Air Scoop July 2007

Highlights in this Issue

Vueling: Competition Cannot but Bites SWOT Analysis of easyJet Fifty LCCs in Europe, and a « Bloodbath » Expected Rough Times: Duty Rises – Shares fall The Analysis of the Romanian LCC Market

The Low Cost Carriers Analysis Newsletter

EDITORIAL

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he main issue discussed at the Low Cost Air Transport Summit 2007 was with no doubt the impact of environmental issues on Low-Cost Carriers activities (p. 17). Indeed, a way to limit global warming is to tax tickets which would directly rise their prices (p. 11) and have therefore negative consequences on the growth of LCCs. Each speaker, one after the other, had at least a word on it, and easyJet even hold a press conference to present its future Eco-Jet. With its own business model, easyJet has some assets to manage the slowdown of activity in the European LCC sector, that’s why Air Scoop has realized a SWOT of the carrier (p. 6) in order to present its strengths and weakness. One signal of the slowdown of the market is the current wave of consolidations occurring through Europe. Air Scoop had the opportunity to interview Maunu Von Lueders and Daniel Skjelman (p. 2) about the recent acquisition of FlyNordic by Norwegian. Face to these mergers and acquisitions, our team has analyzed the effectiveness of LCCs mergers (p. 21) and their limits. Another sign of the slowdown of LCCs is definitely the global fall of LCCs shares (p. 14). Ryanair, easyJet, Air Berlin, Vueling… their shares all has followed the same falling trend these weeks. In this tensed context, many analysts predict a “bloodbath” among LCCs soon (p. 13). The market has reach its limits in terms of activity and the slowdown will lead to few strong carriers and the death of others. As usual, in each issue, Air Scoop makes a focus on a Central/Eastern Europe market. After Hungary, the Czech Republic and Slovakia, we have analyzed the Romanian LCCs market (p. 16). Bulgaria and Poland will be our next markets…

Air Scoop - In the Air

Vueling: flying with Band-aid!

Air Scoop - July 2007

«Clickair unsafe to fly»

p. 5 p. 6 p. 13 p. 15 p. 16

Air Scoop ANNOUNCEMENTS 2007 Ancillary Revenue Airline Conference (ARAC 2007) November 14 and 15 in Frankfurt Learn to boost your non-ticket revenues by attending the only conference dedicated to this topic. Ancillary Revenue Airline Conference - - ARAC 2007 - - will take place 14/15 November 2007 in Frankfurt. The two-day agenda offers more than 25 speakers, including senior airline executives and top industry vendors working in the field. Confirmed speakers include: Air Canada - Sandra Lindala, Senior Director New Revenue Opportunities Amadeus - Alberto Pozo, Managing Director - Travel Services & Leisure Flybe - Militsa Pribetich-Gill, Ancillary Revenue Manager Lufthansa Systems - Roland Moor, Future Airline Core Environment Eurostar - Luke Kingsnorth, eCommerce Manager SkyEurope Airlines - Karim Makhlouf, Chief Commercial Officer US Airways - John Reistrup, Director of Marketing Programs & Customer Loyalty Visa - Kirk Stuart, Vice President Co-Branding Vueling Airlines - Arturo de Perthuis, Ancillary Revenue Manager Visit the ARAC 2007 web site to view the agenda and register: www.airlineinformation. org and click on the Conferences tab. The discounted early bird rate of $479 (for airline and transport providers) expires on 15 June. Air Scoop subscribers qualify for this low rate. Simply enter «Airscoop» as the promotional code when you register for the conference.

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BIRD’S EYE VIEW ‘‘NORDIC CONSOLIDATION’’

Interview of Maunu von Lueders (CEO of FlyNordic) What is the difference since Norwegian has acquired FlyNordic? First of all, our previous owner is a traditional airline and a member of a global alliance. We were a strategic tool for them, but now for Norwegian, we are a tool for expansion and to broaden their scope. Because FlyNordic and Norwegian are very similar in the way they function and in their business model, there are a lot of synergies. I think we are going to expand and grow much faster now than with our traditional owner. We will also gain from joint network, distribution and things like that. As now you are a big player in Scandinavia, which carriers are your tougher competitors in Scandinavia? We are competing with any carriers, not only LCCs, so SAS is our biggest competitor. We will definitely be a big opponent to SAS. First, we are going to cover some routes that they have, we will have some routes they don’t have, and we will have a very customer friendly proposition. For a lot of customers, the choice between FlyNordic and SAS will be based on price, schedule… I cannot see what we couldn’t do that SAS is doing. How do you explain the collapse of FlyMe? It was an overcapacity from them; you cannot swallow a bigger piece than your mouth. It was an expecting thing, and we were wandering how they survive so long. You cannot keep growing without the resources necessary to grow and without knowing if the grow will ever be profitable. Growing for the sake of growing doesn’t make sense.

Maunu von Lueders (CEO of FlyNordic)

How do you see your expansion in Scandinavian countries? Outside Scandinavia? We are already in the Scandinavian countries. Denmark’s market is very small while Norway domestic is huge. Swedish domestic market is important too, but only half of Norway. So by having our stronghold in Norway and in the Swedish market, it is a very powerful thing. Denmark is interesting essentially because Copenhagen generates some traffic and we can capture business travel there. As we are focused on business travel, our schedules are designed to fit to these passengers. I’m sure Norwegian and FlyNordic will cover major cities in Scandinavia any time soon. We don’t have any long-haul projects for the moment. The growing markets are Asia and Eastern Europe, so I’m sure Central and Eastern Europe will be part of our expansion strategy. It’s not much about regional targets but more about specific interesting destinations, but definitely Eastern Europe is interesting. Local carriers there are more known in their home base, and in Scandinavia FlyNordic and Norwegian are well known, so if you talk about traffic from Scandinavia to Eastern Europe, we have the strength. It mainly depends on the direction of the market.

Interview of Daniel Skjeldam (Director Network and Revenue of Norwegian) Do you believe Norwegian is protected on its own Scandinavian market against other LCCs competitors? Yes, definitely. The reason is simple, it is because, on a lot of routes, 70% of the market is originated in Norway, Sweden or Denmark. That’s why, with this outbound, domestic carriers will always have the strongest positions. Our customers know our brand and check prices of our company with the ones of our competitors. If we are competitive, we will sell the ticket; if they are competitive, they will sell it.

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Now that Norwegian and FlyNordic are merged, what will be the main changes? What about the consolidation of the Scandinavian market? By acquiring FlyNordic, we get an interesting size to develop in the future. We can use FlyNordic fleet, staff, routes and of course its brands. This acquisition of FlyNordic gives

Air Scoop - July 2007

Daniel Skjeldam (Director Network & Revenue of Norwegian)

us a lot of synergies which will be used for our growth. It is very hard to say if there will be other consolidations in the Scandinavian market as the sector is really fast moving. How do you feel about the “price war” launched by Ryanair? It doesn’t affect us at all. We are competing on quite a few routes, but the price difference must be very high to see our customers changing their flying habits with us. We actually see a boost in the routes on which we are competing with them, and not a decline. It attracts customers to these destinations because they spend more money on marketing. Our customers always check first if the home base carrier doesn’t have a flight on this route, and they compare the prices. If our competitors spend money on marketing, it also affects other routes in a good way.

