Air Scoop June 2007

Highlights in this Issue

Nordic LCCs’ Wars: Norwegian and FlyNordic SWOT of Air Berlin 2nd Air Transport Conference for CSEE Analysis of Czech LCC Market Ryanair and its Customer Service Challenges

The Low Cost Carriers Analysis Newsletter

EDITORIAL

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s in few days, the whole LCC industry will meet in London at the 2nd Low Cost Air Transport Summit, we must notice early warning signs about the market. First, shares of the two LCCs leaders, Ryanair and easyJet, have heavily dropped these last weeks; then load factors of these two carriers are lower than last year; and last Michael O’Leary announced few days ago that 2007/2008 could be very difficult in terms of profit growth and the amount of price stimulation they will have to do to fill all this capacity. There are some reasons for such a slowdown in the low-cost market: Current overcapacities of the carriers force them to fill always more and more their aircrafts in order to avoid load factors drop. To fill their aircrafts, Ryanair has launched a war on fares and gives tickets for “free”, even during the summer season. Furthermore, LCCs desperately suffer from Environmental associations, such as Friends of the Earth (p. 2), which put pressure on regulation authorities and encourage citizens to limit their travel by plane. Has the LCC model, as it is known today, reached its limits in terms of growth? Meanwhile, consolidation of the market is still going on with the acquisition of FlyNordic by Norwegian (p. 5). Like Air Berlin, Norwegian has decided to compensate for the slowdown of the market by taking-over other LCCs. In these conditions, ancillary revenues are essential for LCCs. For instance, when ancillary revenues usually represent between 10 and 15% of total revenues, Vueling announced almost 50% in its latest financial report. To better understand ancillary revenues of another carrier, SkyEurope, IdeaWorks has released a complete analysis of it (p. 4). In every issue, we publish a SWOT analysis of a low-cost carrier and we make global market analysis of Central and Eastern countries. So after Hungary and Slovakia, we have analyzed the air transport market of Czech Republic (p. 15). While we had a SWOT of Ryanair in May, we have released an analysis of Air Berlin in this issue (p. 6). The 4th of May, there was the 2nd Annual Air Transport Conference for CSEE in Bratislava. This conference was the opportunity to tackle few current issues of LCCs (p. 13). And at last, as Gordon Brown government took early revenge on Ryanair by legislating to force the budget airline to launch an online complaints service, we have looked after the impact on the carrier (p. 18). Vueling: main stakeholder out?

Air Scoop - In the Air

Air Scoop - June 2007

p. 5 p. 6 p. 13 p. 15 p. 18

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 through 1 July 2007. Simply enter «Airscoop» as the promotional code when you register for the conference.

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BIRD’S EYE VIEW Exclusive Interview of Richard Dyer (Aviation Campaigner for Friends of Earth)

Richard Dyer Aviation Campaigner for Friends of Earth

Aviation is currently getting a lot of attention from environmental groups precisely because it is poses such a huge threat to efforts to tackle climate change. The rapid growth in LCCs is just a symptom of a wider problem. In 2005, the independent Tyndall Centre for Climate Change Research found that a 90% cut in emissions by 2050 will be necessary if the UK is to play its part in preventing dangerous climate change. Simply put, aviation growth at current rates will use up this entire target thus making it impossible to achieve it even if all our homes, cars, schools hospitals and business’ were to become carbon neutral. This research incorporated the predicted emissions savings that are likely to come from new aircraft and engine technology as well as improvements to Air Traffic Control.

travel business will have to embrace the green agenda as both Eurostar and First Group have recently done by announcing ambitious plans to cut their train emissions. We look forward to LCC moving into the low carbon travel business and using their marketing expertise to offer attractive low carbon rail and ferry packages to destinations all over Europe.

So, even though aviation is just 6.3% of UK carbon emissions now we simply cannot allow it to continue to grow. Of course there is a great deal that can and must be done in other sectors to cut carbon emissions. Friends of the Earth played a major role in getting the Government to introduce a climate change bill, a law that will force the Government of the day to cut carbon emissions. Measures like home insulation, renewable electricity generation and low energy appliances will have a big role in cutting emissions and Governments must do more to put these measures in place, but these efforts will be wasted unless aviation growth is tackled. All aviation emissions will need to be included in the new climate law.

So want do we want to happen? - All aviation emissions including the UK share of international flights must be included in the Government’s forthcoming climate law - The Government must introduce fair taxation on aviation so the cost of flying reflects the damage it does to the environment - The Government must abandon plans to expand airports - LCCs to accept a limit to their expansion aspirations and move into low carbon alternatives

It’s scandalous that regional Governments are subsidizing such a highly polluting form of transport in this way. The airlines already benefit from huge tax exemptions from fuel tax and VAT, additional direct subsidies by Regional Governments that encourage ‘binge flying’ are unjustified and should be ended.

Flying is one of the most polluting things that an individual can do, the fact that they fly with a LCC which may have new aircraft and a high low factor may slightly reduce this pollution but it doesn’t compensate for the fact that the aviation sector’s emissions are the fastest growing source in the UK. Governments, industry and individuals have to face up to the fact that this expansion can’t go on. However, this doesn’t mean we have to stop flying or close down airports or airlines it just means we’ll have to stop flying more and more each year and look at alternatives. We are encouraged that this message is starting to get through - many people are choosing to take the greener option of the train and are also spending holidays in Britain instead. Companies in the

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DOWN TO EARTH SkyEurope Realizes a 75% Revenue Increase from its Enhanced Ancillary Revenue Portfolio Ancillary revenue now accounts for 18% of company operating revenue, which SkyEurope attributes to new services offered through its web site. SkyEurope brands its onboard food and beverage service as SkyDelights. Investors in the company might call its recent ancillary revenue achievements “EuroDelights”. First quarter revenue for 2007 leaped ahead of the same period for last year by 75%, and contributed over 5.8 million Euros (1). During the first quarter of 2006, ancillary revenue represented 13% of total operating revenue; this statistic advanced to 18% for the first quarter of 2007. SkyEurope’s conscious decision to increase the selling effectiveness of its web site has clearly brought attractive financial results. This highly competitive airline, with hubs in Budapest, Bratislava, Prague, and Vienna, has become a leader among world airlines in the scope of its ancillary revenue initiatives. SkyEurope has focused its energies on three primary areas of revenue generation: passenger service fees, travel-related sales, and onboard products. Some airlines have focused their efforts in one of these areas, but very few have made significant strides in all three.

