAG MAX

Germanwings is currently looking for its 5th base in Germany, and another one outside the country. Catchment area is important to set a base, smaller airports are then commercially not viable to sustain a base of five aircraft as targeted by Germanwings. Few rumors are, as usual, ongoing about potentially airports: Munich International Airport and Nuremberg Airport are the most recurrent options. Munich appears most expensive, but Nuremberg has already a strong presence of Air Berlin, even if it is not a base. Setting a base in Nuremberg could be the opportunity to attack its core market, but till now Karl-Heinz Krüger, CEO Nuremberg Airport, has always rejected proposals from easyJet and Germanwings. Furthermore, a recent statistics indicated that only 10 % of flights out of Nuremberg were true LCCs while other German airports, including Munich, have between 17 and 25 %. Even if a Condor base is scheduled in Munich (Lufthansa might try to avoid competition between its two LCCs), Munich Airport should be favorite to become the 5th Germanwings base.

Open Skies Agreement: New Markets for LCCs? Bosnia and Herzegovina, Bulgaria, Croatia, Iceland, Macedonia, Norway and Romania have signed the 9th of June the agreement on the European Common Aviation Area (ECAA) at a ceremony in Luxembourg. Thus they join the Single European Sky of the EU member states under specific conditions for each country. This agreement still needs to be ratified by national parliaments.

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“The creation of the ECAA will put impetus on the political and economic integration of Europe, for which air

Air Scoop - July 2006

transport plays a key role. The agreement will open up market opportunities for the aviation industry and give people better travel options” said Jacques Barrot, EU Transport Commissioner. Egypt also agreed to consider an ‘open skies’ policy to allow foreign airlines greater access to the Arab world’s largest tourism market. The main issue in these open-skies negotiations will concern Cairo. Indeed, Cairo is the hub of national carrier Egypt Air and is not freely accessible for foreign carriers.

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BIRD’S EYE VIEW Conference Low Cost Air Transport Summit Air Scoop was media partner of the last IEA and Marketforce Communications Conference that took place in London, the 12th and 13th of June 2006: The Low Cost Air Transport Summit (http://www.marketforce. eu.com/lowcost). This successful event was an opportunity to meet the main actors of the European LCC market: managers of LCCs, manufacturers, aviation analysts, airports representatives… Here are some of the main analysis Share of capacity in the low-cost segment, June 2006 (percent) and points of view of the summit. Brian Pearce (Chief Economist - IATA) has expressed few reservations concerning the European LCCs market: “All business models have challenges”. He believes the ‘low-cost’ business model struggles to meet its capital. In Europe, it’s a ‘winner-takes-all’ in the low cost market. According to him, part of the problem is due to the value chain with uneven returns not reflecting risk of value. This inability to rationalize capacity means leads the LCC industry as a whole to deliver returns Euros 8.7bn lower than investors expect. Furthermore, even if margins are improving world-wide, regulatory restrictions and the price of fuel keep profitability lower than investors expected. Willem Hondius (Director of Commerce - Transavia) presented his point of view on competition, differentiation and on the future of the travel industry. According to M. Hondius, most of the 56 LCCs in Europe loose money for few reasons: - The market is price driven, so the pressure is put on yields, and a higher dollar yields do not look as good in real terms. - Ryanair and easyJet have over 50% of European market share; the next competitor (Air Berlin) has only 6%. - The competition has considerably increased between all the carriers. Business models of low cost, charter and network carriers are increasingly overlapping each other, and in the next 5-10 years, their differences will become small, especially between charters and LCCs. - Finally, loyalty of their customers is limited, as it mainly depends on the price of the tickets. Pointing out that most of the LCCs are small players, M. Hondius proposed few strategic options in order to compete with the market leaders: - Becoming a niche carrier on specific niche routes. - Setting up alliances between small carriers, beyond current limited partnerships. - Growth by take-overs or merging. - Changing the business model by developing hybrid models, interlining… - Promoting vertical integration of the business. - Widening their field of action through diversification. « Being big is not the issue, but the ability to adapt fast to changing market circumstances » Willem Hondius

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Air Scoop - July 2006

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BIRD’S EYE VIEW Maunu von Lüders (President – FlyNordic) summed up its strategy in the LCC crowded marketplace: “Listen to the customer!”. Thanks to studies of LCCs customers, both decision makers and travelers, three main points lead: price, schedule and punctuality. He believes six dangers threaten low cost carriers: - Regulatory problems (consumer protection, slots…) - The rising of costs - Overcapacity (higher costs, but lower fares) - Uneven cost structures between carriers (Eastern European cost advantages) - Cannibalizing or complementary structures - Traditional carriers transforming into low cost models Read our exclusive interview of M. von Lüders (p. 2).

