Air Scoop July 2008

Highlights in this Issue

Ryanair and German Airport Subsidies The Low Cost Air Transport Summit 2008 Europe to Change the Airlines’ Online Sale Methods Mitigating Rising Fuel Costs The Predicament of Flybe

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The Low Cost Carriers Analysis Newsletter

EDITORIAL

AIR SCOOP ANNOUNCEMENTS A Glimpse of Headlines News!

Air Berlin: Crisis Detected!

Denmark blacklists six European carriers Copenhagen: Denmark’s National Consumer Agency on Thursday published the names of six European airlines it said were still using illegal marketing practices, despite warnings from the European Commission after a review last year. The Danish Consumer Ombudsman Henrik Oe said the Internet booking sites of Ryanair, Air Berlin, Air Baltic, SkyEurope, Aer Lingus, Brussels Airlines as well as that of Internet travel agent Seat24, contained incorrect information or made use of misleading booking procedures.

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igh fuel expenses seem to have significantly influenced Air Berlin’s flight path but the carrier tries its best to adapt to new circumstances. Though Air Berlin is the third biggest budget carrier in Europe, it is not guaranteed against losses. Having warned of tough times ahead, Air Berlin dropped 7 per cent, which is the lowest since May 2006 when it was listed on the Stock Exchange. In order to make up for additional costs, the carrier will launch a costcutting programme which means reducing domestic and long-haul routes starting November. At least 10 per cent of its flights will be grounded including those to Beijing and Shanghai, Cape Town, Windhoek, Bangkok, to New York, Mauritius and Sri Lanka. The airline’s cost-cutting measures will also result in cutting down administrative staff at DBA, a Munich based LCC it owns. Overall, Air Berlin has revised its earnings forecast and cut the initial forecast twice. Some analysts believe that the cost-cutting plan appeared too late and that it is not able to stave off the threat to Air Berlin’s very existence posed by a sharp rise in fuel prices. Air Berlin appeared to be a stunning but short-lived success. Its growth and acquisition of DBA, LTU made it Lufthansa’s biggest rival in Germany. The acquisition of Condor, which has not been yet approved by German competition authorities no longer seems feasible in the nearest future. What’s more, Air Berlin also reported certain problems with LTU integration. With the help from DBA, LTU and Condor, Air Berlin planned to increase its passenger flow. To date, the carrier has to reduce the number of planes by 14. However, the Chief Executive Officer Joachim Hunold hopes that this reduction won’t affect the number of passengers as the efficiency plan envisages additional flights on high-demand routes. Any further expansion falls under question as well. Most likely, Air Berlin will have to reconsider its order for 25 Boeing 787 long-haul aircraft that were planned to be phased-in between 2013 and 2017. At the core of the current crisis experts see Air Berlin’s aggressive expansion strategy which finally took its toll. Towards the end to focus on long-distance flights, Air Berlin bought two carriers and opened routes to China, Thailand, to the Caribbean and New York. Air Berlin showed itself as growth-oriented but it was cut back by high fuel prices.

Air Scoop - July 2008

EasyJet ad grounded for “misleading” CO2 claims EastJet, the low cost airline, has once again been reprimanded by the Advertising Standards Authority (ASA) for making misleading carbon dioxide (CO2) claims in a national press ad. The advertising watchdog upheld a complaint from a viewer who believed claims made in the ad confused easyJet’s emissions per passenger with its total CO2 plane emissions. Rising fuel cost: Experts foresee airlines’ mergers and consolidation Increased cost pressures on airlines combined with lower spending power among customers, could force a new round of consolidation between carriers, say bankers, analysts and industry executives. Fuel is one of the biggest costs airlines face and the price of oil has doubled in the last year, but airlines may be unable to pass on that cost as businesses and leisure travellers face pressure to spend less as the economy slows. Bmibaby to cut Cardiff services UK carrier Bmibaby, the biggest low-cost airline flying from Cardiff, Wales has confirmed it is to cut flights because of soaring global oil prices. Bmibaby commercial director Julian Carr said cutbacks were being made to safeguard the company’s long-term future. More on http://airscoop.blogspot.com