‘‘IDEAWORKS AISLE’’

by Jay Sorensen (President of IdeaWorks)

www.IdeaWorksCompany.com

(a third party vendor) to provide lounge services. The placement of the trip insurance offer within the booking process is evidence of the attractive commissions paid to airlines by insurance providers. SkyEurope offers two levels of protection at a very modest price. The 10 Euro (per passenger) coverage plan provides basic trip cancellation protection. The 15 Euro (per passenger) package provides trip cancellation protection, baggage reimbursement, accident coverage, and travel assistance. AXA Assistance, which is a subsidiary of the global insurance giant AXA Group, provides the coverage. The following image displays the premium lounge access and trip insurance offers using the example of a roundtrip itinerary between Paris and Vienna:

The Online Experience Customers purchasing travel at the SkyEurope.com web site can customize their travel experience as they buy their airline tickets. The purchase of airport lounge access, trip insurance, and seat assignments has been seamlessly integrated into the booking process. Numerous buttons and menus on the site also allow customers to arrange airport transfers, hotel accommodations, car rentals, and even ski rentals.

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After selecting their flights, customers are presented with the opportunity to request special services. This area of the web site allows customers to add fee-based baggage services for pet kennels and sporting equipment; SkyEurope does not charge for regular pieces of checked baggage. The same section also allows passengers to designate themselves as requiring additional wheelchair or boarding assistance.

The next component of the booking process is the seat assignment feature. The presentation is user friendly, and the pricing strategy assigns a higher premium for better seats. Customers are presented a seat map that is color coded with 3 zones. Assigned seats in the first row are priced at 10 Euros, window and aisle seats are 5 Euros, and the dreaded middle seat is priced at 2 Euros.

The booking process generates a list of lounge locations, and applicable admission fees, associated with the city pairs in the itinerary. The customer may click for additional information to learn about the services offered at each lounge location. SkyEurope has a contract with Airsavings

The following image displays the seat assignment function using the example of a roundtrip itinerary between Paris and Vienna. Passenger Washington opted to splurge on an assigned seat in the first row of both flights and will be charged 20 Euros.

Air Scoop - June 2007

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DOWN TO EARTH While Bratislava is located far from Las Vegas, there seems to be a little Las Vegas style action on every SkyEurope flight. The SkyDelights menu features “Fly to Win” scratch cards that are sold on international flights for 3 Euros. Prizes include credit vouchers for onboard purchases and SkyEurope tickets. The airline promotes a 1 in 5 chance of winning a prize. The Fly to Win program is a good example of SkyEurope’s pragmatic approach - - while other airlines debate the issue of in-flight gaming, SkyEurope has already implemented a revenue-producing solution. What is Next for SkyEurope?

The booking process closes with the form of payment. SkyEurope charges a 5 Euro fee per passenger for payments made by credit card. Residents of Austria may avoid paying the fee by charging their tickets to their mobile phone account. SkyEurope is a ticketless airline, and itineraries are sent via email. Customers may choose to receive confirmation via facsimile for an additional one Euro fee, or as SMS text on a mobile phone for a 1.19 Euro fee. The Onboard Experience SkyEurope’s emphasis on ancillary revenue is consistently applied throughout the customer experience to include the in-flight environment. The carrier recently signed a five-year catering contract with Airest of Austria. Airest, which has a reputation as a premium quality catering company, serves 40 airline clients to include Austrian Airlines. The agreement provides catering support at all SkyEurope aircraft bases and on board all flights. Buy-on-board services, branded as SkyDelights, include an extensive menu of hot and cold snacks, and a full selection of alcoholic and non-alcoholic beverages. The airline introduced authentic Italian espresso and cappuccino drinks on its flights during 2006. Its new Boeing 737-700 aircraft are equipped with high-quality espresso machines from Italy. SkyEurope has developed a product marketing relationship with Illy, a leading Italian espresso coffee producer. The espresso (3 Euros) and cappuccino (4 Euros) drinks are served individually in Illy branded porcelain cups, accompanied with a little chocolate square and a glass of water on a personal tray. This style of presentation undoubtedly adds consumer allure and generates higher onboard sales activity.

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The airline began flights at its new Vienna hub during March 2007, with service to sixteen destinations in western Europe, Italy, and the Mediterranean. The Vienna hub is supported by a SkyShuttle airport bus connection between Vienna Airport and SkyEurope’s nearby hub at Bratislava, in the Slovak Republic. This innovative service nearly doubles the airline’s flight presence in the Vienna and Bratislava markets. The sale of bus tickets has been integrated into the reservation system as a codeshare operation. Passengers traveling to Vienna can choose direct flights to Vienna Schwechat Airport, or fly to Bratislava and connect to Vienna on a one-hour bus trip. Similar airport bus service is offered between Bratislava Airport and Vienna’s city center. The SkyShuttle is a key component in SkyEurope’s dual-hub strategy to tap into a regional population of 6 million people. Vienna represents a major capacity addition for the company and it will require significant management attention. The company notes in recent financial filings that 2007 will produce slower growth with a greater emphasis placed on boosting revenue in established markets. However, growth is a constant factor in this company’s future, as it plans to double in size by 2011. 2006 was a year of great strides for the airline in terms of creating a strong online platform and building operational capabilities to produce greater ancillary revenue. Clearly the importance of the company’s ancillary revenue initiatives will continue to grow. SkyEurope will likely further enhance its primary areas of ancillary revenue generation: passenger service fees, travel-related sales, and onboard products.