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DOWN TO EARTH ‘‘IDEAWORKS AISLE’’ Kulula Strike a Unique Balance as a Low Cost Airline and South Africa’s Largest Online Retailer Kulula.com claims it is “South Africa’s biggest online retailer” with record sales of over 100 Million Euros. This self-described “quirky” airline recently announced a new slogan that invites customers to “Come fun with us.” Kulula offers a unique brand positioning that promises spontaneity and energy, laughter and life, but most importantly - - simplicity and honesty. This consumerfocused and light-hearted strategy also encourages travelers to purchase an array of additional services from the airline. Kulula began flying in 2001 as South Africa’s first low cost carrier. The airline has carried over 7 million passengers and currently operates 300 flights per week on 12 domestic routes. Kulula’s online strategy drives 80% of its bookings and likely generates significant ancillary revenue. The booking process promotes the sale of hotel accommodations, car rentals, taxi transfers, and airport parking. Consumers may also donate to Kulula’s chosen charity and are encouraged to apply for its co-branded credit card. All of these features are neatly integrated into the Kulula.com web site. The airline readily promotes itself as an online retailer, but its basic airline product is relatively simple. Two pieces of baggage can be checked without charge. Seat assignments are provided at the time of check-in. Additional fees are not charged for bookings or payment with a credit card. Snacks can be purchased on board and include hot and cold drinks, sandwiches, muffins and more. But its distinction as an online retailer becomes clear during the booking process. Brand personality supports the online sales strategy The web site uses a natural conversational style by asking questions. Consumers are asked, “Where are you going?” instead of the usual drop-down menus to select an origin and destination. The flight selection process is transparent and consumer-friendly by highlighting lowest fares in a bold font. The conversational style continues by asking, “Would you like to book any extras?” Consumers can choose from cars, beds and cabs. The airline dedicates a portion of the page to its charity initiative. Consumers are encouraged to “do your good deed for the day” by contributing to the Childhood Cancer Foundation of South Africa.

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by Jay Sorensen (President of IdeaWorks) www.IdeaWorksCompany.com

Clicking on the cars, beds and cabs options opens a page offering more information and specific choices. The choices made during booking do not provide a confirmed reservation, but are offered on a “request” basis. Reservation details for cars, beds, and cabs are confirmed by telephone or email within a defined time period. Fees for these services are paid separately by the traveler and are not included in the price of the airline booking. This simplifies the transaction for Kulula, which receives commissions from its travel partners.

The car rental choice presents the consumer with a menu of options such as car sizes and features, standard or super insurance waiver, and length of rental. The hotel choice presents a variety of accommodations at different price levels, and includes a short description of each hotel. Taxi transfers are offered in a similar manner with prices quoted on the basis of travel zones. The following image displays some of the hotel choices offered for Johannesburg.

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DOWN TO EARTH All of the options chosen by a consumer are neatly presented on a summary at the end of the booking process. Consumers may choose from three payment methods: Kulula Moolah, credit card, or later payment by bank transfer or deposit. Moolah is the airline’s loyalty currency. Choosing the “later payment” method prompts the consumer with an offer for the Kulula.com co-branded credit card. Travelers can earn “Moolah” with the Kulula credit card Most co-branded credit cards offer a 1% rebate to cardholders. The Kulula credit card is distinctive because it offers a 3% travel rebate for monthly charge volume below 5,000 South African Rand (approximately 500 Euros). Higher monthly spending drops the rebate to 2% for monthly charge volume of 5,001 through 10,000 Rand (approximately 500 to 1,000 Euros), and 1% for 10,001 through 20,000 Rand (approximately 1,000 to 2,000 Euros). The rebate is applied to a cardholder’s Moolah account, and can be used to pay for tickets purchased at Kulula’s web site. For example, charge activity of 2,000 Rand would generate a Moolah credit of 60 Rand. Account balances are displayed on the cardholder’s monthly statement, or when the customer accesses their Moolah account at Kulula.com. The card offers an attractive sign up bonus of a 20% rebate on the first 1,000 Rand charged by the cardholder. The annual fee for the card is 150 Rand (approximately 15 Euros). Accumulated Moolah rebates do expire after six months if they are unused. As an added loyalty marketing incentive, Kulula provides a 3% rebate on all charges linked to the purchase of airline tickets at its web site. The credit card generates ancillary revenue for the airline through the charge activity of the cardholders. Kulula shares in the revenue realized by the issuing bank from the processing fees charged to merchants. This revenue is used to fund the Moolah balance earned by cardholders. When Moolah is redeemed by cardholders, the revenue is returned to the airline in the form of airline ticket purchases. Kulula’s co-branded credit card is innovative because it delivers many of the benefits of a frequent flier program without the administrative expense. Of course, choosing a credit card to provide a loyalty benefit does restrict the audience to customers who are credit-worthy, or a willing to open their wallet to another credit card offer. What would you like to experience today? Kulula goes beyond accommodations and car rentals with its “Kulula Kicks” adventure experiences. These services are offered under a separate category at the Kulula web site. They are offered at four destinations: Cape Town, Durban, George, and Johannesburg. Selecting Johannesburg produces a list of more than 60 adventure activities. The array of experiences is very broad and includes spa

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services, skydiving, jetfighter flights, hot air balloon rides, safari experiences, and something with the mysterious title of “Crocodile River Rafting.” Customers may click each listing for more information, which includes a full text description and an image. Pricing is offered for each experience, and in a manner similar to cars, beds, and cabs, the booking is made on a request basis with a confirmation made by telephone or email. We are more than an airline … We’re an entire travel experience The sincerity of this airline appears in everything it does. The above statement appears on “Our Mission” page at the Kulula web site. The page also includes the most unusual collection of brand attributes likely found on an airline web site: The easiest around - Simple - Totally honest - Great fun - Safe and professional - Inspirational Many airlines advance their ancillary revenue objectives at the cost of appearing as cold and mercenary corporations. Kulula has taken a different approach by offering a standard travel experience that doesn’t charge extra for features such as checked baggage and payment by credit card. The airline has chosen a retail approach by selling add-ons such as accommodations, car rentals, and adventure experiences. Kulula has proven that low cost need not appear to the consumer as “cheap.” The airline is one of the few that has managed to achieve a delicate balance between aggressive ancillary revenue tactics and a pro-consumer branding image. About IdeaWorks: IdeaWorks was founded in 1996 as a consulting organization building brands through innovation in product, partnership and marketing and, building profits through financial improvement and restructuring. Its international client list includes the hotel, airline, marine, railroad, consumer products and health care sectors. IdeaWorks specializes in brand development, customer service improvement, customer research, competitive analysis, creating partner marketing strategies, cost reduction programs and business restructuring. Learn more at IdeaWorksCompany.com.

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DOWN TO EARTH Vueling: Competition Cannot but Bites Spanish budget carrier Vueling prefers to brand itself not just as another LCC but as a “new generation” carrier. “New generation” means low prices, high quality, major airports, modern planes with funky names, and overall aggressive strategy. It was named the best Spanish airline in 2006 and has been highly valued by the European passengers; it too has been financially successful until it started bothering ‘major’ players. Even though the carrier narrowed down its target area to the south Mediterranean, the sky’s shortage has taken its toll. Now it competes with Iberia, Clickair, SpanAir (SAS subsidiary), Air Europa, Ryanair in Spain and KLM – Air France group on international routes. The very first flight was a challenge. With slots shortage at the airport of Barcelona and Iberia as unnegotiable leader the airline started operations to become the first successful Spanish low cost project. From the very beginning and after opening the second base in Madrid especially it became clear that Vueling was not going to live in the shadow of legacy airlines. It started to pull out Iberia’s charter flights, notably those carrying football fans. That actually forced Iberia to reconsider its international services in Barcelona and Madrid. Vueling has launched ambitious expansion by opening its first international base in Paris and is planning to open the second international base in Italy next year. Connecting Paris with Amsterdam and reinforcing its presence at the airport by opening new routes Vueling challenges the home team – Air France-KLM. Whilst in Spain there is no big price difference between primary and secondary airports, Paris-CDG and Schiphol are classy airports that hardly any LCC could afford. Up to date, financial strategy which involves first-level shareholding structure with such shareholders as Apax Partners, JetBlue Airways, Inversiones Hemisferio, allowed investing money in risky projects. A considerable sum of money – up to €5 mln – was put into the promotion of the base in Paris. Assumingly, the future development and strategy basically hinge on success/failure of this base.