Carten Kroeger (Director of Sales – Air Berlin) insisted on the ‘low fares alliances’ in Germany. For instance, Air Berlin shares its codes with HapagFly, owns 24% of Niki, and has links exchanges with dba website. “It is efficient and cost cutting, but it is not a trend”. For more on German market and LCCs alliances, read our June 2006 issue. Tim Evans (Managing director – BA Connect) M. Evans defended the regional airlines market faced to LCCs: - There is not a total domination from the LCCs, there are still niche carriers - There is an emergence of a kind of alliance or federation among regional carriers - Between regional carriers, there is an important growth of capacity

Duncan Alexander (Managing director Business Development – OAG Worldwide) presented MAX online, a useful product of its company, sponsor of the event. OAG is a global travel information company which provides a suite of solutions for managing, distributing, displaying and analyzing passenger and cargo flight data. Every ten seconds a flight is updated on the OAG system which includes internet timetables; flight analysis tools; flight status displays and SMS alert services for airports, airlines and travel-related web sites. Some Key Trends - June 2006 Vs June 2005

Increase of Low cost flights from/to these markets Source : OAG – June 2006

85% more Low cost flights to/from Baltic States ; 59% more Low cost flights to/from Scandinavia ; 48% more Low cost flights to/from Western Europe ; 47% more Low cost flights to/from Eastern Europe… Air Scoop has established a partnership with OAG which will provide aviation data for our next newsletters.

www.oagmax.com

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Air Scoop - July 2006

Low Cost Carriers Operating To/From Major European Countries By Frequency

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BIRD’S EYE VIEW Dr Andreas Bierwirth (Managing director – Germanwings) introduced Germanwings which is the only pure German low cost carrier and bigger than Air Berlin which is mix-model between LCC and charter. Germanwings is located in Germany’s regions with the strongest purchasing power. Purchasing power of cities in Germany

Germanwings‘s bases

= population density balanced with purchasing (purchasing power per person BIP)

Dr Andreas Bierwirth entered the question of the Fuel surcharge: Is it a viable strategy for the low cost model? For Dr Bierwirth, LCCs need to respond to rising fuel costs as any other airline. Communication and public awareness about high fuel costs will help implementing a Fuel surcharge. The main problem comes from the high price sensitivity among large parts of the low cost passengers. So higher the fuel surcharge will be, higher is the risk to loose parts of the highly price sensitive generated demand. Jason Bitter (Chief Operating Officer – SkyEurope) made his presentation about: “Delivering an Optimal Fleet Strategy for Future Growth”. He explained which points are important when buying an aircraft: “Fleet requirements”

- High Seat Load Factor - Improved earning capacity - Short turnarounds / high utilization of aircraft - Home base concept - Young and integrative aircraft fleet - Reduced need for airport infrastructure lowers costs - Make-or-buy services (engineering, stations/hubs) - Staff costs and crew employment - Maximizing online sales - Outsourcing uncontrollable costs (airport, fuel, credit card…) Keyfactors for Maximising Operational and Cost Efficiency

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Air Scoop - July 2006

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BIRD’S EYE VIEW Jason Bitter also insisted on the fact that fleets have real and artificial costs. Mike Rutter (Chief Operating Officer – FlyBe) described its company and their efforts to reduce costs. FlyBe is a regional low cost airline with frills, concentrating on domestic travel (80% weight). FlyBe has developed a defendable niche within the domestic sector which is supported by its cost structure, its choice of fleet and its strong retail brand. FlyBe operates 25% of UK/France routes and 35% of regional French routes by flying to disadvantaged regions. He also pointed out the important spending on advertising by UK LCCs. Real & Artificial Costs of a Fleet

Advertising spent in the UK air travel market (Nov 2005 – Jan 2006) Source NMS

Essential Ancillary Revenues for Ryanair

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The business model of Ryanair is not meant to generate growth only through the selling of tickets. Money generated by tickets has never been sufficient to cover operating expenses. Ryanair’s boss had the cleverness to use this weakness as a marketing tool with a slogan: “Flying with Free Tickets”. Free tickets are not a reality yet, but here are some ways Ryanair plans to reduce, always more, the price of its tickets. The core activity of the Irish airline is to carry its passengers across Europe. To earn extra-revenues from its passengers, tickets are low, but the services around are not. The LCC proposes (or will propose) meals and drinks, in-flight entertainment and gambling… Every opportunity to get money is considered, even if the airplane must become a flying advertising. To sustain the growth of operating costs and reassure shareholders, Ryanair has strengthened ancillary activities. On the corporate website, the airline already offers car hire and hotel room reservation. Recently, the carrier announced it would provide its customers with car and home insurance products. All these extra-revenues are essential to Ryanair to face fuel rising, to offset low revenues from the tickets and to show good results to the stock markets.