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DOWN TO EARTH EVENTS The only missing component in the airline’s ancillary revenue offering is a frequent flier program. Perhaps SkyEurope will also lead the way among its eastern Europe low cost competitors in the development of a frequent flier program tied to the revenue powerhouse of a co-branded credit card. (1) Report on the First Quarter of the Financial Year 2007, SkyEurope Holding AG

Ancillary Revenue Airline Conference 2007. Ideaworks co-organizes the event with Airline Information. ARAC 2007 will be held November 14 and 15 in Frankfurt.

IdeaWorks cannot guarantee, and assumes no legal liability or responsibility for the accuracy, currency or completeness of the information.

Finland and Norway Team Up Against Sweden and Pave Way To Asia Sophisticated relations are being practiced these days in the Nordic LCC market. Finnish flag-carrier Finnair has reported selling its Swedish subsidiary FlyNordic to Norwegian budget carrier Norwegian Air Shuttle. Both companies, the seller and the buyer, believe that this sale will strengthen their positions in the region. Obviously, this will also bring certain improvements to the sale item which will continue to operate under its name as a separate brand. With this transaction it looks like Sweden is being invaded by foreign LCCs. Given the bankruptcy of FlyMe and SAS’s absolute authority, Sweden could easily play out and leave the market without its national LCC to compete against Sterling, Norwegian Air Shuttle and other European LCCs. According to the agreement Finnair gains 5% share in Norwegian Air Shuttle with the option to increase it up to 10%. The deal has already influenced positively Norwegian’s shares that rose approximately 3% on the Oslo stock exchange the morning after the announcement. Norwegian is about to become an incontestable leader in Scandinavia with hardly any competitors. Arlanda Airport in Stockholm will open new options for operations from/ in Sweden to various destinations and will actually be monopolized by Norwegian Air Shuttle. Apparently, market take-over requires permission from the EU antimonopoly office but the parties concerned plan to draw up the final agreement before the end of June.

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The acquisition will bring Norwegian LCC closer to Asia since the companies agreed on cooperation which means code sharing with Norwegian flights linked to Finnair’s Asian routes. FlyNordic established network allows Norwegian Air Shuttle to operate flights to Central Europe. To expand to the UK Norwegian may also like to use other Finnair’s connections, such as its alliance with the British Airways. Completion in Arlanda airport is tense enough to maintain a stable price level. Finnish-Norwegian cooperation in Sweden and in the rest of the Nordic countries will be thus an absolute win-win relationship. Whilst Finnair will focus on its Europe-Asia strategy, Norwegian will bring Scandinavian passengers to the Asian flights. Though establishing close relations with long-haul, it is unlikely Norwegian would suddenly change its own strategy towards being a legacy carrier since it would lessen its competition capacity. FlyNordic was acquired by Finnair and re-branded as a Swedish budget carrier. The idea was to undermine SAS’s monopoly in the region by low prices. However, Finnish attempt was not successful. So, now it is Norway next in turn to be a thorn in SAS’s flesh.

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BIRD’S EYE VIEW SWOT TEAM

SWOT Analysis of Air Berlin Low cost sector seems to drive the global aviation growth. The volume of low cost flights grew by 14% worldwide and 18% in Europe in 2006. In Europe the capacity share of the LCC was 24 %. Air Berlin is a charter and scheduled low cost carrier, which started operations as a charter in 1979. Its unique hybrid business model caters to the Value market segment, offering basic free on-board services and reasonably low fares. Its customers include shoppers, leisure and business travelers. Air Berlin is currently, Germany’s second biggest airline (behind Lufthansa) and Europe’s third biggest low-cost carrier (behind Ryanair and easyJet). After its recent mergers and acquisitions, Air Berlin also became the fourth biggest airline in terms of European traffic. The German airline owns about 90 aircrafts and reaches almost 100 destinations across Europe. It operates on 357 low cost airline routes. The CEO of Air Berlin is Joachim Hunold. The company has over 4100 employees. Awards: Air Berlin has been making news for all the right reasons as opposed to some other major players. It has been receiving awards for its services and for providing safe and comfortable flights for the last couple of years. Few of the awards are mentioned below: � In January 2007, Air Berlin was given the best Short Haul Business Airline Award by Business Travel World for offering a business service at low cost and for developing a domestic UK network to complement its fast growing schedule from the UK. � In June 2006, Air Berlin was awarded best low-cost carrier in Europe & the world based on an independent survey carried out by London consultants - Skytrax. More than 13 million passengers from 94 countries took part in the worldwide survey consisting of business travelers and holiday-makers. � In January 2005 Air Berlin was voted the top airline among 15 airlines in Germany by Stiftung Warentest - a German independent consumer organization - on account of its high standard of services, straight forward business terms & conditions and good quality of product information.