The financial strategy of the airline involves first-level shareholding structure and the position of the carrier is largely dependent on the situation with shareholders. When Apax Partners, the former core shareholder, was reported to plan a bid for Iberia and to team up with BA and KLM to prepare that bid and to merge Vueling with its competitor Clickair, Vueling dropped 10%. After Apax had sold its 20.9% stake shares dropped even more. Vueling has managed to safeguard 5% so far by attracting Atalaya Inversiones, SRL which acquired this stake. With this new investor, which is characterised by Vueling as stable, the picture of shareholders looks like this: Inversiones Hemisferio (Lara family), JetBlue Airways, Atalaya Inversiones. Indeed, the 1st quarter report shows that despite the increases in load factor, net income fell by 127.9%. Notably, the main source of income this quarter was predominantly achieved by ancillary revenues that constitute about a half of the total revenue whereas for Ryanair it is estimated 1/5th of the revenue. Raising money through meal, insurance, hotel accommodation should not be a business priority for an airline. By the same token, this source of income is not stable which means plausible financial problems in case it exhausts. The year results are largely dependent on the results of the third quarter. However, the outlook is already pessimistic. Even with the new “stable investor” Vueling continues to decline and has lost 7% adding to the previous 10%. The increasing capacity in Spain, including Iberia’s ambitions, Ryanair’s attack and direct competition with Air France – KLM, makes Vueling’s displacement very plausible.

EVENTS

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Air Scoop is proud to be media partner of Airports 2007. This conference will be hold in Warsaw the 19-20th September 2007. This year’s edition of Airports 2007 Conference will be dedicated to extension of airports and challenges that every airport should equal to with reference to EURO 2012 that was granted to Poland and Ukraine. We’ve invited representatives from Portuguese and German companies, that not long ago had an occasion to organize huge sport events like EURO 2004 and Mundial 2006. Our intention is also to invite representatives of Ukrainian ports so they can share with their plans of airport infrastructure extension. More information: http://www.actiaconferences.com/www/index.php?pid=_en

Air Scoop - July 2007

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BIRD’S EYE VIEW SWOT Analysis of easyJet easyJet is Europe’s leading low fares airline. Formed in 1995 by Sir Stelios Haji-Ioannou, it has grown rapidly to become Europe’s fourth largest airline by passengers carried. Sir Stelios has credited easyJet’s success to two strategic imperatives. The first was “sweating the assets”, that is making sure that the planes were as full as possible and flying as much as possible. The second was a sophisticated yield management system which would set an infinite number of fares for a given flight, based on the demand and supply position for that flight. The prices for the seats fluctuated depending on the demand for them at a particular time. easyJet was the first LCC to start the sale of its airline tickets online. In 1999, Stelios was voted London Entrepreneur of the Year at the London Electricity Londoner of the Year Awards. In the same year, easyJet was voted «Best Low Cost Airline» by readers of Business Traveler magazine for the first time. easyJet was selected as a Business Superbrand by the Superbrand Council which recognizes companies with an outstanding brand name in November 1999. Other Superbrand companies include such globally-recognized names as Virgin, Coca-Cola and Manchester United. In December 1999, ‘Marketing’ magazine described the launch of easyJet as «one of the 100 great marketing moments of the 20th century». Stelios entered the Guinness Book of Records for being the world’s youngest international scheduled airline chairman when he launched easyJet in 1995 at 28 years of age. Sir Stelios was knighted by the Queen in June 2006, for services to entrepreneurship. The combination of favorable market conditions, robust operating principles and world-class marketing, underpinned by the entrepreneurial vision of the man now known to the public simply as Stelios, brought success and fame to easyJet.

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SWOT TEAM In April 1996, easyJet took delivery of its first whollyowned aircraft (started operations with two leased Boeing 737-200) and went international with first services to Amsterdam from London Luton. easyJet launched its website, easyJet.com which provided information about the airline. In September 1997, easyJet placed an order for 12 brand new Boeing 737-300s for delivery by 2000. In October, easyJet also launched its second UK base at Liverpool Airport. easyJet bought 40% of a Swiss charter operation, TEA Basel AG, based in Basle for a consideration of three million Swiss francs in March 1998. This airline was later renamed ‘easyJet Switzerland’ and moved to Geneva where the first European base was opened. In April, 1998, the airline sold its first seat online at easyJet.com while telephone sales continued. easyJet ordered 15 brand-new Boeing Next Generation 737-700 aircraft in July 1998, with a list price in excess of $500 million. In June 1999, easyJet increased stake in easyJet, Switzerland to 49% and acquired an option over the remaining 51%. In July 1999, easyJet Switzerland inaugurates services from Geneva to Nice, Amsterdam and Barcelona (the first easyJet services wholly outside the UK). easyJet seat sales over the Internet passed the one million mark in October 1999. easyJet became the first low-cost airline to launch a flight arrivals information service on its web site in April 2000. Internet sales reached 85% of total sales in September. easyJet entered the London Stock Exchange Listings in November 2000 at an offer price of 310p and sold 25% of the stock to public. The IPO earnings went mainly towards financing the purchase of the new Boeing 737-700 order placed in March 2000 taking fleet size up to 44 aircraft by 2004.

History

It established London Gatwick as its fifth base in December 2001, and becomes the second largest scheduled airline at the airport.

The easyJet airline was founded in 1995 by Stelios HajiIoannou, with £5million family loan and 20 staff members, based on the Southwest Airlines model. The first bookings were made on the easyJet telephone reservation centre opened at easyLand, the home of easyJet at London Luton Airport. Its first passengers flew from London Luton to Glasgow and Edinburgh for the ludicrously low price of £29 one way on November 10th, 1995.

In August 2002, easyJet and Go combined to become Europe’s largest low-cost airline and two months later, in October, they ordered Airbus A319 aircraft. Since then, the Airbus A319, together with Boeing 737-700s, are interchangeable on all easyJet routes, so maintaining the “any aircraft, any route” aspect of the easyJet business model. In November 2002, Stelios stood down as Chairman of easyJet and Sir Colin Chandler took over the position.