Air Scoop - July 2006

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BIRD’S EYE VIEW Air Scoop: Could you please present Air Baltic to our readers? What are your specificities compared to other European LCCs? What do you do better than your competitors? Bertolt Flick: Air Baltic is, in a way, a very unique Low Cost Carrier, if we can call Air Baltic a Low Cost Carrier. The company has been established in 1995 by Latvian Government, investment funds and Scandinavian airlines. Air Baltic is the national carrier of Latvia and combines still some features of very traditional airlines, with business class, full services in business class, as well as connecting flights, combines this with the best practices from LCCs. The cost structure of Air Baltic is definitely comparable to any of the best LCCs in Europe. However, we do offer a product which is a very original product on markets which are not served by LCCs. In Central and Eastern Europe, there are already many low cost carriers (SkyEurope, WizzAir, Estonian Air, CentralWings…), how do you manage competition with so many carriers? Are “Islanders” (Ryanair, easyJet) your main competitors? A few years ago, Air Baltic was a very traditional company focused on the business travelers; and around 2002-2003, we started to turn around the company to be competitive with LCCs on all destinations. Currently, about a half of our destinations that we fly to Western Europe, we have Low Cost competition. It has been our aim to restructure the company in a way that we can successfully compete with LCCs. So we have competition with Ryanair, easyJet, Aer Lingus and Norwegian on a number of destinations, and actually we do fairly well in direct competition. In most cases, despite the fact that we are a much smaller airline, we get a very fair share of the market and we are highly profitably on all destinations where we fly with direct competition with LCCs. In the future, we expect to have Low Cost competition practically on all destinations to Western Europe. But in the same time, we fly a lot more to the former Soviet Union and to Eastern Europe which are markets which still are not served by LCCs, and obviously we take a very determining step into these markets. 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 serving niche market? Neither for the LCCs, nor for the traditional airlines, I see a real consolidation taking place. First of all, there are plenty more markets that can be served by LCCs. A lot of the networks do not overlap. I cannot see us going out of business just because easyJet gets bigger or starts flying in Spain. We do not overlap and where we compete in direct flight, we do very well, and so it goes for many other airlines. I think it is a total myth to assume that the consolidation is a necessity; there’s no proof for this and some of the

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Air Scoop - July 2006

Interview of Bertolt Flick (CEO of Air Baltic)

second rank LCCs are already very substantially airlines. Quite frankly, I think this is just a journalist truth. All the flights from Eastern Europe to/from Western Europe stop at your Baltic hubs. Do you plan in a near future to offer direct flights between eastern cities and western ones? There is a very big difference in flying to Western Europe than to the former Soviet Union. The markets outside the EU are fully regulated; you need the designation from the ministry of Transport which you only get when the company is majority nationally owned and controlled, and there’s no open sky to those countries, so we are allowed to operate, for example, to Russia, only from Riga and not even from our base in Vilnius. This is not something that we will significantly change in the case of Russia, Georgia and a number of countries in the near future. There are countries like Ukraine which are developing to an ‘open sky system’ and it is not totally impossible that once the open sky will be implemented in a country like Ukraine, there could be direct flights from Ukraine to other parts of Western Europe. But for the time being, this is not yet possible. We profit from the fact that the Baltic States, Riga in particular, as a historically part of the former Soviet Union, have a very strong demand to a number of destinations in Russia, Ukraine, Belorussia, as well as Azerbaijan or Georgia. You operate a “star network”, do you consider serving cities inside “blocks” (inter-cities in the western block, and inter-cities in the eastern block)? Not everything that is allowed by open sky makes commercial sense. It is for us very important to operate out of our bases. Of course this looks like a star, but this is a question of also developing a certain size in a given market. From a third market to a third market, you have very little marketing power, that’s why it is at the moment not so interesting for us to fly from, let’s say, Roma to Marseille. In Lithuania or in Latvia, we have to develop a certain market presence, and we will rather look at a third place that starts operating flights from third markets to third markets. Warsaw and Budapest are located between the two “blocks”. Do you plan to convert them into “hubs access points” like Riga or Vilnius?