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Overview of Air Berlin: History and Growth: Air Berlin was shaped by forces that divided and reunited Germany. During the Cold War, only civil aircrafts from Allied nations (the United States, the United Kingdom, and France) were allowed to fly into Berlin. Former PanAm captain Kim Lundgren founded Air Berlin in USA in 1978 to provide flights for tour operators from the German capital to the holiday destination Palma de Mallorca in Spain. In 1981 the Mediterranean became the main destination area. When the occupation of the country by the Allies ended after the reunification of Germany, Lundgren established the airline as a new German-registered company, Air Berlin GmbH & Co. Luftverkehrs KG, in partnership with Joachim Hunold, and other investors in 1991 and Joachim Hunold became its CEO. It had 16 aircrafts. In 1997 Air Berlin began operating as a low-cost scheduled carrier to major European cities and joined the IATA. In 1999, it started running the Mallorca (Majorca) Shuttle from 12 German airports to Palma de Mallorca. Its fleet increased to 31 aircrafts. The airline’s 200-person maintenance division performed heavier maintenance duties, both for the airline and for third parties. Also, during that time, Air Berlin began selling seats through its own call center. Internet sales began few years later. In October 2002 Air Berlin launched the City Shuttle. The City Shuttle connected German airports with major European cities like Amsterdam, Barcelona, Bournemouth, Budapest, Copenhagen, Helsinki, London-Stansted, Madrid, Milan-Bergamo, Manchester, Paris, Rome, Vienna and Zurich. Berlin-Tegel is the home base of Air Berlin. Air Berlin carried 12 million passengers on 48 aircrafts in that year. In late 2004, Air Berlin ordered 70 A320 aircrafts. In January 2005 both the product lines – Mallorca Shuttle & City Shuttle - were combined to form the Euro Shuttle, thereby underlining the airline’s core European competence. In December 2005 Air Berlin became the first German airline to offer domestic flights within the UK connecting London (Stansted) to Glasgow & Manchester. It was also the first European airline to use London (Stansted) as a transfer hub connecting sixteen destinations in Spain and Portugal via its other hub Palma de Majorca.

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BIRD’S EYE VIEW In May 2006, Air Berlin became the second German airline to be listed on the Stock exchange. The issue price was 12 euros. It placed an order for 60 (Boeing 737) aircrafts in November 2006. Holdings, Mergers and Acquisitions Niki Holdings: On 9 January, 2004, Air Berlin purchased 24 % of Niki Lauda’s (former Formula One champion) airline Flyniki and announced cooperation with them. Niki Lauda, who holds the rest of the shares, rebuilt «NIKI» airline from insolvent Aero Lloyd, Austria. Joint marketing agreements were part of the deal, which was billed as the world’s first low-fare airline alliance. Air Berlin and Niki, would coordinate destinations and schedules as well as sharing sales, marketing and logistics infrastructure to keep down costs. Air Berlin would use NIKI’s base of Vienna, as a springboard into Eastern Europe. dba Merger: On Aug 16, 2006, Air Berlin bought dba - British Airways’ former German unit from the proceeds of Air Berlin’s IPO. This move increased head-to-head competition with Lufthansa. This deal increased Air Berlin’s total fleet to 90 aircrafts, mainly Airbus A320s, Boeing 737s and Fokker F100s. It obtained a base in Munich, Germany’s second busiest airport and gained valuable slots at the busy Munich and Düsseldorf airports. The company functioned as a separate division of Air Berlin with its own management team, but under the Air Berlin brand. The merger created a denser network of routes (without overlapping). 70% of dba’s travelers are business travelers which increases Air Berlin’s business travelers from 18% to 30%. LTU Acquisition: In March 2007, Air Berlin announced the acquisition of the German charter long-haul airline LTU. Air Berlin paid 140 million euros in cash and also covered LTU’s debts (around 200 million euros). The LTU innerEuropean network was transferred to Air Berlin network and LTU’s long range flights were operated under the wellknown LTU marketing brand. One of the primary motivations for taking over the charter carrier was to expand its base in Düsseldorf – the busiest airport in Germany. Belair holdings: Air Berlin also bought 49 percent of Belair Airlines AG to expand in Switzerland recently. All the above deals have made Air Berlin the fourth biggest airline in terms of European traffic.

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Current Status in market In 2006 sales grew by 30% to 1.57 billion euros, helped by the dba acquisition. Revenue from single seat sales rose by 37.3% and in the charter segment it rose by 18.8%. Net income in 2006, totaled 50.1 million euros versus a loss of 115.9 million-euro the year before. Profit was helped by a net tax gain of 4.9 million euros, after a 49 million-euro burden in 2005, because of a change in the law governing corporate tax credits. Measures to hedge against currency shifts also helped improve earnings. Joachim Hunold is expected to stay as CEO until 2011 which augurs well for the company. The closing price of share on 29 December, 2006 was 16.50, rise of 37.5% over its issue price. The carrier is valued at 979.8 million euros. Revenue in 2007 as predicted by the company will be between 2.1 billion euros and 2.2 billion euros. Business Model Air Berlin has set new standards for low fare air travel with an unrivalled price-performance ratio. Begun as a charter operator, Air Berlin has repositioned itself, in large part, as a scheduled carrier. Air Berlin specializes in flying to sunny vacation spots in the Mediterranean, the Canary Islands and North Africa, as well as to major business destinations in Europe. Its unique features are: High service standards: � The award winning Air Berlin’s on-board service includes complimentary snacks, soft drinks, newspapers, seat allocation on one of Europe’s youngest fleets. � The cabin crew treats passengers with respect and in a cheerfully competent manner. � There are no charges for checking in luggage within the specified weight limits. Disabled passengers and families with infants can pre-select seats without a fee. Blanket coverage: � Its emphasis is on direct departures from a number of regional airports, rather than a hub-and-spoke system, fulfilling its objective of offering ‘Blanket coverage’. � The smaller airports used by Air Berlin are often near city centers, making them more appealing to business travelers. � The airline has set new standards with its Euro Shuttle, which links European cities in Austria, France, Egypt, Germany, Hungary, Portugal, Spain, Tunisia, Greece and the UK.

