Air Scoop March 2008

Highlights in this Issue

Interview of Raphael Bejar (CEO of AirSavings) Ryanair is Paying for Being Unhedged French Government Support LCCs Challengers? SWOT Analysis of French Low Cost Carrier Market Comparing Airport Subsidies in Europe and the US

p. 2 p. 3 p. 5 p. 6 p. 13

The Low Cost Carriers Analysis Newsletter

EDITORIAL

AIR SCOOP ANNOUNCEMENTS

Oil Prices, High Loss... Bloodbath?

A Glimpse of Headlines News!

O

il, Loss and Blood… These words could be the motto of this month. According to easyJet, “the biggest danger facing the airline industry is the global oil price”. Same forecast for competitor Ryanair which expects another round of fuel surcharge increases. Indeed, starting 1st of April 2008, the carrier will have no fuel hedged which means it remains unprotected from rising prices (p. 3). Furthermore, Ryanair is now getting more profit from ancillary revenues continuously increasing prices of add-ons and services (p. 12). Therefore, some analysts believe that decline in passenger yields, fall in fares (by 4.4%) and rise in ancillary revenues (by 30%) alarm of the strategy failure. In our last issue, we analyzed the consequences of the slowdown of European LCCs Industry (Read Air Scoop February 2008). Some carriers are in great difficulties, and among them we find Vueling (Vueling reported a sharp widening in full-year net loss to €63.2 million ($93.7 million), nearly six times worse than the €10.8 million loss posted in 2006), SkyEurope (SkyEurope has been forced to sell two Boeing 737700s before they were due for delivery, and admits it failed to comply with financial conditions attached to half of the 737-700s it has on lease from GECAS.), but also CentralWings (CentralWings is close to bankruptcy with a loss a loss of 73 million zlotys in 2007 compared with 65 million in the previous year) and clickair (JPMorgan estimates clickair Loss up to 100 million euros). These financial difficulties could finally lead to the famous “bloodbath” many times announced by Michael O’Leary… French Connect 2008 will be take place this year in Courchevel the 9th to 11th of April. Air Scoop is sponsor of this event, and will release for the French Connect a Special issue. French civil aviation market is largely dominated by Air France. The legacy carrier is backed by the government, so it was a big surprise to notice the presence of a government representative at easyJet’s little ceremony to launch its new base at Paris-Charles de Gaulle, France’s biggest airport (p. 5). For its 10th SWOT, we have realized a SWOT on French Low-Cost Carriers market (p. 6) with its own specificities, difficulties and challenges. Finally, subsidies to LCCs is a big issue nowadays (The European Commission recently said it was investigating an agreement on Irish lowcost carrier Ryanair’s use of Slovakia’s Bratislava airport on suspicion it may contain illegal state aid), especially in France (The European Commission has launched a state aid probe into the use by Ryanair of Pau airport, and would in particular examine a contract with the PauBearn Chamber of Commerce, which operates the airport, that sets out the conditions for Ryanair’s use of the transport facility). In order to better understand airports subsidies, we have realized a comparison between Europe and the US (p. 13).

Air Scoop - March 2008

EU probes Bratislava Ryanair deal The European Commission says it has launched a formal investigation into an agreement between Bratislava Airport and Ryanair. This follows a complaint which alleged that the airport offers Ryanair reduced airport charges for existing destinations and new scheduled flights. The commission says the discounts could be up to 31% for existing destinations and 48% for new services. EasyJet fears damage to airlines from rising oil price The biggest danger facing the airline industry is the global oil price, easyJet warned today, after it released strong passenger numbers. The no-frills carrier said the passenger load factor, or proportion of seats sold per flight, was 84.6% in February compared with 82.8% for the same month last year. Passenger numbers, driven by the airline’s acquisition of more jets, rose by nearly a quarter to 3.2 million. A revolution in the skies... a disaster for the planet Cheap flights. More flights. Multiplying routes. At the end of a week that has seen protests against airport expansion, predictions of further airport chaos, and record oil prices, British travellers are showing no sign of shaking off their addiction to CO2-heavy cheap flights.

More on http://airscoop.blogspot.com

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BIRD’S EYE VIEW Interview of Raphael Bejar (CEO of AirSavings) Raphael Bejar (CEO of AirSavings)