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BIRD’S EYE VIEW Ryanair Gets Under Pressure in Germany for Receiving Airport Subsidies For Ryanair, it is just a new illegal subsidies affair. At the end of June, the German LCC Air Berlin, the third lowfare airline in Europe, filed a complaint with the German Federal Court of Justice against the Luebeck airport, in Northern Germany. Air Berlin accuses the airport to grant its Irish rival lower charges, and thus to create unfair competition. Air Berlin’s action is not completely a surprise. Last year already, the European Commission launched an inquiry against several European airports, among which Luebeck, for similar reasons: bilateral deals offering some airlines special financial conditions, which could be considered as illegal state aid. And the contract between the Luebeck airport and Ryanair had already been suspected of illegality by the EC... eight years ago, at the time it was signed. What is more, Ryanair is accustomed to that kind of accusations. The first illegal subventions inquiry by the European Commission against the company dates back to 2002, in Charleroi. Ryanair was finally forced in 2004 to pay back 30 pc of the subsidies it had received from the Belgian airport. Less than two years later, a new contract was signed between the airport and the Irish airline, which still has a big hub there. After Charleroi, many other inquiries were opened by local or European authorities all over Europe. Brussels currently examines different deals Ryanair and other airlines as EasyJet concluded with several European airports: Pau in France, Aarhus in Danemark, Bratislava in Slovakia, Tampere in Finland, but also Berlin and Dortmund in Germany for EasyJet. And just a few days before Air Berlin’s announcement about Luebeck, in June, the European Commission opened another investigation on the Frankfurt-Hahn airport (150 km from Frankfurt), suspected of having received public aid from the Länder of Hesse and Rhineland-Palatinate, and from its public owned mother company Fraport. The Commission will also examine bilateral contracts between the airport and Ryanair, which operates in Frankfurt-Hahn one of its major European hubs. This examination follows a complaint from a German airline. The Luebeck case, however, has something specific. First of all, it occurs two months after Ryanair opened its first German domestic route from Berlin to Frankfurt-Hahn, directly challenging Air Berlin. Ryanair’s CEO, Michael O’Leary, at that time even predicted the disappearance of the German LCC: according to him, Lufthansa and Ryanair will in a few years be the only companies operating

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in the German sky! This new Ryanair boss provocation shows the German market is just at the beginning of a harsh battle, and Air Berlin’s complaint in Luebeck may be part of it. Secondly, the Luebeck case will be judged by a German court, which decision will set a precedent in the country. With this trial, Air Berlin, supported by the German Association of Airlines, clearly wants to set an example for the national air transport sector. What the airline is asking for is in a way the mere application in Germany of European rules established after the Charleroi affair: subsidies from airports to airlines have to be limited in time, restricted to new routes or new frequencies, cannot be proposed to a single airline, and have to be transparent and communicated to other airlines and to European authorities. It is of course a way to attack Ryanair’s business model, partly based on more or less illegal airport subsidies, often paid to the airline’s sister company Airport Marketing Services as a counterpart for promotion actions of the destination abroad. Subsidies or airport fees reductions represent important revenues for the Irish airline: they reach several hundred thousand Euros per airport and per year. If Ryanair loses the German trial, its other - or at least future - deals with German airports may be put into question. And beyond the German market, the increasing number of illegal subsidies cases involving the Irish airline could soon begin to threaten its business model, and its financial wealth. Especially when the whole air transport sector is expected by analysts to be hit soon by a strong downturn, mainly due to record oil prices. In February, Michael O’Leary warned 2008-2009 financial results could be weaker than expected. Investors are already very cautious: since October 2007, Ryanair’s share has lost nearly 50 pc of its value. The worst case scenario for the airline would of course be several condemnations similar to the Charleroi one: if Ryanair was forced to reimburse 30 pc of all the subsidies it perceived, the financial impact could be enormous. Ryanair has another point of view about subsidies and free competition in the European sky: according to the airline, the companies really supported by state aid and subsidies are national leaders as Lufthansa and Air France. Ryanair regularly accuses the European Commission to protect national leaders instead of stimulating free competition.