Air Scoop - July 2007

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BIRD’S EYE VIEW easyJet launched pioneering online technology which allows customers to view and change their bookings online in July 2003. easyJet established a new base at Berlin Schönefeld in November 2003, dramatically expanding the existing network with the addition of 11 new routes. In February 2004, easyJet announced new base at Dortmund, increasing the existing network with eight routes. On 28 May 2007, easyJet made history by checking in an entire flight through the new, ground-breaking self-checkin kiosks at Nottingham East Midlands airport. In July 2004, easyJet introduced Europe’s most generous hand baggage allowance by removing the 5 kg weight restriction and in December, Hotelopia and easyJet teamed up to launch exclusive accommodation products and services as easyJet Hotels. EuroAirport-Basel-Mulhouse-Freiburg is announced as the airline’s next base in January 2005. In May 2006, Ray Webster, the Chief Executive of the Company steps down from his post. In June, Gatwick became the airline’s biggest base with flights to 29 destinations. In a bid to further improve its offering to business travelers, easyJet and ServisAir introduce easyJet Lounges, easyJet joined the European Low Fares Airline Association (ELFAA) on 1 October 2005. In October, easyJet and Europcar introduced the opportunity to purchase car rental at the same time as flight bookings through ‘dynamic packaging’. easyJet has already been offering «dynamically packaged» travel insurance to its UK market since March 2005. In October, easyJet announced a new base at Milan’s Malpensa Airport. Malpensa was the airline’s 16th base in Europe and first in Italy. easyJet became the first major low-cost airline to roll-out internet check-in for its UK passengers in February, offering a 15-minute gate arrival time for those traveling only with hand baggage. Andrew Harrison, the new Chief Executive of the company, took up his post on 1 December 2005. The airline expanded into new markets outside the EU to Marrakech, Istanbul, and Rijeka in March 2006. The airline appointed Ogilvy UK as the airline’s first Pan-European advertising creative agency in May 2006. It launched a new base at Madrid’s Barajas airport in August and in November, and introduced a new facility of ‘Speedy Boarding’ that will give passengers greater choice over their seating arrangements onboard the aircraft. Profit after tax in 2006 increased by 59.4% over 2005. Basic earnings per share increased by 56.8%. In January, 2007, easyJet, Europe’s leading low-fares airline, and Microsoft launch the pioneering “easyJet desk

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top gadget.” The two leading technological innovators have teamed up for the development of the new Windows Vista and the 2007 Microsoft Office System to create a range of desktop «gadgets» and web services to ensure travel is seamless from desk top to touch down. The «easyJet desk top gadget» enables customers to personalize flight information and booking services using the Microsoft Vista technology. Strategy and business model easyJet’s operational policies were based on keeping costs to a minimum to allow the airline to offer the lowest fares possible. It adopted a number of practices that helped curb wasteful expenses and provided the best possible service within the limits prescribed by cost. easyJet’s strategy has six key foundations: 1. Strong branding: easyJet has invested a lot in PR and advertising. It has been coming in airline TV programs and created strong brand profiles in catchment areas through advertising. The neon orange ‘easy’ brand represented value for money. Sir Stelios has been known come out in public and demonstrate against any increase in taxes and also exhibit strong support to a greener environment. 2. Pricing and revenue management: The airline follows a one-way, time- dependent pricing with only online reservations except for two weeks before take-off, when telebooking is allowed. 3. Lower unit costs: Although easyJet does have lower operational costs, its operating margins are much lower than Ryanair. This is because it flies to major airports most of the time, uses two main types of fleet, invests heavily in advertising and public relations and adopts limited fuel hedging. Its fares are also much higher than that of Ryanair (but it gets to some extent gets neutralized by the higher distance of Ryanair airports from city and town centers). 4. Network strategy: easyJet follows a point-to-point route connection and grows by joining dots. It focuses on catchment areas and low prices to obtain traffic. Unlike Ryanair, it flies to destinations within cities but uses smaller airports (like Luton and not Heathrow, London) within the cities itself throughout Europe. It expands by increasing frequency of flights. It operates 289 routes from 79 airports, connects 36 cities and has 17 main bases. 5. Employee culture: easyJet employs around 4,859 people around Europe. In terms of culture, easyJet favors an informal company culture with a very flat management structure, which eliminates unnecessary and wasteful layers of management. All office-based employees are encouraged to dress casually. Ties are banned - except for pilots! Remote working and ‘hot-desking’ have been characteristics of ea-

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BIRD’S EYE VIEW syJet since the beginning. Employees can buy company shares and also are given performance awards appreciating their services. 6. Commitment to customer service: It targets both business and leisure travelers. Customer proposition of easyJet is “Low cost with care and convenience”. easyJet has adopted the philosophy of providing basic service with a smile. It has been achieving above average customer satisfaction, proven by the awards that it has been receiving over the years. It does not have any weight restrictions on hand baggage but only limits the size of baggage. They also have the facility of accommodating a passenger who has missed flight on the next flight at an extra charge of just £35 within two hours of the departure of the original flight. It also provides seating in easyJet lounges at a rate where the early passenger can wait and relax. Features of the business model: easyJet keeps costs low by eliminating the unnecessary costs and frills. Their business model meets the customers’ demand for a simple, budget-driven travel alternative. This is achieved in a number of ways: � Pioneer in the use of internet: easyJet was one of the first airlines to embrace the opportunity of the internet when it sold its first seat online in April 1998. Now over 95% of all seats are sold online, making easyJet one of Europe’s biggest internet retailers, substantially reducing its distribution costs. The passengers who book online receive an email containing their travel details and confirmation number, rather than tickets through the post. Online buyers also benefit from paying the price of a local call, instead of the standard national rate of easyJet’s booking line. easyJet’s internet booking process is simple and straightforward for which it has won many awards; � Maximizing the utilization of substantial assets: easyJet flies its aircraft intensively, with swift turnaround times each time it lands. This gives it a very low unit cost with maximum utilization of its fleet. It has permission to carry passengers , cargo and mail in aircrafts of 20 or more seats; � Ticketless travel: Passengers receive booking details via an e-mail rather than paper and hence resulting in ticketless travel. This helps to significantly reduce the cost of issuing, distributing, processing and reconciling millions of transactions each year; � No “free lunch”: The airline has eliminated unnecessary services which are complex to manage such as free catering, pre-assigned seats, interline connections and cargo services. This keeps the total cost of production low; � Efficient use of airports: easyJet flies to main destination airports throughout Europe, but gains efficiencies compa-

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red to traditional carriers with rapid turnaround times, and progressive landing charge agreements with airports; � Paperless operations: Since its launch, easyJet has simplified its working practices by embracing the concept of the paperless office. The management and administration of the company is undertaken entirely on IT systems which can be accessed through secure servers from anywhere in the world enabling huge flexibility in the running of the airline; � Safe and efficient flight operations: The average age of easyJet fleets is about 2.5 years. It has only one class in flights. easyJet’s Airbus A319 have two pairs of overwing exits instead of the standard one-pair exits, fulfilling extra safety requirements required for higher passenger density. It also uses the internet and the telephone as efficient marketing tools. Ancillary sources of Revenue are: a) Credit card fees; b) Excess and extra baggage charges; c) Speedy boarding fees; d) Sporting equipment fees; e) Ticket changes charge; f ) Infant fees; g) easyJet lounge fees; h) Profit share from in-flight sale of food, beverages, and boutique items; i) Commissions received from products and services sold for e.g. hotel bookings, car hiring, travel insurance, credit card etc. Issues: The airline seems to be positioned very well, with experts predicting strong growth in the low cost-sector. Given the saturated market and the shortage of other options in the UK, competition is likely to intensify – inevitably followed by consolidation, an early sign of which is easyJet’s purchase of GO. The UK market offers little growth opportunity; therefore concentration will be on the continental market and other new EU member markets. So easyJet must look at some issues with a long term perspective. These issues are: � What should be the long term game plan to combat competition and hostile takeover bids? � How should it grow and expand its operations without affecting its operating margins? � Which are the most lucrative geographical markets and niche segments that it must focus on? � Should it plan for expanding outside Europe in a major way? � How can it increase its sources of ancillary revenue?