Could you please present Airsavings to our readers? Airsavings is a 7 year-old company that started as a Group Buying Service for LCCs and evolved into a leading player in the supply of Ancillary Services to the airline industry. Airsavings leveraged its purchasing know-how with its IT capabilities in order to bring to the airlines better margins, better technology (with REAL Dynamic Packaging), higher speed to market (because an airline wants to earn money in weeks, not in months), and more innovation, because airlines want to enlarge their scope of activities when it comes to ancillary services. Airsavings has also been acting as a kind of “think tank” with its customers, often taking the investments on its shoulder when launching new ancillary services, which ultimately benefit the entire industry as a result. How do you analyze current situation of ancillary revenues for European low-cost carriers? The development of ancillary revenues is an increasingly important part of the European LCC model, which has and will continue to evolve at a very high speed. Around 3 years ago, we created a team dedicated specifically to this emerging field. And in these 3 years, we have migrated from the single “micro-site” selling these services (the 1.0 version), to Dynamic Packaging (version 2.0). Now, we have started running the 3.0 version, which is the Dynamic Packaging associated with a Loyalty Scheme that helps passengers buy more valuable services, and to get compensated for doing so. This version is obviously an accelerator of net income to the airline. How do you evaluate the part of ancillary revenues in LCCs? Well, it is dependent on the type of airline. Many of them are still relying on the suppliers they have chosen from years ago; they still do not have the right margin or the right “dynamic packaging technology”. Notwithstanding, because of their deep-seated fear to break a model (which doesn’t work anyhow), these airlines are lacking in real ancillary income. Then there is another type of carrier, who is willing to make money….and fast. This group is far more pro-active, they are willing to outsource part of this activity (ancillary revenue creation) as they know it is the shortest way to profitability and to stay on the top with more innovative services available to their customers. Once you have implemented the big 3, i.e., insu-

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rance, hotels and car hire in a Dynamically Packaged way, you have to find other services. And this is very often where we get brought into the picture. How do you believe it will evolve? I believe ancillaries will eventually evolve into the Amazon model of purchasing. Amazon started by selling books over the Internet. After seeing the sheer volume of traffic coming to the site, it started selling CDs, then DVDs, MP3s and so on until the site become a marketplace for just about anything. Today, Amazon even sells fresh foods in certain areas. This is what, I believe, could be the evolution for ancillary revenues in the airline industry. An airline that captures more than 70 % of its sales through the internet has become, quite simply, an e-commerce business. And in doing so, the airline has to act in that capacity as well, meaning it has to be creative, reactive, and ready to test new products and services which will meet with its customers’ needs. By always looking for more ancillary revenues to compensate ticket prices, there could be an imbalance. Could it be a danger for LCCs if they don’t manage this issue well enough? Hmm, as I said just above, their own clients will show them if there is an imbalance. However, as long as the airline sells services which could satisfy their clients, why should the airline not to do it? What could be the next generation of ancillary revenues for the European LCCs? A service that will reward customer loyalty at every step of the purchase path. Recently, the consumer watchdog group Holiday Which? released a report criticizing low-cost carriers for levying an increasing number of charges on consumers and requi¬ring travelers to jump through numerous hoops to avoid any additional fees (read Air Scoop February 2008). By always looking after “extra revenues”, could LCCs lose at midterm some customers that mostly see “hidden charges”? Consumers have different choices…. They could go with a Legacy carrier where all the charges are hidden in the ticket price. Or choose an LCC where they know what they are paying for. The key is transparency; then let the consumer choose.

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BIRD’S EYE VIEW What is your opinion on the analysis of ABN Amro, co-authored by Andrew Lobbenberg, published in July 2007? In the report, ABN argues that ancillary revenues can be divided into ‘genuine’ ancillaries and ‘hidden fares’. It says: ‘Genuine ancillaries are those that earn revenue from offering the customer a useful service or product related to air travel, and hidden fare increases are new charges introduced for something which was previously free.

ges, and genuine ancillaries. But we are in a free market situation; passengers have become much more educated about air travel in recent years and know where they could be misleaded. In this era of Web 2.0 and social media and recommendation sites playing a bigger role in the exchange of consumer information, there is no doubt that these “tools” will help towards sanctioning such behaviors.

Yes , I rather agree with this report. It is true that some airlines have been creating confusion between extra char-

Ryanair is Paying for Being Unhedged After the long-awaited third-quarter profit announcement, Ryanair shares drooped by 15 percent, or 55 cents, and stood at 3.05 Euros which indicated the largest fall since January 2004. Additionally, Ryanair reported that its profits could fall as much as 50% by March 2009. The carrier said it expected to be affected by a general downturn in the industry caused by low demand, high fuel prices and weak European economy. Regardless these very loud alarm bells, analysts still advise to ‘buy’ rather than to ‘sell’. On the one hand, they seem to be confident about the entire business model and see Ryanair as the best positioned LCC in the market which has repeatedly beaten its own gloomy forecasts. What might disappoint stakeholders is that Ryanair is now getting more profit from ancillary revenues continuously increasing prices of add-ons and services. Some analysts believe that decline in passenger yields, fall in fares (by 4.4%) and rise in ancillary revenues (by 30%) alarm of the strategy failure. On the other hand, it is not only real profits and financial results that influence the stock exchange but some good PR moves as well. Commenting on the financial situation in the third quarter and in the coming fiscal year, Michael O’Leary said that not only was he not disappointed with losses but welcomed a recession in the industry which would hopefully sweep the weaker rivals away. Following this positive comment, Ryanair shares recovered and finally closed down 11 cents only, or 2.9 percent.

than 30 percent of the carrier’s costs which means that every additional 1 Euro will result in an extra €15 million. With oil now hitting $100 per barrel, the Irish low-cost is risking to spend extra $35 a barrel. However, Ryanair stays confident about the oil market and is intending to hedge in case prices fall below $80 per barrel. O’Leary is probably sure about the positive outcome of the recession as he is committed to buying 100 additional aircraft which will basically double the fleet. He seems to be more inspired by the 21 percent increase in passenger numbers than the 27 percent fall in profits. Whilst the competitors are becoming more modest about growth plans, Ryanair is planning to open new routes and add new bases going on with its excessive expansion. However, given the future major slowdown which has been predicted by O’Leary himself and raised fees for various services, Ryanair might indeed struggle to fill its seats. If only a ‘perfect storm’ of the recession does not remove all the competitors.