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BIRD’S EYE VIEW Market segments and positioning: � It caters to three customer segments namely: business and corporate clients, holiday travelers and shoppers. � It is uniquely positioned between the original LCC players (e.g. Ryanair) and the traditional carriers (e.g. Lufthansa). Ticket booking: � Two-thirds of its ticket sales are through single-seat ticket sales and one-third is through tour operators and tour organizers. � Flights can be easily booked through a travel agent or by calling customer service number or through its website (www.airberline.com). � Bookings can be changed by telephone any time up to the day before the flight. � It provides 90% fare discount for infants less than 2 years and 33% for children between 2 - 12 years.

London- Stansted. Air Berlin ensures safe transfer of luggage from one flight to another. This is another frill which differentiates Air Berlin from original LCCs. Safety & effeciency: � Safety is a prime consideration for Air Berlin. It arranges for Deutsche Lufthansa to carry out all the major items of regular maintenance work. � Air Berlin was also the first German holiday airline to install, voluntarily, the TCAS anti-collision system in its aircraft. � It also installed winglets to the wings of its 737-800’s that enable a faster rate of climb and result in greater fuel efficiency. The aircrafts of Air Berlin are young, quiet and economical. Ancillary Revenue generation activities Ticket fares: There are two types of ticket tariffs:

Flight connections: � Air Berlin is the only LCC to offer connecting flights from its main hubs to major cities in Europe. The main hubs are Nuremberg (Germany), Palma de Mallorca (Spain) and

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a) Flex fare tickets: Here you can book your ticket at a set fare with the option to rebook and cancel at no extra charge at all. Flex fares are corporate rates which depend on the travel volume, allowing for discounts from 20 to

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BIRD’S EYE VIEW 70 percent. These tickets are not fixed to a quota and are always available; b) Special offers which are subject to seat availability and booking date and the rates include all taxes and fees. Top Bonus frequent flyer program: Air Berlin is one of Europe’s few low-cost airlines offering a frequent flyer program. The Top Bonus Program is full-featured and offers increased sophistication through an elite two tier program namely Silver status and Gold status. Air Berlin travelers can collect Miles when they fly, when they hire a car (Hertz) and when they book a hotel (Radisson) or any time (while shopping also) they pay with American Express Credit Card or the Air Berlin Master card. These Miles remain valid for three years after the date they were collected. Consumers can fly 20,000 miles within a year and be automatically awarded complimentary annual Silver Status or alternatively pay a fee of €50.00 (US$63.44) per year to immediately enjoy Silver tier benefits. Air Berlin’s unique offer to allow customers to purchase immediate Silver elite tier benefits was accepted by an estimated 36,000 customers during 2005. If you collect 40,000 Miles within an entire year you receive the Top Bonus Gold Status. Top Bonus Gold, provides more benefits than Silver status. More than 100 companies have signed up and a few among them are Volkswagen, Siemens and Bayer. Seat selection: Seats can be pre-selected for a fee of €8.00 (US$10.16) per person per flight (no fee is charged for the disabled or families with infants). Seats with more legroom, called XL Seats, cost €20.00 (US$25.20). Paying by credit card will incur a fee of €6.00 (US$7.62), but the fee is waived if the consumer uses their Air Berlin MasterCard.

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Other revenue earning sources: 1. In-flight sales 2. Credit card business 3. Excess baggage 4. Air Berlin card 5. Hotel and car rental commissions 6. Travel insurance 7. ‘Sansibar’ meals on-board 8. Ground transportation tickets 9. Leasing activities 10. Earnings from advertisements 11. Sale of flight vouchers in Supermarkets (UK’s premier discount supermarket chain Lidl) for a specified period. SWOT Analysis Mission statement of Air Berlin: Value for Money: The Air Berlin Strategy. We are not a “low-cost carrier” but neither are we a traditional “full fare airline”. We are quite simply – Air Berlin! Aims and objectives: � The ‘Blanket Coverage: «Closer to the customer» is Air Berlin’s motto. ‘We take off where you live.’ � Air Berlin set standards in service – on board and on ground, before and after the flight itself. They attach great importance to friendliness, superior qualifications and commitment to our customers, � They aim to “completely” meet the needs of our customers. The Service center is available to customers twentyfour hours a day and seven days a week. Holidays, Shopping, Business – the Air Berlin brand stands for satisfaction of all customer needs. In the words of Air Berlin CEO Joachim Hunold: «Our ethos is to provide quality products and services at low prices and we are excited to be able to continually surprise our customers with special offers. You put the customers first, at the centre of the business, let them leave happy, and they will come back.”

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BIRD’S EYE VIEW

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BIRD’S EYE VIEW

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BIRD’S EYE VIEW

Recommendations 1. It can plan to have a pure low-cost, non-charter airline division, catering to the economy traveler and small and medium enterprise travelers for flight duration of less than one hour between business cities, providing minimum comfort at least fares.

8. Air Berlin should look for opportunities to expand its pilot training school to new geographical locations foreseeing an enhanced demand for LCC pilots in the near future. Conclusions

2. It could also create special Air Berlin brands to serve segments with different needs and confront the main sources of competition. 3. It should try to share resources among its different operations and optimize costs. It should prepare a clear game plan for operating and combating competition on its short-haul, medium-haul and long-haul routes. 4. It can expand its shuttle services between all capitals or business cities of Europe, Africa and Russia. 5. It can leverage its expertise and strength & expand into other geographies such as Asia and Middle-East. 6. Air Berlin must advertise more and make the passengers aware about its awards. It must also publicize its awards on the home page of its web-site, on-board of its flights on new routes and at its hubs.

Air Berlin, with its unique hybrid low cost model and the strategy of growing quick and big has been performing extremely well. The airline appears to be morphing into a legacy carrier while retaining its low cost structure by embracing technology at every turn, an example of which is its Top Bonus frequent flyer program and safety measures adopted. It has been leading the wave of consolidation in the airline industry and in setting high service standards in customer service in the LCC sector. Air Berlin is vulnerable to competitive attacks from two sides of its unique middle position in the airline market. The key challenge for Air Berlin is to be able to continue its way forward at its current pace with its newly integrated and expanding profile, amidst increasing competition and changing travel landscape.