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BIRD’S EYE VIEW

The Low Cost Air Transport Summit 2008 11th & 12th June 2008, The Waldorf Hilton, London High fuel prices, an impending economic downturn and continuing environmental pressures mean that tough times are ahead for the aviation industry. LCCs must carefully evaluate their models, identify new revenue streams and attract the most profitable customers if survival is to be ensured in a hotly competitive and challenging marketplace. The Low Cost Air Transport Summit brought together the leading figures from across the industry for incisive debate into the strategies shaping the evolution of the low cost model. The debate revolved around how to do ancillary revenues well, the future for long-haul low cost and how airlines can become more environmentally friendly in their operations.

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DOWN TO EARTH Alex Cruz (CEO of clickair) Clickair presents itself as the «lowest fares in Europe flying to main airports.» According to Alex Cruz, oil at 150 dollars per barrel will «clean» the industry, and therefore low cost / low service won’t work long term. M. Cruz believes that LCCs must work on fare elasticity, with more relevant ancillaries and more biz-services. And above all, they must keep low operating platforms.

Due to oil prices, «It is no longer possible to go to Venice for the day» said Alex Cruz. It means that leisure passengers price sensitive are less attracted by low-cost carriers. This implies an evolution of LCCs business models, towards legacy services. The elements shown here under by clickair clearly indicate such a trend: main airports, assigned seats, cabin services... What could be the future of clickair: - Business class. M. Cruz said they were not ready yet, but slowly getting there. A new sign of a global trend concerning business models evolution with LCCs. - Relationships with travel agents. - More agreements with other airlines. clickair already has cross-sellings with Germanwings with selected flights between Spain and Germany. - Long-haul distributions. - Air - Rail product for connection could be an idea...

According to Alex Cruz, clickair has the second lowest costs with 3.16 eurocents/ ask (2007 exfuel) behind Ryanair with 2.75 euro cents, and is the most punctual carrier on the Spanish market with 92% of flights on time (Jan-May 2008).

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DOWN TO EARTH Daniel Skjeldam (Chief Commercial Officer, Norwegian Air Shuttle)

Norwegian Air Shuttle in Quick facts: Publicly listed on Oslo Stock Exchange, Norwegian is the largest Scandinavian low fares airlines with 6.9 million of customers in 2007. Operated by 1350 employees, the carrier has 7 bases in Norway, Sweden and Poland, and currently uses 41 aircrafts. The LCC had a profit of 208 million NOK in 2007 (EBITDA).

M. Skjeldam declared «Today’s fuel price works as an «environmental tax» and create an incentive to cut emisions.»

Evolution of LCCs business models due to oil prices pressure and competition.

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DOWN TO EARTH Mike Rutter (COO of FlyBe) With the acquisition of BA Connect, FlyBe is now Europe’s largest low-cost regional airline. FlyBe serves 12 countries with more than 180 routes. The carrier operates from 56 European airports, and expects a revenue of £630m in 2008/2009 (March). To face the increase of oil prices, FlyBe has decided to attract business passengers declared Mike Rutter. To do so Flybe will increase routes frequency, serve main airports... «Flybe cannot longer be considered as a low-cost carrier, it is a mix model.»