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BIRD’S EYE VIEW We have no specific interests in Warsaw or Budapest. If we look at a third base, we look for a place with strong traffic to the Baltic States. The Baltic States being a part of the former Soviet Union have very little trade relationships with Hungary or even with Poland. Warsaw and Budapest are being very served by a number of carriers, and we definitely have no interests in those two places. Are you focusing more on Business or Leisure passengers? Depending on the destinations that we serve, we have of course a number of destinations which are primarily for the interest of leisure passengers, and other destinations, like our flights within the Baltic States, will attract more business passengers. What we see in the former years, we used to have 70% business travelers. Nowadays, the share is equally divided which has to do with the kind of destinations we serve and also with the fact that the Baltic States have become more attractive for tourism which was simply not true just ten years ago. To face strong competition, Air Baltic has adapted its model into a “mix model” which means having LCC and legacy passengers in same flights. How do you manage such model? Saying we have a mixed model between LCCs and legacy sounds a bit negative. What we really have is a cost base which is lower than most of LCCs. In Economy class, we have no difference between ourselves and most LCCs. Our prices are for one way ticket without any conditions. We also keep the business class, particularly because of the flights to Eastern Europe and also to Western Europe which is of the free choice of the passengers to buy the business class, not like in the earlier days when he was forced by conditions to seat in business class. There is no real management difficulty with this model. However, the LCCs model is easier and simpler, and I will not exclude in the future that we will transfer to a single class model if we see

the time for it. Your routes to the Scandinavian market serve capitals (Helsinki, Stockholm, Oslo). Do you plan to extend your routes network in Scandinavia? It’s quite clear that initially the traffic even to the capital cities was very limited. We see the traffic to Scandinavia growing very fast and we are definitely considering to look at secondary destinations there. We have already started, we have opened Bergen in Norway, and we are looking at other Norwegian destinations, Swedish destinations, Danish destinations or Finish destinations. Are you worried about the shortage of pilots and crew hitting LCC market? I don’t think there is a reason for panic yet concerning pilots. However, within the local market, we do not have a sufficient supply of pilots, that’s why we have to recruit our pilots all over Europe. The pilots in our company come from over 18 countries, and we unfortunately have to pay salaries, which are not comparable to low cost salaries, but which are fully competitive with European salaries. You already have few partnerships with other carriers (Spanair, Blue1, AtlasJet…), can you tell us what is your strategy with these partnerships? Do you plan to form a low cost carrier’s alliance? We have one very important strategic partnership with SAS which covers the Scandinavian countries, and with some SAS group companies such as Spanair and Blue1. When we operate into the former Soviet Union, we try to cooperate with the local partners. Partnerships can have all kinds of depths and shapes; we have a very close partnership now with Aeroflot to serve Moscow, and we have also a partnership with Austrian Airlines to serve Vienna. At the moment, LCCs don’t have a combined nor unified global reservation system. And before there is a link between different airlines systems, I do not see any LCCs alliance making any sense.

SkyEurope: New Share Issue to Get Cash

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SkyEurope Airlines shareholders approved the planned increase in share capital; 20 million new shares should be issued which will raise share capital to 40 million Euros. The cash generated will be used to buy new aircraft and develop the network (Read Air Scoop May 2006). The time of the issue will depend on the situation of the market, but “this summer is rather a bad moment since the situation on the bourses in the region is not good”, said Andrea Hofer, Manager for investor relations. The Air Berlin IPO is the latest example.

LCCs, the impact of fuel rising. Fuel rising has a direct impact on operating costs which rose of more 46% compared with first semester 2005.

SkyEurope had a lost worth 33,75 million Euros in the first half of fiscal year 2005-2006. According to SkyEurope, this loss is due to investment in capacity expansion and launch of new flights. In fact, the Slovak LCC is facing, like other

Set up in 2001, SkyEurope made an IPO in September 2005 through the Warsaw and Vienna Stock Exchanges. Shares on Warsaw bourse debuted at 6 Euros, while their price in June 2006 fluctuated around 4 Euros.

Air Scoop - July 2006

Even if SkyEurope transported 216 246 passengers in May 2006, which represents a 44,2% increase over March 2005, the load factor in May 2006 decreased to 70,5% due to the opening of new routes including the new base in Prague, a reduction in non scheduled services and a strong increase of available seat capacity.