7. Air Berlin should increase its advertising in-flight revenue by taking some cues from Ryanair’s tactics.

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BIRD’S EYE VIEW 2nd Air Transport Conference for CSEE

EVENTS

Air Scoop is proud to have been media partner once again of the 2nd Air Transport Conference for CSEE. Following the success of the Inaugural event last year, this year EastEuroLink is continuing in dealing with the issues Air Transport is facing in this region. The Low-cost model has been introduced in the region of Central and Southeast Europe and the struggle between local and western LCCs is now even more intense. The competition is tougher, but is it getting fairer? The passenger growth has accelerated and is about to grow even more, but meanwhile airports struggle to keep up. This conference was the opportunity to tackle few issues such as “how do low-cost airlines see the CSEE market?”, “Benefits and costs of low-cost airlines?”, “Are mergers and alliances the next steps for LCCs in CSEE?”…

Kim Flenskov, Managing director of Lufthansa Consulting The development of the market has increased the level of competition forcing yields down. To be successful, airlines must seek new ways to offer value in a low yield environment.

The “commoditization”of short haul airline travel has made business models converge.

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BIRD’S EYE VIEW New entrants’ primary focus is the area of cost advantage (LCC’s). Recent trends target differentiation advantage.

Sources of Advantage

Competitive

Each business model has its position in the market providing it appropriately matches the value proposition to the relevant segment.

Scale: In Million Passengers. Source: UK CAA

Chris Mandl, Founder and CEO of SkyEurope Above 80% on-time performance and consistently better than easyJet.

Increase in ancillary revenue per passenger by 20.5%. - Reintroduction of booking fees - Increase in portfolio of products such as car rental and hotel bookings - Increase of Excess baggage and Seat assigment fees - Wide range of onboard sales including hot snacks, Illy Coffee - Partnerships with brands such as Avis, Airest (owned by Do&Co) Ancillary revenue per passenger (in Euros)

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DOWN TO EARTH The Analysis of the Czech Low Cost Air Transport Market The low cost/low fares air transport market of the Czech Republic shows a similar character in many aspects to the already analysed Hungarian and Slovakian markets. In each of these countries, the bulk of the traffic is concentrated at the capital city: Budapest, Bratislava and in the Czech case, Prague. Secondary airports play an almost insignificant role in these countries as so far, both their infrastructure and catchment area have been insufficient to attract low cost carriers (LCCs). Currently, there are 3 international airports in the Czech Republic that serve LCCs, these are Brno, Ostrava and Prague. There are 19 low cost carriers present in the country and they serve 81 routes altogether. However, from Brno and Ostrava only 4 routes are served, Prague Airport is responsible for the rest of the traffic. This is the reason why an analysis of the Czech market almost exclusively involves the analysis of the traffic of this airport.

Prague Airport has shown a dynamic growth in terms of passenger numbers: since 2000, passenger turnover has more than doubled, and recently, the intensive growth in LCC traffic has contributed greatly to these dynamics. In 2004, the share of LCC passengers amounted to 16.5% of the total traffic, in 2005 this figure increased to 17.35% and last year almost every fifth passenger (19.75%) at Prague Airport resorted to the services of LCCs. The growing share of LCCs in passenger turnover takes a great part in the overall growth of Prague Airport. Compared to 2004, in 2005 an additional 1.08 million passengers used the airport, 25% of them were carried by LCCs. Compared to 2005, however, in 2006 the growth of passengers amounted only to 0.8 million but more than half of this growth (416 406 passengers) came from the increase in the number of passengers carried by LCCs. This suggests that in the past couple of years, the growth of the Czech market was fuelled by the dynamic growth of the low cost segment.

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These figures are underpinned if one observes the recently opened destinations served from Prague. Based on the summer and winter timetable of 2006 and the summer timetable of 2007, 28 new destinations are being served from Prague airport, 15 of them were opened by a low cost carrier. Especially Sky Europe has demonstrated great activity in opening up new routes, as 8 of these 15 routes are operated by the Slovakian low cost carrier. This is not a coincidence since in February, 2006, Sky Europe established a new base in Prague, committing itself to the Czech market and becoming a tough rival of the sole Czech low cost carrier, Smart Wings. In terms of number of routes served, Smart Wings is dominating the Czech market. The company serves 19 routes from Prague and 3 others from Brno and Ostrava. The runner-up is Sky Europe with its 16 routes, the next LCC is easyJet with 10 routes, then follows Jet2 with 5 and bmibaby and Norwegian with 4 routes each. Data on passenger figures shows a slightly different picture. Smart Wings is a subsidiary of the largest Czech charter carrier, Travel Service, and passenger numbers for its low cost carrier are not separated from that of the parent company. Therefore, all what can be drawn from the passenger data of Prague Airport in 2006 is that the traditional, full service carrier, Czech Airlines takes 46% share of the total market and Travel Service (including Smart Wings) is in the runner up position. The next LCC in the list of top 15 carriers in terms of passenger numbers in 2006 is the bronze medalist easyJet, which is followed by Lufthansa and British Airways, two prestigious traditional carriers. Sky Europe is ranked 6th, closely followed by bmibaby in the 7th position. In the top 15 there is another LCC, Jet2, taking the 11th place.