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BIRD’S EYE VIEW

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BIRD’S EYE VIEW SWOT Analysis

margins must make a definite plan to overcome this hurdle without comprising its ‘no-frills’ advantage.

easyJet’s mission statement: “To provide our customers with safe, good value, point-topoint air services. To effect and to offer a consistent and reliable product and fares appealing to leisure and business markets on a range of European routes. To achieve this we will develop our people and establish lasting relationships with our suppliers.” Vision and objectives are: � Low fares and high frequency between major European airports; � Consumers willing to pay ( a little ) more for valueadded proposition; � Growth based on joining the dots and adding frequency. Recommendations 1) easyJet is already catering to business travelers by operating from within city airports, but it needs to further innovate its services to attract the frequent business traveler. 2) The airline should make a definite plan to expand into low cost medium haul sector as the short haul routes are getting filled up. With adding a little more of services on its flights, it should be able to easily adapt to this sector. 3) The growth of the low cost market will slow down considerably in the next five years which will increase operating costs. So easyJet, which has very sensitive operating

4) The value price segment to which easyJet is targeting is bound to increase in numbers, but also the variety of choice available to them is also increasing. So easyJet has to devise strategies to retain customers and build customer loyalty. 5) Expansion into Russia. Middle-East, Africa and Asia should be part of any dynamic player in the airline industry in the face of intense competition within Europe and saturating demand. 6) easyJet should increase its sources of ancillary revenue in-flight and on ground to reduce its vulnerability to external forces not under its control. Conclusion easyJet’s major strength besides its business strategy has been the aggressive, flamboyant marketing approach adopted by its ex-chairman Sir Stelios which has enabled the brand name to earn very high recall and recognition. Hopefully this will continue and serve the company well in the competitive markets. But the need of the hour for easyJet is to broaden its vision to include progressive measures for becoming a global player by refining its current strategic business model. This is very important as the current European markets would definitely get saturated and as the LCC industry is moving towards consolidation it has to look for new avenues for growth and expansion.

Taxes and Global Warming Impact on LCCs When it comes to using LCCs, the impact on people’s pocket is a far bigger potential deterrent than concerns about the environment itself. Three out of ten people would be put off flying to and from France if a new ‘green tax’ on LCCs was imposed according to a survey by the online magazine website FrenchEntree.com. LCCs created the problem of rising passenger numbers. Indeed, according to the Civil Aviation Authority figures, 3.1m travelled from the UK to Europe on LCCs in 1996, and by 2005, it was 51.5m! Air travel will be the fastest-growing source of carbon emissions by 2050. Already by 2020, we will take half a billion flights annually (up from 189m in 2002), and aviation does far more damages than its perceived 2 per cent of UK emissions. In a review of the economics of climate change last year, Nicholas Stern put aviation’s share just at 1.6% of global greenhouse gas emissions. In fact, LCCs contribution to global warming is two to four times that because of the amplification of negative effects of burning kerosene at altitude. “Planes are 10 times more damaging to the climate than trains, so if we don’t do something about the growth in aviation, Britain will find it very hard to meet its global warming targets.”, said John Sauven, Greenpeace Director.

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DOWN TO EARTH

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BIRD’S EYE VIEW Fifty LCCs in Europe, and a « Bloodbath » Expected The European LCC leader Ryanair is well-known for its very pugnacious vision of the air transport, as confirmed by the company’s Northern Europe manager, Wilhelm Hamilton, describing the future of the market in a conference in March in Helsinki: “It will be a bloodbath”, he said. Participating to the same conference, officials of Germanwings, Lufthansa’s LCC, agreed. Michael O’Leary already used the term of “bloodbath” three years ago, as the air transport market was in great difficulties, with increasing costs and a strengthening competition. He wanted to stress the point that the sector would have to face a strong consolidation, and that many LCCs would go bankrupt or have to merge. According to him and now to many analysts, only one or two big LCCs will fly the European skies on the medium term. For now, about 50 LCCs are operating in 22 European countries, and 23 of them operate more than 50 daily flights - they were 14 in 2005. That means the number of significant players has reached their highest peak. But obviously LCCs are too numerous, and many small players will disappear! When the market leaders (Ryanair, easyJet, Air Berlin…) speak about a “bloodbath”, they do not refer to themselves of course, but to the swarm of smaller airlines that will undoubtedly be swallowed in a move of bankrupts and mergers. On the German market, the consolidation has already begun. This country is a real LCC battlefield; six European LCCs operate 90% of the flights. Within less than one year, three airlines disappeared or were acquired: Air Berlin bought LTU and DBA, and the two TUI-airlines HLX and HapagFly merged into TUIfly. With its partnership with the small Austrian LCC Niki, and its acquisition of 49% of the Swiss Belair, Air Berlin has also begun a transnational expansion. Consolidation is not over in Germany… In Ireland, Ryanair wanted to take control over the national company Aer Lingus introduced on the Stock Exchange at the end of 2006. The European Commission will decide about this merger on July, 4th. In Scandinavia, Swedish FlyNordic has just been acquired by Norwegian airlines, and after FlyMe’s bankruptcy in March 2007, the Danish Sterling immediately placed its airplanes on two of FlyMe’s former routes! Central and Eastern Europe is the area with the most important potential in Europe, hosting several small local airlines, sometimes operating the same routes (SmartWings, Centralwings, Wizz Air, SkyEurope...) and a growing amount of Western companies. The battle will also be

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bloody there as some of these carriers have strong financial weakness. Will SkyEurope, introduced on the Stock Exchange in 2005, be able to defeat its local challengers and to resist Ryanair and easyJet, in a « Centralers » Vs « Islanders » fight? Another important stake of the “bloodbath” may be the newly announced intercontinental flights. Air Berlin bought the charter airline LTU to develop long-haul flights. Fiercely opposed to this strategy few years ago, Michael O’Leary finally announced in April his plans to create in 2010 a subsidiary for flights to small North American airports like Baltimore or New York Long Island, with fares starting at 10 Euros without taxes. In 2008, open sky agreements between Europe and the US will be effective. For customers, such “bloodbath” could have positive effects. It will mean new routes, both in Western Europe and in « peripheral » areas (Scandinavia, Central and Eastern Europe, North Africa...), and also an increasing pressure on fares. Ryanair and easyJet have launched a “price war” in order not to lose their passengers and to keep as high as possible their falling load factors. To balance, companies emphasize on ancillary revenues such as priority check-in, snacks, reservation of hotels... For instance, these ancillary revenues now count for 50% of Vueling’s revenues! In such conditions, load factors are indeed extremely important: no passengers equal no ancillary revenues…

EVENTS French Connect 2008 - Courchevel Next year, French Connect will take place from 9th to 11th April 2008 in Courchevel. Keep checking www.FrenchConnect.net for updates on the new programme format. To have more informations about last edition of French Connect in La Baule, read the full coverage in Air Scoop May 2007.