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BIRD’S EYE VIEW Europe has a Long Way to Go to Change the Airlines’ Online Sale Methods The European Commission is getting very angry towards European air ticket selling websites. At the beginning of May, it released an inquiry on the online air ticket market, involving several European countries (1). The conclusion was harsh: 137 out of the 386 websites examined at the end of 2007 (airlines, travels agencies, tour operators, fare comparison sites...) were not in conformity with the European legislation on misleading advertising and unfair contract terms. These 137 sites represent 80 different companies, especially airlines. The Commission in particular noticed three types of infractions: wrong, confusing or lying information on fares, for example extra costs and taxes not included in the initial fare (58% of the incriminated websites); unfair information on the terms of the contract, for instance optional travel insurances automatically included in the ticket (49% of the websites) ; unavailability of commercial offers (15% of the sites). «It is unacceptable that one in three consumers going to book a plane ticket online is being ripped off or misled and confused», European Consumer Commissioner Meglena Kuneva said. Once the « faulty » airlines and operators had been identified at the end of 2007, the countries involved in the inquiry proceeded to enforcement actions for the breach of consumer rights. They asked the companies to rectify their websites, and then checked the corrections. On the European level, Meglena Kuneva firmly asked the airlines to change their marketing methods, threatening to publish the name of the « faulty » airlines if nothing was done, and warning about possible closing of some websites. But the Commission itself can not directly sanction an airline or force it to close its website. It can only for example ask the airline’s national authorities to do so, and if they refuse, prosecute the country in the European Court of Justice. The mere enforcement of the law is a matter of national authorities. It makes the Commission’s power to directly change the airlines’ marketing methods quite limited.

website). Only 12 pc of these cross-border cases have been resolved. It shows how European voluntarism can be restrained by difficulties in transnational cooperation. Commissioner Meglena Kuneva put an ultimatum on May 2009 to solve definitively the problem of commercial abuses in the online air ticket market. Otherwise, the European Commission plans to adopt a new specific directive on air ticket fares, constraining airlines and other ticket sellers to provide customers from the beginning with explicit final prices including all the fares, taxes and fees. That kind of specific legislation could be more efficient than the current global European legislation on commercial practices. The airlines could also be forced to change their irregular methods by the customers themselves, who become more and more aware of all the tricks companies use to increase their final prices. Commissioner Meglena Kuneva thus called consumers to be aware of these practices, to compare fares, to check preselected options, and to lodge a complaint if they were victims of abuses. The first airlines to suffer from such a reaction may be the LCCs: companies like Ryanair and EasyJet rely a lot on the gap between advertised fares and final prices. They attract the customer with incredibly low prices, and then add numerous extra costs: credit card tax, insurances, priority booking... These hidden costs, part of which are included in the « ancillary revenues », represent an important part of their income. For now, the European inquiry has two other limits : first, important LCC countries like Ireland, the United Kingdom and Germany did not participate - which does not mean they do not conduct they own inquiries : in the UK, for example, 13 airlines were ordered by the Office of fair trading to modify their websites. Secondly, the names of the incriminated airlines were not published. Except in Norway and in Sweden, where the most litigious airline was... Ryanair, and Blue One in Norway. (1) Belgium, Bulgaria, Denmark, Estonia, Greece, Spain, France, Italy, Cyprus, Lithuania, Malta, Austria, Portugal, Finland, Sweden + Norway

Finally, at the beginning of May 2008; 50 pc of the problems noticed during the inquiry had been solved directly on the national level. The situation was far more complicated concerning cross-border cases, when judicial cooperation between two countries was necessary (for example, when illegal methods are noticed on a foreign airline’s