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BIRD’S EYE VIEW Niki: Ex-Formula 1 Champion Creates Austrian Low-Cost The former triple Formula 1 world champion Niki Lauda (1975, 1977 & 1984) has quite early switched from the steering-wheel to the joystick. In 1979, when he was still competing in the Formula 1 championship, he created the Austrian charter company Lauda Air, focused on holiday destinations. It was sold to the national leader Austrian Airlines in 2001. Two years later, Niki Lauda, who sometimes pilots his planes himself, attempted a new breakthrough on the air transport market: in November 2003, he bought the Austrian affiliated company of the German Aero Lloyd, who had gone bankrupt, to create a new airline, Niki. The new company started with two planes operating charter flights. Three years later, with five planes, it remains a small business, divided between charter and lowcost routes. But the company is growing: in 2005, Niki carried 1 million passengers, and made profit for the first time. It expects to carry 1.2 million customers in 2006, and to achieve a turnover of about 135 million Euros (+5%). The company also plans to buy one new plane every year until 2011.

AIRWAY MARKERS Niki plays the role of Air Berlin’s « extension » in Austria, operating for instance flights from Wien to Palma de Mallorca, from where Air Berlin brings the passengers further to Spain and Portugal. During the winter, Air Berlin and Niki work together to carry Spanish and Portuguese passengers to the Austrian Alps. Air Berlin also provides logistic support to its Austrian partner (Internet, call-center...). Niki, which already serves four airports in Austria (Wien, Salzburg, Linz, Graz), nineteen in Germany, and a few other in Europe, now plans to extend to Eastern Europe, in spite of an aborted attempt to fly to Poland in 2005. Niki Lauda wants to land in Moscow at the beginning of 2007, and then possibly in Saint Petersburg. Thereby, Niki challenges Austrian Airlines, leader in Austria, which main market is already in Eastern Europe. Air Berlin, also willing to expand to the East, would of course benefit from its partner’s routes to Russia. The Wien-based company’s symbol is a fly. Trying to develop the « low-fare » business model, Niki Lauda also created a car leaser, Lauda Motion.

In order to survive in the very competitive air transport market, Niki Lauda, 57 years old, quickly decided to lean on an important European airliner to gain solidity. Few months after the creation of Niki, he negotiated a partnership with the German Air Berlin, the third low-cost company in Europe. It was the first European low-cost alliance ever. Air Berlin now owns 24% of Niki.

Ryanair: Money Back in Belgium

Ryanair has lost an important High Court bid. The Belgium High Court refused an application by the Irish carrier to stay proceedings brought against it by the Kingdom of Belgium. Belgium seeks to recover 2.8m Euros provided by Belgian authorities to Ryanair during the development of its base at Charleroi. Many of the financial arrangements agreed between Ryanair and Belgium’s Walloon were declared state aid incompatible with the common market said the European Commission in February 2004. The European Commission decision still has to be regarded by the Irish courts as having the force of law, but if the airline does not succeed in Europe, Ryanair will have to give the money back to Belgium. Money had already been paid into an account. Analysts of the market wonder if this case won’t be the first of many, as the European Commission intends to clarify aids to Low Cost Carriers.

Air Scoop - July 2006

UPS AND DOWNS

Air Berlin: Best low-cost airline in Europe Europe! With around five million airline passengers, the Skytrax survey analyzed their opinion on a range of customer satisfaction criteria. Air Berlin has been named best low-cost airline in Europe. easyJet is second and Vueling is third. Furthermore, Air Berlin has been named the world’s best low-cost airline. JetBlue Airways finished second and easyJet in third place. Skytrax survey: http://www.worldairlinesurvey.com

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DOWN TO EARTH DEREGULATION OF LCCs EUROPEAN MARKET Deregulation of the European market is a big issue for Low Cost Carriers. During the latest two conferences on LCCs, the topic was omnipresent because deregulation has a huge impact on current and future market. Air Scoop decided to publish different points of view to cover the largest spectrum of this issue. - Case study: LCCs in Italy Vs ENAC - Point of view of Eurocontrol (European institution)