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BIRD’S EYE VIEW Rough Times: Duty Rises – Shares fall With the emergence of LCCs two separate but yet intertwined markets appeared: low-cost travel market and low-cost share market. Whilst the first one is believed to remain relatively stable, the second depends on numerous things to be considered: fuel prices, new duties, security, position amongst other airlines and many other factors that are simply out of LCCs’ control. Listing an airline on the stock exchange depends on shareholders, partners and other supporting bodies. To increase shareholders’ funds is as an important part of LCCs’ everyday business as increasing passenger flow. Expanding market share and price influence is yet another battle field for any airline that whishes to be profitable. Though LCCs do create a common market phenomenon it would be wrong to say that all LCCs are treated equally by investors. On contrary, every airline creates its specific market. And when two competing markets contest it can drop drastically their shares. It is exactly the case of easyJet and Ryanair. Ryanair was listed on the Irish stock exchange in 2001 and ever since then its share price varied from 3.16 € to 6.35 €. Its position as a leading company creates certain stability in the market. Though the carrier has demonstrated considerable growth in profitability, it does not mean that investors will never shun its shares. Share performance is dependent on virtually any change in the market. Seemingly, decisive factor for Ryanair is the publication of interim results. Given that the airline is one of the most profitable, share price should reach its peak shortly after the publication which mean May and October. This year the airline encountered a considerable drop. Reporting that the doubling of UK’s passenger tax had influenced load factor and created softer yield environment, O’Leary killed almost 5% of Ryanair’s share price. easyJet started its stock performance in 2000 that got really strong with the acquisition of Go Fly. Another significant booster for easyJet’s shares was the idea to create a global low-cost airline in the beginning of 2007. Apparently, this May has demonstrated the real intensity in the market and complex pricing situation. easyJet shares that dived drastically indicated that yields pressure was a general phenomenon. Being primary concerned with the revenue, easyJet intends to lower ticket prices and increase promotion. However, Ryanair was the first to offer the greatest seat sale. The airline also stakes on ancillary services.

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All this reminds of arms race. To gain more profits airlines are buying more planes and opening new routs glutting the market with offers and breaking out fare wars. Perhaps, it is time to realize that mutual and balanced reduction would safeguard profits. However, LCCs have proved themselves as uncompromising.

Ryanair Shares Historical Chart

easyJet Shares Historical Chart

Air Berlin Shares Historical Chart

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DOWN TO EARTH The Analysis of the Romanian Low Cost Carrier Market Romania has the seventh largest population in the European Union. According to UN estimates, it was approximately 22.2 million people in July 2007. The sheer size of its population implies that the country may have great potentials in the low-cost carrier market. However, the share of low-cost carriers from the total air traffic is significantly lower than in the already analysed three countries, Hungary, Slovakia and the Czech Republic. Based on Eurocontrol data, the low-cost market share in Romania (based on total flight movements, excluding overflights) was 7.7 % in the second half of 2006, while the same figure in Hungary was 15.5 %; in the Czech Republic it was 13.9 %, whereas Slovakia demonstrated the highest share of 37.9 %. (1)

Given that the country joined the European Union only this year, a further wave of entry of low-cost carriers is yet to come. Still, LCCs have shown a surprisingly low activity in Romania so far. Only a dozen of them are present in the country, but half of them serves just one single route (including such major European players like Germanwings and easyJet). The carriers that offer service on more than one route are the local low-cost player, Blue Air, the Hungarian Wizz Air, the Slovakian Sky Europe and finally, the Italian LCCs, AlpiEagles, Vola Wind Jet and My Air. Even this relatively simple image of the Romanian market can be further simplified, since AlpiEagles offers flights to its main hub, Venice Marco Polo airport, and then further flights will take the passengers to the final destinations. In short, AlpiEagles uses the «hub-andspoke» concept as its business strategy, similarly to Vola Wind Jet, whose main hub is Forli Airport, near Bologna. Therefore, only Blue Air, Wizz Air and My Air are those of the more significant players in Romania that offer direct flight connections to the indicated destinations. Nevertheless, the Romanian market is more diversified in terms of international airports hosting LCCs, than the other Central European countries analysed in the pre-

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vious issues of Air Scoop. Currently, there are 7 international airports in Romania that are served by at least one of the low-cost carriers. The most important ones are located in the capital of the country. Bucharest-Baneasa (its full name is «Aeroportul International Bucuresti Baneasa Aurel Vlaicu») is the most preferred airport of the LCCs and it is also the main operational base of Blue Air. However, between 10th May and 31st July 2007, this airport is closed due to construction works, therefore in this period all flights will depart from the other airport of the capital, Bucharest-Otopeni (Aeroportul International Henri Coanda). Originally, this is served by AlpiEagles and Vola Wind Jet and some other LCCs, playing a minor role in Romania. However, 5 international airports used by LCCs are in the countryside, and are located near large cities. The airport of Arad is served exclusively by Blue Air, while the airport of Timisoara, which is the second largest airport of the country and is only 60 km away from Arad, is served by AlpiEagles. Targu-Mures, the city in the heart of Transylvania is served by Wizz Air, while the airport of Cluj (approximately 100 km to the east from Targu-Mures) is served by both Blue Air and AlpiEagles. The last airport to be served by an LCC is in Bacau, which hosts Blue Air. According to the summer schedule of 2007, currently 12 countries and 57 routes are served by low-cost carriers from Romania. The geographical distribution of the final destinations shows a very one-sided nature: 72 % of the routes lead to Italy or Spain and only 16 of them lead to other countries. On the one hand, the strong presence of the Italian LCCs in Romania may explain this rather strange phenomenon. However, their presence in the country is not a coincidence, therefore, on the other hand, it may be explained by another substantial factor. Recently, a huge flow of outward (labour) migration has been characterised Romania. The main destinations of these migrants were Spain and Italy, because of already established cultural ties and perhaps because Spanish and Italian languages are easy to learn for Romanian native speakers. According to unofficial estimates, more than 1.2 million people left the country and this strong outward migration is likely to continue in the future, too. In essence, the migrants pose a constant, strong demand for air travel, and this may be the reason why one can observe the absolute dominance of Mediterranean routes offered by LCCs in Romania. In this sense, it is not surprising at all that Wizz Air considers the country as its most important business opportunity after Poland. A substantial part of the company’s business strategy is to build on the market niche of mi-

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DOWN TO EARTH grant workers and their demand for flights between the home and host countries. This is the reason why Wizz Air’s network is concentrated between Polish cities and the UK and Nordic countries, as most Polish migrants are working in this region. Following its strategy, Wizz Air has already established a strong presence in Romania as well, and poses a great challenge to the local player, Blue Air.

flights per week of Wizz Air results in a total seat offer of 13320 seats, Blue Air’s maximum weekly passenger capacity for this summer can be estimated around 18 thousand seats. In sum, there is indeed a great competition between the two carriers, although the market is subject to strong growth in the future. Some city-pairs are already «crowded», especially the Bucharest-Barcelona, Bucharest-Rome and Bucharest-Milan pairs. Five LCCs offer flights to Barcelona from Bucharest while 4 fly to Rome and Milan from the Romanian capital. Five other routes between city-pairs are served by two LCCs, however, all the other destinations are served by a single air carrier. Given the one-sided structure of the geographical distribution of destinations, and given the relatively low market share of LCCs in Romania, there may be still a lot of opportunities left for low-cost carriers to enter this market. Routes to Germany, the UK and to the Nordic countries are the most likely to be open in the future and these are also those routes that may bear great profitability. Since the regional airports are developing dynamically and since their catchment area is also significant in terms of population, Romania seems to be an Eastern European market worth observing in the immediate future.