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DOWN TO EARTH Comparing the number of routes served from Prague with the rank occupied by the carriers, easyJet and bmibaby seems the most „efficient” as they serve less routes than their major rivals, Smart Wings and Sky Europe, but are still able to carry approximately as many passengers as these two. The reason for this is that the UK-based carriers serve routes from Prague to the UK, which happen to be the most popular destinations among passengers. EasyJet, which flies to both London Gatwick and Stansted, and Thomsonfly that serves the Prague-London Luton route, attracted altogether more than 400 thousand passengers to London in 2006, which is more than twice the number of passengers carried to the second most popular destination, Nottingham/East Midlands (161 511 passengers served by low cost carriers easyJet and bmibaby on this route). In the list of top ten destinations in terms of passengers carried by LCCs, there are 7(!) UK locations. Only Paris (served by Smart Wings and Sky Europe), Milan (easyJet and Sky Europe) and Rome (Smart Wings and Sky Europe) are non-UK destinations in the top ten.

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This may imply that the UK market served from Prague is close to saturation but there might be underserved demand to other destinations. For instance, after Sky Europe started to fly to Milan, passenger numbers carried to this destination from Prague grew by more than 55% in 2006 (compared to the previous year) and the case was quite similar with Rome, showing an annual passenger growth rate of 42%. Nevertheless, the most profitable routes may have already been taken and competition is rather fierce as every fifth destination from Prague is served at least by two low cost carriers (13 destinations out of a total of 61 served by LCCs), including the most profitable ones (London, Nottingham, Paris, Milan, Rome, Manchester, Barcelona etc). A barrier to further LCC expansion is first, the limited capacity of Prague Airport, second, and most siginficantly, the high airport charges. Even though landing fees are not particularly high, passenger fees amount to approximately

Air Scoop - June 2007

16.5 euros per passenger which is even higher than in one of the most expensive airports in Central Europe, Budapest (LCC terminal: Terminal 1 – 12.1 euros, Terminal 2A and 2B – 16.4 euros). This may be the reason why Ryanair is only symbolically present in the Czech Republic, serving only one route from Brno to London Stansted. Passenger traffic of LCCs at Prague airport shows the usual seasonal fluctuation, the summer period being the busiest over 200 thousand passengers carried each month, while the winter season, especially the period between January and March, is the low season, around 140 thousand passengers carried by LCCs monthly (based on data of 2006). Currently 18 European countries are accessible from the Czech Republic by a low cost carrier but what is interesting to observe is that there seems to be a specialization to certain regions or countries. This specialization is largely determined by the home market of the given carrier. As already mentioned, the UK-based LCCs serve routes exclusively to the UK (easyJet being the only exception), while Norwegian flies only to Norway from Prague, similarly, small Italian LCCs offer Italian destinations and Aer Lingus flies solely to Ireland. This is not at all surprising, what is more exciting is that two LCCs try to pursue „general” ambitions. Both Smart Wings and Sky Europe offer a wide range of destinations, although a certain degree of specialization can be observed in their case as well. Smart Wings has strong positions in Spain and in Greece, while 6 of Sky Europe’s total routes of 16 lead to Italy. However, Sky Europe seems to be better equipped to cope with the competition, as Smart Wings so far has failed to target a segment which could provide stable demand for its services. Sky Europe has already entered to its most profitable routes (Paris, Rome) and as long as almost exclusively Mediterranean destinations are served by Smart Wings, the seasonal fluctuation in demand will seriously affect its flights. A lack of appropriate focus or a lack of a big enough market niche to serve will pose a barrier to the future growth of Smart Wings, which can eventually lead to the decline of the company. What are those destinations that may prove profitable and currently are underserved by LCCs? Frankfurt is certainly in the first place, as in 2006 it was the third most popular destination from Prague, however, no LCCs fly to this German city from the Czech Republic. The Russian market, especially Moscow could also be taken into account and other potential candidates could be the so far totally neglected Romania and Turkey. All in all, there is still room for expansion, the question is if Prague Airport will be able to accomodate more LCC demand in the future. Source of data: Traffic Report of Prague Airport, 2006 (www.csl.cz/en/site/business/provozni_statistiky/archiv/archiv_2006/traffic_report.pdf )

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DOWN TO EARTH

Thxxxx Fridaxxxx

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Air Scoop - June 2007

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

Ryanair and its Customer Service Challenges As Ryanair grows, it will receive increasing pressure from politicians and regulators on a number of issues. Aside from the environment, a concern all companies must contend with in the near future, Ryanair will continue to take the brunt of criticism directed at low-cost airlines for: • Delays or cancellations without explanation or adequate compensation. • Misleading advertised fares that cost several times more after taxes. • Delayed or virtually nonexistent customer service. When Gordon Brown becomes PM, Labor may be more willing to go after LCCs than under Blair’s reign. Provided they remain in power, Labor will likely target Ryanair and other LCCs in a number of ways: • Labor may try to ensure that all online companies, airlines included, provide customers with a free-of-charge online complaints service. • Brown may lobby for an APD increase, which would raise prices for consumers and likely reduce demand, especially for the discretionary travel that Ryanair promotes. • Legislators in the UK and other EU nations may implement procedures to increase enforcement of existing EU compensation regulations. This would force airlines to provide compensation more often in the event of a delay or cancellation, and damage Ryanair’s ability to offer such low fares.

airline. It won’t be able to portray itself as fighting a guerilla war with other carriers. If Ryanair improves its image and service successfully, while maintaining its cost and fare advantage over its competitors, it could put significant pressure on easyJet and Air Berlin to find other, more expensive ways to court business travelers. Some suggested means include improving customer service standards, offering more flexibility to ticket holders, and adding more amenities in order to justify their higher fares. Ryanair frequently boasts that it’s the airline with by far the fewest complaints, but competitors retort that Ryanair skews its figures by only accepting complaints in writing sent to its Dublin headquarters. Adding an online complaints service could also allow Ryanair to keep customer service and compensation costs low. If Ryanair launched an online complaints service, the airline could still require customers who are entitled to compensation to send their request by post, due to the physical documents, such as receipts, which customers must send in to verify their compensation claims. That would enable Ryanair to both delay the time it takes to pay out compensation, and reduce the number of people who receive compensation, since fewer travelers will send in written documentation for compensation than an electronic complaint. It would also keep costs low, since it would minimize the amount of new staff Ryanair would have to hire to handle the new queries.