Low Cost Carriers in Italy and ENAC: The Challenge of Working Together If Low Cost Carriers in Italy, Sicily, and Sardinia had their way, they’d enjoy the flexibility of initiating flights to and from the islands that would connect with LCC hubs spread across Italy. From the LCC’s point-of-view, such flights would not only benefit the airlines; but would also benefit consumers, and in the bigger scheme of thing benefit tourism: more flights, more passengers, more reason to travel and more profits. Everyone goes home a winner. Achieving those goals seems easy enough: the number of available flights to and from Sicily, Sardinia and Lampadusa is strictly regulated by ENAC (Ente Nazionale per L’Aviazione Civil) the civilian aviation air regulatory commission for Italy. Since 1997, ENAC has created a set of ground rules that govern how airlines conduct themselves and where they can fly. ENAC’s position covers a lot of ground, and they’ve been proactive on many levels regarding the airline industry, for example identifying LCC and legacy airlines that don’t meet its stringent safety standards for aircraft and passengers. However, in the eyes of many LCC’s, ENAC has also taken steps that seem to limit the growth of Low Cost Carriers; particularly in the south. Consider the recent frustrations of Ryanair -- unquestionably the LCC heavyweight throughout Europe -- which is currently fighting an ENAC decision that regarding air service in and out of Sardinia. Ryanair has written to the European Commission over what it termed the “abuse of regulations” governing Public Service Obligation (PSO) routes by the Italian Aviation Authority. It contacted the Commission following the announcement that Alitalia would be allowed to fly on a PSO route which, according to Ryanair, it did not apply for when initially offered to carriers. Following allegations by Ryanair in May that the Italian Civil Aviation Authority blocked Ryanair and easyJet from offering low fares, competition and choice to consumers wishing to travel between mainland Italy and Sardinia, the European Commission launched an investigation

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into the application of PSO rules in Italy. While that’s a matter for the courts to decide, ENAC Director General Silvano Manera adds that, “…ENAC rules are impartial toward low-cost and legacy carriers. Evaluation parameters are identical for all carriers. A certified EC carrier with an operating licence issued according to EC Regulation 2407/92 and meeting all technical, operational, insurance and safety requirements is apt to operate, on the national territory, on all routes not subject to restrictions. The possibility to operate under a PSO regime is open to all carriers, which have to comply with the limit of the maximum fares, the commitment to operate all year round, a minimum number of daily flights (going back and forth on the same day) tailored to the users’ needs.” The challenge then may be to work within ENAC’s established perimeters. WindJet Airlines -- by far the most profitable Italian LCC in the South -- refers to this issue as one of “territoriality”. Remarks Windjet’s Commercial Director Mr. Massimo Polimeni … “…In Sicily, there are no real travel restrictions per se, except those related to connections to the major islands and the minor islands (for example Pantelleria and Lampedusa). In Sardinia, there is a regulation that refers to “territorial continuity” which means that only airlines which fall under the authority of ENAC have access to the airspace. This pretty much spells out which companies are permitted to fly from the mainland to the islands and vice-versa. Obviously this creates an enormous limitation on the number of independent low-cost airlines which can operate, but that’s the way it is…” WindJet has found a way to work within these guidelines while at the same time demonstrating unparalleled growth in the marketplace. Not all LCC’s have been so successful. The discussion of “territorial continuity” was the topic of discussion in a recent ENAC general assembly meeting that addressed whether AirOne and Meridiana could increase the number of flights they offer from Sardinia during peak holiday and vacation periods.

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DOWN TO EARTH Remarked Manera, “…The Minister of Transports, according to EC Regulation 2408/92, has levied public service fares on certain routes to/from Sardinia, with the aim to guarantee territorial continuity with the Peninsula. All EC air carriers owning an operating licence as per EC Regulation 2407/92, regardless of their being low cost or legacy, can conform to the public service fares or, should no carrier accept, present their offer for the public tender, for the entrustment of operations under a public services regime. The PSO (Public Service Obligation) routes are subject to restrictions and can only be operated by the carrier/s which has/have accepted the conditions imposed by Ministerial Decree or, on an exclusive basis, by the carrier which won the public tender for the operation of services under a PSO regime. I take this opportunity to remind that ENAC is the enforcing Authority of rules set forth by a Joint Services Conference, convened by the President of the Region Sardinia on the authority of the Minister of Transports. It is Sardinia itself which deems it a priority to safeguard mobility as well as territorial continuity needs of its citizens…”

Regarding the increase of flights, ENAC President Vito Riggio remarked that such an augmentation was possible if it involved code-sharing with other LCC’s -- that is -- booking passengers from other airlines. A decision is pending. The relationship between LCC’s and ENAC is either challenging or strained depending on one’s point of view. LCC’s remain committed to their goals: striving to offer low prices while at the same time remaining competitive in an ever-growing marketplace. ENAC -- likewise -- remains loyal to it’s charter as well, “…enforcing European and national standards in Italy, adopting an impartial stance, regardless of an airline’s status as low-cost or legacy, with a view to to the passengers’ rights, the service level offered by airports and the operators of the civil aviation system and taking into account, primarily, the safety safeguard. ”