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BIRD’S EYE VIEW Mitigating Rising Fuel Costs; LCCs ask…hedging or group purchasing alliances? By Rapahel Bejar CEO, Airsavings SA email: [email protected] The cost of oil has always been a central, if not prominent consideration for transit and transport industries in general, particularly for the airline industry, which has historically needed greater quantities of fuel compared to other methods of conveyance. But recently, the harsh realities about global supply have begun to sink in: the traded price of crude has quadrupled since the turn of the century, and global markets and media have started to make oil a central consideration as well. It seems that nearly everywhere there is intensely growing interest in fuel cost mitigation, the reduction of consumption, and the overall scope and trend of the oil futures market. From consumer dialogue to congressional inquiry, everyone wants to know what’s happening with oil. In no other industry is this sense more acute than the airline industry, and for good reason. In 2007 alone, US passenger and cargo operations consumed more than 19.6 billion gallons of jet fuel, or 465 million barrels (1). To put a dollar value on that already astronomical figure, the price of jet fuel increased nearly 50% over this time period (2) from $1.69 per gallon to $2.67 per gallon at the beginning of this year. To further compound this trend, the real price rise has happened since January, with crude jumping from $93 per barrel to $134 and Jet A-1, averaging $1.25 more per gallon in the ensuing six months. While these are alarming statistics and do indicate a disturbing trend, they are by no means new discoveries. Our industry is of course very well-versed in the meteoric nature of oil prices, and is aware of the difficulties inherent to operating in such an environment of unprecedented fixed (read: fuel) costs coupled with intense downward pressure on prices and increasingly elastic demand. Airlines have typically employed a handful of methods to help offset the volatility of oil prices, including hedging, term contracts, spot market speculation, and purchasing alliances, all of which have had varying degrees of success in the current climate of unbridled price increase. The technique that has garnered the most attention is hedging, which (very simply) is when an airline buys a fuel futures contract at a current price for delivery in a specified period, often more than a year in advance. Hedging works best in a market with steadily rising prices and limited volatility, though in the current market it has worked for those airlines that have committed substantial resources to

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maintaining what is, in effect, a commodities brokerage in addition to their primary air transit operations. Southwest is the poster carrier for this method, having hedged substantial percentages of its operating fuel consumption for every quarter for the next few years. According to a New York Times article (3), Southwest owns long-term contracts to buy most of its fuel through 2009 for what it would cost if oil were $51 a barrel. As the value of those hedges has soared as oil raced above $130 a barrel, they are now worth more than $3 billion. In hindsight, Southwest seems quite the genius enterprise for betting so heavily on what now seems an inevitable rise in oil prices. So why didn’t other airlines enter the sweepstakes when oil was in the sub-$100 range? Most airlines engage in term contracting with individual fuel suppliers, foregoing the need to ‘play’ the speculative oil markets, but also foregoing the long-term cost savings enjoyed by Southwest in favor of shorter-term, negotiable contracts. Term contracting is more flexible than hedging, while still providing a measure of security against price volatility, and is thus often preferred. Of course, both of the above methods are employed by larger, established airlines (even Southwest, with its low cost carrier cachet and origins, is a giant among LCCs and in the US marketplace). Emerging low cost and midsized airlines have different concerns when it comes to purchasing fuel, namely obtaining a price comparable to that paid by legacies and other large airlines. All things being equal (that is, excepting hedging and spot market speculation), the large legacy airlines have the advantage of economies of scale over their smaller or regional competitors. Airlines like Southwest and American have far more purchasing and negotiating power with fuel suppliers than do carriers such as Spirit or JetBlue, simply because they need to buy more at any given time. The only avenue LCCs and midsized players have to combat this competitive advantage is the formation of purchasing alliances. Alliances and other group purchasing organizations allow several airlines to pool their individual needs to purchase in larger quantities, including recurrent items like fuel and fuel term contracts. While there is no prognostication involved or long-term betting or market speculation, group purchasing is nonetheless the most accessible and effective way for low cost and midsized carriers to level the purcha-

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BIRD’S EYE VIEW sing playing field with the majors. Several organizations, including Airsavings , facilitate the development and establishment of these alliances, and allow many of the LCCs that have reshaped the airline industry in the past decade to maintain their successful business model and compete with established carriers worldwide.

1. http://www.airlines.org/economics/energy 2. New York Harbor Jet-A spot price, http://tonto.eia. doe.gov/dnav/pet/hist/rjetnyhm.htm 3.http://www.nytimes.com/2007/11/29/ business/29hedge.html?n=Top/Reference/Times%20Topics/People/K/Kelly,%20Gary%20C.