Based on the summer schedule of 2007, and accounting for all the currently served and planned routes (those that will be open later during the availability of the summer schedule) the following can be derived in connection with the rivalry of Blue Air and Wizz Air. Blue Air will offer approximately 150 weekly flights (with its four Boeing 737 aircraft, with a seat capacity of 123, 136, 144, and 167 seats, respectively), while Wizz Air will increase its number of flights to a maximum of 74 per week (Airbus-A320 aircraft, 180 seats). As Blue Air operates flights between its hubs (Arad, Bacau, Bucharest and Cluj), and some of its international flights are offered through these domestic connections, the actual number of weekly flights will be less than the indicated estimate of 150. Therefore, if the 74

(1) Eurocontrol Low-Cost Carrier Market Update, December 2006 (available: www.eurocontrol.int/statfor accessed on 14 June, 2007)

Air Berlin Offices Searched in Insider Trading Probe

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Prosecutors searched for evidence of insider trading in connection with last year’s takeover of competitor DBA in Air Berlin’s offices. The investigators look through emails and board-meeting minutes, and five managers including CEO Joachim Hunold and Supervisory Board Chairman Johannes Zurnieden are under investigation. «The management board and supervisory board chairmen alone acquired shares worth 1.47 million Euros», the prosecutor’s office declared. BaFin’s initial probe led to a formal investigation last year, when the regulator asked the company to provide documents. BaFin sent its findings to the Stuttgart prosecutors in March and asked them to investigate further.

Air Scoop - July 2007

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DOWN TO EARTH The Institute of Economic Affairs 2nd Annual Conference The Low Cost Air Transport Summit 13th & 14th June 2007, The Waldorf Hilton, London

EVENTS

This summit came at a time when the low cost model is under pressure, and carriers are fighting to differentiate themselves and compete effectively in a crowded marketplace. In addition, they are facing an increasingly stringent regulatory burden as the environmental impact of air transport moves up the political agenda. ‘The Low Cost Air Transport Summit’ has tackled these issues, in a focused forum dedicated to asking the question, ‘Where Next for Low Cost Carriers?’ Keith Mason, Director of the Business Travel Research Centre and Senior Lecturer in the Department of Air Transport Cranfield University «With years, average fares have increased, so low fares is the main objective. Chasing ancillary revenues could be counter-productive», Dr Keith Mason «There is not a lot of room to reduce costs in long-haul (…) You need to have a business class or at least a two cabin (…) The cutting in price is just not possible» Ryanair and easyJet dominate the European LCCs market. We should notice that only 13 companies carry more than 500 000 seats per year. Cranfield forecast for 2015: Due to maturation of the market (or its fatigue?), European LCCs market would be dominated by 2 or 3 large carriers, plus a number of smaller player. Low-Cost Carriers in long-haul market won’t be easy as opportunities to gain lower costs and significantly undercut incumbents is limited. Long-haul flights are less likely to stimulate this market as much as short haul. Furthermore, there is an increasing likelihood that passengers will self connect at LCCs airport «hubs», and therefore opportunities to sell insurance for self connections.

Low Fares Airlines Seats in September 2006 Source: OAG, easyJet The LCCs environmental paradox: On one hand, high load factors give lower seat emissions, but on the other, if the market had not grown, far fewer people would be travelling. If 60% of trips on LCCs are stimulated by low fares, environmental taxes could have a significant impact on the European LCCs market.

LCCs strategy comparison: Network Avoiders Vs Network Supplanters

Network Choices

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DOWN TO EARTH Maunu von Lueders, CEO of FlyNordic (read our interview page 2)

«Biggest increases are to Asia, Eastern Europe and the Baltic countries», Maunu von Lueders

Which of the following factors are most important when your company chooses an airline to enter into an agreement with?

Which of the following factors are most important when choosing an airline for business trips? «Price is important but only together with other value adding factors» Sweden to Europe with SAS has one way fares which are at LCC levels. Swedish domestic full service carrier offers full in-flight service with fares that are successfully competing with LCC carriers.

On which of the following measures do you think your company should focus as regards business travel?

«The basic LCC model is losing ground and some of its competitive advantage. Environmental concerns will increasingly be afecting the demand for air travel.»

Alex Cruz, CEO of Clickair «Since the demise of Air Madrid, the Spanish CAA has increased inspections ten fold», Alex Cruz «10 of 28 routes were previously Iberia. Clickair is still highly dependant on Iberia (handling, maintenance, aircrafts…. )» «The battle for the summer will be bloody, main airports, short haul. We have till summer 2008 to prove ourselves»

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DOWN TO EARTH Enda Corneille, Commercial Director of Aer Lingus

«Cost is the key while price is the driver», Enda Corneille When price becomes the sole focus of a message or a company’s marketing activities, you are undermining your chances of being perceived as unique.

Aer Lingus optimum position should be customer centric and differentiate itself from other low-cost/no-frill carriers. It is essential to remain consistent with the business model, to build on some natural and core strengths, and to develop new ones in the future.

Aer Lingus has carefully chosen product differentiators that are valued by customers while maintaining simplicity and low costs. For instance, centrally-located city airports, allocated seats, one-way fares, online advance seat selection, transparent pricing through website, Frequent flyer programme, self service check-in, customer care in the event of disruption...

David Doctor, Director of Airline Business Group

LCCs trends are not only to grow volumes, but also to increase prices. Surveys show that business passengers pay up to 40% more than leisure passengers, one reason is because they want flexibity.

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DOWN TO EARTH Daniel Skjeldam (Director Network & Revenue of Norwegian)

«Our worst ennemy is the Nordic winter! A real challenge for aircrafts», Daniel Skjeldam With the acquisition of FlyNordic, Norwegian is now the largest LCC in the nordic countries with more than 30 aircrafts and between 9 and 10 million of customers in 2008. 108 routes to 70 destinations and 1100 employees. 70% of the market comes from inside Scandinavia. Distribution Tim Jeans (Managing director of Monarch Airlines) «Environmental attacks is the most important threat to the LCC business», Tim Jeans «Then comes taxation and airports in the UK which make a lot of damages to the business. Moreover, slots are today a real break on flexibility.» Andy Harrison (CEO of easyJet) Andy Harrison has unveiled a model termed the ‘Eco Jet’. easyJet Routes in % «Global warming is a near certainty. Environmental debates have an impact on passengers demands», Andy Harrison

Philippe Wilmart (Marketing Director of Marseille Airport)

How can airports work with airlines to attract low-cost traffic? Airports, like in Marseille, can identify all potential customers segments (size and location of communities, second home markets…) and therefore tailor made marketing plans. MP2 also had to educate, inform and stimulate its local markets, and helped establish and develop the LCCs brands locally.