Eurocontrol and Deregulation of European Low Cost Carriers Market Low-cost carriers have changed the shape of aviation. It is, in large measure, due to them that traffic levels recovered after 11 September 2001. It seems clear that they will also drive future growth. Deregulation allowed low-cost carriers to compete with flag-carrying and network airlines. This liberalisation happened first in the United States, in 1978, and Europe followed suit in 1997. It was a process that changed air transport irrevocably. In Europe, using a series of liberalisation packages, the European Commission eroded the monopoly position of the major airlines, allowing start-ups to compete with slashed ticket prices on routes between and within European countries. The result has been intense competition which has affected not only the industry’s former leaders but the new budget airlines too, some of whom have failed, especially in the United States. In Europe, the number of low-cost carriers has remained more or less constant at around 50 for the last few years. Impact The impact on Europe has been tremendous. In fact, Ryanair’s Chief Executive, Michael O’Leary’s, claim that “Low-cost airlines are the new Europe” is not as far-fetched as it might seem at first.

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Jean-Paul Soyer, Eurocontrol’s Central Route Charges Office

A new generation of Europeans has now built their lives around cut-price tickets, which make it easily affordable for most citizens to travel widely within the continent. Low-cost carriers are shoring up the ideal of free movement of goods and persons. Labour mobility, for instance, has become a reality, as people in the new European States in search of better paid work are able to move around the continent without having to pay large sums of money in order to do so. The impact on regions has been most impressive. Relying as they do on linking region to region and by-passing expensive big-city hubs, low-cost carriers have literally transformed some of Europe’s backwaters (1). Four years ago, only 200,000 travellers passed through Charleroi in Belgium. The airport, known as “Brussels South Charleroi” now processes more than 2 million passengers annually. The region has benefited hugely: the airport itself accounts directly for about 700 jobs, but more than 3,000 have been created indirectly.

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BIRD’S EYE VIEW In Carcassonne, France, it is estimated that the 235,000 travellers who arrive there each year have created over €270m of extra economic activity. Talinn in Estonia has had a dramatic transformation, as has Katowice in Poland. Thanks to the low-cost carriers that fly there, nearby Cracow has seen 50% growth in tourism since 2004: last year, it received three million visitors. Property development has boomed and thousands of new jobs created as a result. Slovakia’s economic overhaul and flat tax system are often credited for the country’s newly-won economic success. But there could well be another reason. Slovakia stands out from the rest of Europe as the one national market where individual flows are most dominated by low-cost carriers (in other countries, traditional carriers lead the market: out of the top 10 total country-pair flows in Europe, the low-cost carriers have the highest share only in one - between Spain and the United Kingdom). There is a clear connection between low-cost carriers’ destinations and direct rises in local employment: more taxi licences are issued; bus lines are opened; services in general proliferate. There is parallel growth in tourism; a rise in property investment and new businesses. Good, cheap logistic connections encourage investment generally: it makes sense for big companies to invest in an area where land is inexpensive and labour plentiful. Growth The market share of low-cost carriers in Europe is climbing steadily: it reached 16.3% of all European flights in May 2006. According to an analysis recently conducted by Eurocontrol, comparing the first six months of 2006 with the same period in 2005, low-cost carriers’ market share (2) rose from 12.9% to 15.3%. There are now 15 low cost operators with more than 50 flights each day, compared with 13 only a year ago. Since deregulation in 1997 in Europe, well over 40 companies have carried over 100 million passengers each year.

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tive proposals could well have worse effects. For example, a charge based on passengers would increase the burden on the airlines’ ability to achieve a high seat occupancy rate, which is precisely the case with low-cost carriers. Concern Environmentalists are concerned about the rapid rise in low-cost carrier growth, pointing out that aircraft emissions are now the fastest rising source of greenhouse gases. Cheap flights are appealing - but the environment might have to pay the full price one day. Eurocontrol is doing what it can to enable Air Traffic management mitigate the effect of aviation on the environment. Just to take one example, through effective use of flow management, thousands of tonnes of fuel (3) are saved annually. Other projects are underway and valuable work is being carried out with stakeholders to do everything possible to limit pollution through air transport activity. The Future Low-cost carriers have around 20% of the world’s airline market today and this figure may reach 40% by 2010. In May 2006, Ryanair, Europe’s biggest low-cost operator, said that it was on track to double passenger volumes and profit by 2012. There is doubtless still room for growth, especially in Eastern Europe, where the low-cost market only really took off following the inclusion of ten States into the European Union in 2004. There are plenty of military airbases, now unused, in the old Warsaw Pact countries which could be developed by budget airlines. However, there could be constraints in the future if Europe follows in the United States’ footsteps. Low-cost carriers there are beginning to lose their labour cost advantage. At the end of 2005, network carriers had 27% higher labour costs than low-cost carriers. That is a daunting amount but it is a lot less than their 77% disadvantage in 2000.