Online Complaints Offering an online complaints service could be a mixed blessing for Ryanair. On one hand, it could help Ryanair portray itself as a more professional airline responsive to customers’ needs. But on the other hand, a poorly operated complaints service could damage the airline’s reputation. Due to its rapid expansion, Ryanair is increasingly marketing itself to business travelers, a largely untapped market for the airline. Management realizes that their core leisure traveler customer base won’t fill its new airplanes, especially with increasing pressure from environmentalists on discretionary travelers. Offering an effective online complaints service will be critical to help Ryanair attract and keep different types of customers. EasyJet has polished its image and improved its customer service standards in recent years, and as a result, the number of business travelers flying easyJet has soared. Ryanair will need such an image when it becomes Europe’s largest

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However, Ryanair needs to be careful how it manages its online complaints service. If the process to complain is made easier, more customers will take their grievances to Ryanair. But a cursory customer service response to customer’s complaints may be worse for Ryanair than no response at all. The airline business is centered on customer service, and if something goes wrong, timely and supportive customer service is the only way airlines keep customers loyal. As Ryanair grows, customer service will be increasingly important in maintaining market share, and Ryanair must use its online complaints service to satisfy customers, not as a tool for evading claims which Ryanair has done in the past with complaints sent by post. If Ryanair conducts its online customer service on the cheap, with few employees who give unhelpful responses to complaints, it would simply exacerbate a customer’s frustration. Passenger Tax Increase

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BIRD’S EYE VIEW A rise in the APD, or similar taxes in other EU nations, could also hurt Ryanair enormously. With Brown in power, a raise in the tax is not out of the question. However, if the APD increases, it will hurt easyJet and Ryanair in different ways. Ryanair has the advantage of having a more diversified network than easyJet with a greater portion of its flights departing from airports outside of the UK. Also, many of Ryanair’s routes from Britain are to Ireland, where rail travel, the most convenient alternative on most short-haul routes, is impossible. EasyJet has more UK domestic routes than Ryanair, where rail travel is becoming a more popular and viable alternative to air. For this same reason, Flybe would also be hurt tremendously by an increase in the APD, although they pose a less serious competitive challenge to Ryanair. Also, since Ryanair has a longer average stage length than easyJet and Flybe, Ryanair passengers will be less likely to ditch the plane for the train or bus. However, Ryanair relies more on passengers who take discretionary trips than easyJet. Since one of easyJet’s network focuses is to link major business centers, the airline will see less of a drop off in passengers on some of its routes than Ryanair. A good example of this is in Poland, where Ryanair serves nearly a dozen Polish cities, many of them relatively small markets targeting working class Poles. EasyJet serves the two cities with the biggest concentrations of business travelers, Warsaw and Krakow. Ryanair will have much more of a challenge maintaining its smaller markets than easyJet will for its larger two, because Ryanair’s are based more on discretionary travel.

traordinary circumstances” clause of the current EU compensation regulation. Any compensation reform would have to clarify the definition of “extraordinary circumstances” in order to make it clear to airlines and passengers which delays receive compensation and which don’t. Due to the historical problems with enforcement of EU compensation regulations, the Commission is in the process of forcing member states to come up with better procedures for enforcing the law. It remains to be seen whether this reform will work, but if Ryanair and other LCCs continue to flaunt EU law regarding compensation, some sort of reform is inevitable. While airlines will try to fight the updated requirements, the EU compensation regulations with better enforcement guidelines will probably result in significantly more frequent compensation payouts. Listing Fares in Full Listing fares in full will make Ryanair more competitive with other LCCs that already do so, including easyJet, Air Berlin, and Transavia. Ryanair recognizes that unless customers can easily see that its fares are the lowest, the airline could lose market share. By enabling customers to easily compare advertised fares, Ryanair can help prove to customers that its fares are the lowest. It also makes Ryanair a more transparent airline to customers suspicious of its business practices. Ryanair now makes it very clear to customers what the absolute minimum fare they will pay is, without inhibiting the ability of the airline to offer addons to customers which cost additional money. Ryanair will still be able to freely charge customers fees for early boarding, checked baggage, and credit card use during the booking process since those are all optional.

Improved Compensation Enforcement If EU nations, including the UK, were to institute new procedures to better enforce existing EU compensation regulations, all airlines would be affected, but Ryanair would be hardest hit. Ryanair currently engages in every imaginable stalling tactic in order to avoid paying out compensation. This is wonderful for the bottom line, but is unsustainable in the long run because government will eventually have to bow to consumer pressure to change how the regulations are applied and enforced. Depending on the arrangement, all LCCs could be forced to significantly increase fares, since airlines could be forced to pay greater sums of compensation more frequently. Airlines are currently able to skirt the EU compensation law by claiming that a delay isn’t their fault, using the “ex-

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The new pricing will have a minimal negative impact on ticket sales, and may even benefit Ryanair. There will be a few travelers who won’t purchase tickets when they can’t “book a flight for a penny”, but the vast majority of travelers recognize that Ryanair hasn’t increased its fares, but merely changed how they are displayed. Ryanair’s fares are still the same bargain they were when they were advertised without taxes and fees. It’s unclear whether the UK will proceed with requiring airlines to offer online complaint services, reform the enforcement of the EU compensation regulations, or re-raise the APD, but with the anti-aviation climate in the UK right now due to environmental and noise concerns, more action will be taken against airlines, which could lead to problems for airlines that fail to adapt, and opportunities

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Air Scoop - June 2007

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