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BIRD’S EYE VIEW Exclusive Analysis for Air Scoop Are LCC Mergers Effective? With the recent merger activity in the LCC industry, as well as the slowdown in demand, rumors abound about additional consolidation. Airlines engage in mergers for a variety of reasons, and this article explores the ever-shifting LCC merger environment. LCC mergers are typically used to help LCCs consolidate in a given region, in order to further trim costs and better compete with other carriers. LCC mergers are often designed with a long-term outlook, and the main goal of any airline merger is to increase worker productivity, particularly in the managerial and aircraft crew positions. According to Dr Keith Mason at Cranfield University, high worker productivity is most correlated with LCC profit, and ultimately, LCCs are focused on increasing profits with any merger. In the larger merged company, redundant worker positions can be eliminated and others can be streamlined. Flight attendant and pilot scheduling can be optimized to better meet the needs of the company. However, savings also exist from many airport jobs, including ground crew and maintenance staff, but are more elusive since many LCCs outsource these functions. Mergers typically do less to increase aircraft productivity, since most LCCs already use their planes as much as possible, and a merger doesn’t change that paradigm very significantly. Mergers give the new carrier additional market share and often, reduced costs, critical to a LCC’s survival. Market share provides pricing power, and more leeway to adjust capacity to meet the demands of the market. With LCC growth slowing, airlines need to raise fares. And airlines can most easily do that by controlling capacity to better meet the needs of the market. When LCCs are small, market share is difficult to acquire, but as a LCC grows and matures, it often has lower costs, greater name recognition, and more pricing power. Some LCC mergers, especially between smaller carriers, will be focused more on efforts to pare costs as much as possible. When these mergers occur, fleet and airport commonalities are more important, as they allow the two carriers to sync operations more quickly and more immediately realize the cost benefits from their connection. Other mergers, typically between larger carriers, are more focused on acquiring more market share for the combined company. Fleet and airport commonalities are less important, and the two airlines involved in the deal often continue to operate separately for the indefinite future. Many mergers take place even though the two airlines operate completely different fleet types or from different airports. For example, even though FlyNordic operates MD-80 series aircraft, while Norwegian operates 737-300s, the two companies merged.

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www.airlinebulletin.com Approximately 60 LCCs presently operate in Europe, and many of them are vulnerable to competition. Ryanair and easyJet are much more powerful than any other LCCs, and they will ultimately move into most regions around Europe. Ryanair and easyJet also have lower costs than most other LCCs, so they pose the greatest threat to lesscompetitive LCCs. Smaller LCCs are most likely to consolidate, especially when vulnerable to LCC competition. When Ryanair entered Scandinavia and lowered fares drastically, other LCCs were hurt. Since the market is relatively small, airlines were fighting for relatively few passengers, and Ryanair’s lower fares attracted a significant share of the market. To compensate, Norwegian and FlyNordic merged, and other Scandinavian LCCs, including Sterling, may be vulnerable to takeover. Consolidation could create regional airlines that could have costs similar to Ryanair or easyJet’s, but which target a particular market. The Norwegian/FlyNordic and the Air Berlin/DBA mergers created two large airlines in their respective regions. The most rampant consolidation will be seen in markets that are less penetrated by Ryanair and easyJet and which also lack a dominant low-cost carrier. Such regions, which include Spain/Portugal, Italy, and Eastern Europe, could see merger activity, depending on additional circumstances, particularly those that are contributing to the present slowdown, including higher interest rates, higher taxes and landing fees, and the amount of competition already in a market. In Spain and Portugal, Vueling has struggled to expand in the face of stiff competition from Ryanair, easyJet, Clickair, and SpanAir. The upstart Clickair has had a lot of success, with costs that are close to Ryanair’s. A Clickair/ Vueling merger could create an airline that offers extensive domestic service as well as substantial service to Portugal, France, Italy, and Germany thereby becoming more competitive with many of its low-cost competitors. Since both Clickair and Vueling operate A320 aircraft, there would be significant fleet commonalities, and the new airline could deliver a streamlined, uniform service to quickly realize cost benefits of the deal. It’s also possible that Vueling or Clickair would merge with SpanAir to create a Spanish low-cost powerhouse, but that seems less likely right now because the benefits of that merger would be less immediate due to differences in fleet types as well as network structure and overall business model.

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BIRD’S EYE VIEW In Italy, with a less developed LCC market, the merger picture is more difficult to predict. It’s less likely that a merger between two Italian LCCs will occur than in Spain. However, a buyout of an Italian LCC by a larger LCC, such as Air Berlin or easyJet isn’t out of the question, since both those companies have fleet commonalities with Italian LCCs and are fighting for greater market share in the country. And one merger between two Italian carriers isn’t out of the question. A merger between My Air and WindJet would enable the merged carrier to have significant market share and pricing power on routes to and from Sicily. In Eastern Europe, the picture is also hazy. Ryanair has made a very strong push in Poland, and has developed considerable market share there. It’s possible that Ryanair or easyJet may make an acquisition, as both carriers want to gain additional market share in the region. Eastern Europe will probably someday see around two to three large LCCs because of the diversity of markets that can be served from that region, since there are so many different countries, and there is potential for services not just to Western Europe, but also to Russia, Turkey, and the Middle East. Air Berlin or another LCC that uses hubs might consider an acquisition in the market and using that leverage to create an Eastern European hub to funnel passengers from Western Europe to emerging low-cost markets in the Middle East. Both Wizz and SkyEurope suffer from competition with Ryanair and even legacy competitors. Wizz seems to have the biggest problems with Ryanair right now, and the airline may need to join with another to diversify the markets it serves and to grow more quickly. easyJet and Wizz could be good partners, since easyJet is looking for an additional presence in Eastern Europe, but Wizz also has other opportunities that it can’t ignore. Also possible, though less likely, is that two LCCs from different parts of Europe could link up to create a transEuropean network, potentially offering customers the ability to connect to certain destinations. For this reason, Vueling and Wizz might make a perfect match. Both companies are struggling with competitors, both operate A320 aircraft, and both want to pare costs. A merger between these two carriers could create an airline with a network spanning Europe, offering customers in Spain and Portugal the ability to access destinations in Eastern Europe and vice versa. That would distinguish the company from SpanAir, which focuses primarily on routes to Germany, Italy, and Scandinavia, as well as Ryanair, which has little presence in the Spain/Portugal-Eastern Europe market.

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Consolidation may even be seen in other markets where a dominant LCC already exists. In this case, a larger LCC may merge with a smaller carrier in order to give the larger carrier more leverage in a given market. For example, in Scandinavia, rumors abound that Sterling may merge with easyJet. That could enable easyJet to expand quickly into a virtually untapped market for the company, Scandinavia. It would give the new operator greater worker productivity, providing a competitive edge against the alreadystruggling SAS. Unlike easyJet and most other LCCs, Ryanair has a unique rationale about mergers. Ryanair doesn’t look for cost reduction through mergers, since the airline has by far the lowest costs in Europe and any further cost reductions would be marginal. Instead, Ryanair looks for acquisitions that will help the company gain share in a new market quickly. For example, an acquisition of Blue Air in Romania would enable Ryanair to become a leading carrier in the country overnight. Ryanair could greatly stimulate traffic with lower fares than Blue Air had been offering and expand service from the country to destinations east and west. In Eastern European countries where many working class citizens are looking for cheap travel to Western Europe, Ryanair’s low fares greatly stimulate traffic, which in turn enables Ryanair to offer service to additional markets. That reality could work to Ryanair’s advantage in Romania. However, Ryanair has a very successful formula, and the airline has been very careful not to tinker with that formula very much. For this reason, Ryanair is less likely to merge with another carrier than easyJet, Air Berlin, or another large LCC, and any merger or buyout would be conducted on terms favorable to Ryanair because Ryanair has so much leverage. Although there’s a lot of buzz about potential mergers, I doubt that there will be a sizable number of mergers in the marketplace soon. Airline mergers are complicated, timeconsuming, and risky, so they will likely be conducted sparingly. It’s possible that up to two or three additional LCC mergers could occur over the next year or two, but I doubt more. However, those airlines that do decide to merge could change the marketplace in a region dramatically, and with the downturn in the industry, those changes could be magnified. And that could potentially lead to an additional round of consolidation in the future.

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Air Scoop - July 2007

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