The Single European Sky initiative aims at enhancing fairness – putting players on the same footing – in particular in the area of terminal charges. Currently, the situation in Europe is very opaque. The convergence towards a common formula should increase transparency, allow for comparison and ultimately focus competition on the level of charges and not on semi-confidential local arrangements.

It has been stated that the single largest driver of labour costs in the future will be growth. Low-cost expansion will probably slow significantly in the next five years as new opportunities become more limited. As this growth slows, labour costs will continue to rise at the low-cost carriers, in all likelihood reducing the advantage they once enjoyed.

Some low-cost carriers are unhappy that this formula still uses a weight factor. But on one hand, this formula is not really a handicap, if one considers the average composition of the fleets of these carriers. On the other hand, alterna-

Conclusion All the same, the changes made by low-cost carriers on the air transport market will probably prove to be permanent: the days of premium prices are over. As IATA,

Air Scoop - July 2006

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DOWN TO EARTH the International Air Transport Association, has declared, all airlines are lower cost now. The network carriers have adapted their business models to follow the low-cost carriers as far as they can. This has been of real benefit to passengers who now have more choices and better prices. by Jean-Paul Soyer, Head of Billings and Customer Relations, Eurocontrol’s Central Route Charges Office

The ‘MOL’s Word of the Month’

Notes 1. 25% of low-cost carriers’ operations are carried out at airports with less than 50 arrivals per day 2. in the Eurocontrol Statistical Reference Area 3. in 2005, the unnecessary consumption of roughly 350,000 tonnes of fuel, or almost 1.1 million tonnes of carbon dioxide, were avoided thanks to air traffic flow management

WORD OF THE MONTH

‘‘I will leave some time in the next couple of years; I wouldn’t tie myself down to 2008. It will be some time after Ryanair has established world domination, then it will be time to go.” Michael O’Leary

Strategies to Respond to Rising Fuel Costs LCCs must adapt themselves in order to survive the rising fuel costs. The result is often a mixture of secured and unsecured fuel contingent (fuel price backup, hedging…) and a new approach of fuel consumption, privileging direct flight routes, lightening aircraft weight, adjusting flight altitude,

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and also in the choice of engine types less consuming. The following diagram displays strategies of LCCs to respond to rising fuel costs.

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BIRD’S EYE VIEW Eurocontrol Low-Cost Carrier Market Update (May 2006) The number of low-cost carriers has fallen by 2 to 50, operating out of 22 States in Europe. They operated 16.3% of all flights in May 2006. Finland, Poland, Denmark and Latvia market shares have jumped by more than 5 %, while others like Greece, Hungary and the Balkan countries have lost market shares. “Ten of the top 25 low-cost country-pair flows involve the United Kingdom. Slovakia is the national market where individual flows are most dominated by the low-cost. However, the biggest markets remain dominated by traditional carriers: out of the top 10 total country-pair flows in Europe, the low-cost carriers have the highest share in only one.” Low-cost share is increasing in only 3 of the 10 major country pair flows in Europe.

Change in market share in percentage points, Jan-May 2006 vs Jan-May 2005 Source : http://www.eurocontrol.int/statfor

BLOGS TREND Constant blog coverage for easyJet Ryanair still had the main blog activity, but easyJet with an important coverage overtook its competitor at the end of the month. The most important peak was due to the British Prime Minister when he took a flight back home from Italy with Ryanair. This event provided an important buzz activity around it. A second peak occurred during the third week when the Irish airline announced it would launch home and car insurance to its customers. easyJet had no real peak in June, but a constant blog activity which implies a regular corporate communication. Among others, easyJet has won an award for its website, awaited for Turkish approval to serve Istanbul, launched investigations on ammunition carried in a hand luggage onto one of its aircraft… Air Berlin had a low blog coverage this month with only one main peak around the 20th of June. This corresponds to the nomination of the German airline as the best low-cost carrier in Europe.

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Air Scoop - July 2006

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