The price of oil, in the very long term, isn’t likely to abate. As a finite, non-renewable resource, the supply of oil will only become more constricted as the years pass. Sad but true. And this will hold true even if the current price of crude turns out to be more driven by speculation than by real macroeconomic forces of supply and demand. The only real long-term solution to outlandish fuel prices, then, is a reduction of demand. Technology, including that affecting the airline industry, is moving in that direction. In the meantime, airlines will continue to do everything and anything they can and will to keep fuel from being the industry’s fundamental undoing.

Raphael Bejar is CEO of Airsavings, a group purchasing and ancillary services firm based in Paris, France. As founder and chief executive of a company that focuses on critical operational aspects of low cost and mid-sized carriers on three continents, and with his 15 years of experience in airline finance with European giants Credit Foncier and Jet Finance, Mr. Bejar is uniquely positioned to comment on emerging trends affecting the airline industry. Mr. Bejar founded Airsavings in 2001, and in the ensuing 7 years has become an outspoken proponent of the LCC business model and provided well-reasoned critiques of US and European legacy carrier operations over the past decade.

EVENTS

World Low Cost Airlines 2008 September 23 to 24 in London

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

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

The Predicament of Flybe Flybe has experienced more difficulties than many of the larger LCCs in recent months, in part because they have a business model that doesn’t work well in this environment of rapidly rising costs, and partly because the airline has failed to execute reliable service to its customers. As fuel prices climb and competition intensifies, the airline could run into further difficulties unless it reverses course. Cost Troubles Flybe operates Q400 and E195 aircraft, both of which are considerably smaller than their counterparts at easyJet and Ryanair. Smaller aircraft have higher per-seat costs, and in this age of rising fuel prices, that has meant greater expenses for the company. Flybe has greater difficulty than many legacy carriers at generating the necessary yields to justify the higher per-seat operating costs. Fortunately, Flybe has considerable market share in certain smaller destinations, such as Jersey and Southampton, and can use its pricing power to generate higher yields, but the company still operates many routes to leisure destinations, which likely generate lower yields. Moreover, Flybe has not adopted the LCC model as devoutly as Ryanair has, and the company will face increased costs in the coming years managing two very different types of aircraft, as well as rapidly rising costs at many primary airports across Europe. Service Mishaps Flybe has not received good press recently, because of some service mishaps that have damaged the carrier’s reputation. Last year, several flight crewmembers complained of sicknesses, which they say were caused by toxic fumes leaking into the cabin from the engine. While no definitive conclusion was reached about these claims, it did increase pressure on the carrier to remove its BAE146s more quickly from its fleet, and created health and safety concerns among passengers. More recently, Flybe was criticized by airport executives who noticed an abuse of the company’s obligation to uphold a subsidy contract. On some routes out of the Norwich airport, Flybe was promised a substantial subsidy by the local airport authority if it could be shown

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that the company could generate sufficient traffic levels at the airport by a given deadline. On the Norwich-Dublin route, Flybe projected a small shortfall in the minimum number of passengers required to receive the subsidy, and so the airline hired actors and gave away free flights for any passengers who were willing to fly the routes in order to raise passenger totals. Needless to say, the airport was incredulous, but contractually, there was little they could do about it. However, the story came out, and damaged the company’s reputation. Unfortunately, this type of practice is becoming increasingly common, and is therefore less shocking to customers who have heard similar tales of Ryanair and other LCCs abusing airport subsidy programs for their own gain. While it’s not great press for Flybe, the story is really more of an indictment on the unethical business practices of LCCs in general, rather than the fault of any specific carrier. Business Model Flybe is a different kind of LCC than easyJet or Ryanair, and as such, needs to innovate the LCC model to better fit the realities of the times. What many observers don’t recognize is that LCCs are done with removing frills. There’s almost nothing that Ryanair can charge extra for, and other LCCs across the continent are running out of potential charges. As fuel prices climb, all airlines will suffer, and while LCCs will still have lower cost bases than legacies, and will still be able to offer lower fares, the difference between LCC fares and legacy fares will decrease, and their fares will become more comparable. Most passengers are willing to spend a little bit more to receive frills, as evidenced by the wild success of JetBlue in the United States, and this is especially the case with business travelers. Flybe operates more like a legacy carrier than other LCCs, because its costs are higher. As a result, the company needs to seriously consider dropping a pure no-frills business model, and evolve into a model that is traditional, but still minimizes costs. Flybe will never beat most other LCCs on price, and should therefore spend a little bit extra to give customers the level of service and comfort that they expect from a more expensive product. The airline should seriously consider adopting two-class seating ar-

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BIRD’S EYE VIEW rangements, assigned seats for all passengers, and free beverage service. Passengers are more likely to understand if they have to pay for a meal on a very short flight, than if they have to pay to check luggage, and charges should be implemented based on the needs of customers on regional flights, not the trend-setting moves of a larger LCC. Moreover, with higher fares, the airline will attract fewer leisure travelers. This is acceptable, because business travelers generate higher yields, but also have higher expectations about comfort and service, and Flybe needs to adapt to their needs. With rising fares, leisure travel could suffer, and consequently, Flybe should seriously reconsider its route map. There is a niche for the carrier. The aircraft they operate are very effective at serving certain routes, but they need to be used more strategically. Flybe should dramatically reduce its exposure to leisure routes, or instead make more of them seasonal. Moreover, the carrier should focus on two primary markets. One is the island-hopping market, from various islands in the UK (such as Jersey or the Isle of Man) to the mainland. These are nice, short flights with little competition, and the carrier can generate high aircraft utilization and yields. As long as Flybe keeps out competition with its pricing and service, the company should see continued success in these markets for years to come. The second market is targeting business travelers who need to fly between major European cities and key UK regional airports, such as Exeter, Southampton, Leeds, and Newcastle. The company should offer business travelers the convenience of nonstop service from these cities, versus a connection in London or elsewhere, and generate higher fares as a result. Flybe would need to target markets carefully, to ensure that they are not easily accessible by other modes of transport, nor large enough that Ryanair or easyJet could enter and profitably service them. But, if the carrier does so successfully, it can avoid the downward pricing pressure of other LCCs and create long-term success. Environmental Concerns While Flybe has tried to be proactive on the environmental front, by offering a carbon footprint tag on all flights, so passengers can evaluate the likely emissions of their journey, the fact remains that regional flights are simply not

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environmentally friendly. Understandably, there is a place for some regional flights, given the difficulty and hassle of other forms of transport between certain islands or cities in the UK and the European mainland. Nevertheless, as airfares rise much faster than train or bus fares, and as growing environmental awareness makes regional flights less attractive, Flybe may be more vulnerable than other LCCs to a shift to other forms of transport within the UK. The airline should seriously reconsider some of its domestic routes within England and Scotland and determine whether these routes are viable, given the environmental and cost challenges regional flights will face in the future. Flybe needs to evolve into a niche carrier, one that can efficiently serve critical UK regional markets for higheryielding travelers. While the airline has many low-cost attributes, it should seriously consider adding some smaller costs in the forms of amenities or added staff to provide improved service. Moreover, Flybe should remove some of its ancillary fees in order to better meet the needs of business travelers, who are more adverse than leisure travelers to the “unbundled” airfare model. If the airline does this, it should be able to survive the eventual shakeout of the LCC market. Remarks, questions… Join Sam by email (samsellers@ gmail.com) or on his website to comment this article… http://www.airlinebulletin.com.

Sam Sellers provides analysis and commentary on the airline industry at his website, www.airlinebulletin.com, and is the author of Take Control of Booking a Cheap Airline Ticket, an ebook for travelers in the United States who are interested in purchasing cheap airline tickets.

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Air Scoop - July 2008

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