Anyway, the most promising scenarios still see a big drop in Ryanair’s profits in the coming year. Starting 1 April 2008 the carrier will have no fuel hedged which means it remains unprotected from rising prices. Having hedged fuel until the end of March 2008 Ryanair locked its price at around $65 per barrel. Fuel expenses constitute more

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BIRD’S EYE VIEW

EVENTS

French Connect 2008 April 9 to 11 in Courchevel

Air Scoop is proud to be part of the 5th French Connect in Courchevel. For the 5th consecutive year, CEOs of French airports and European low cost airlines will gather for 3 days of debates and networking. French Connect, the only professional forum dedicated to low cost air traffic development in France, will take place in Courchevel, French Alps from 9th to 11th April 2008. Created in 2004 to respond to the specific needs of French airports, French Connect has become, in just a few years, a must-attend meeting and debating forum for French airports and low cost airlines. For 3 days, decision-makers will gather from over 20 low cost airlines and 50 French airports together with representatives from regional, national and European political institutions. French Connect 2008 is hosted by Grenoble-Isère and Chambéry-Savoie Airports, two airports managed by VINCI Airports and Keolis Airports on behalf of the Conseils Généraux (County Councils) of Isère and Savoie. Innovation and dynamism are the key words for next year’s event, which will be an exceptional opportunity to understand the issues of low cost air traffic development in France. To have more informations about last edition of French Connect in La Baule, read the full coverage in Air Scoop May 2007. For more information on French Connect 2008, visit www.frenchconnect.net

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Air Scoop - March 2008

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BIRD’S EYE VIEW Why Does the French Government Support Air France’s Low-Fare Challengers? What a weird situation! On February 7th, easyJet had organized a little ceremony next to the Eiffel Tower, in Paris, to launch its new base at Paris-Charles de Gaulle, France’s biggest airport. The airline already launched 6 new routes from there, in addition to 11 already existing. But Charles de Gaulle is also the historic fief of national leader Air France, which mother company, Air France-KLM, is owned at 17.8 pc by the French state. So, it was really weird to see Luc Chatel, the French Secretary of State for Consumers affairs and Tourism, attending the ceremony and clearly supporting Air France’s British challenger... Of course, in France, purchasing power is currently the biggest public concern. And a very recent report by the economist Jacques Attali suggests to create a low-cost terminal at CDG and to develop low-cost air transport in France, only representing 17 pc of the total traffic, versus 34 pc in Europe. From that point of view, officially welcoming a low fare airline is nothing less than logical! « I consider the development of LCCs in France as a good thing for both consumers and tourism, Mr. Chatel said. The part of low-cost is insufficient in France. » But still, several elements make this support incoherent. First, Andy Harrison’s aim is clearly to challenge the national leader, well-known for its fierce hostility against foreign LCCs. « We consider ourselves as the best French alternative to Air France », Harrison said. The airline has now two bases in France - Orly and Charles de Gaulle - and will very soon open a third one in Lyon. It plans to invest €600m in the four next years. In 2011, it expects to carry in France 12 million passengers (6 million in 2007) to 80 destinations. Some of its new routes from CDG (to Marrakech, Porto and Krakow) are directly challenging those of Transavia, the Air France-KLM LCC branch. By operating inward flights (Paris-Nice, Paris-Toulouse...), EasyJet also directly challenges the French railway company, the stateowned SNCF.

Ryanair, which Irish salary conditions allow to pay better wages. By supporting EasyJet, is the French government also supporting that kind of social dumping? New tensions about this topic between the state and the airline are predictable... Finally, French authorities will have to pay attention to the development of LCCs in France because it makes it easier for the French to leave their country... and to spend their holiday money abroad. In Great Britain, a budget hotel chain accused LCCs of « killing British tourism », and the government of being conniving - there is no VAT on international ticket sales. According to the hotel chain, inward tourism spending decreased by 16% between 1995 and 2002, whereas spending abroad by British tourists increased by nearly 50 %! And all because of LCCs! Could the same phenomenon happen in France? France is one of the biggest touristic markets in the world, and tourism represents about 7 pc of its GNP. French people participate to this strong economic market, as they very mostly travel inside their own country. Furthermore, they do not travel a lot by plane: a 2007 study shows that only 5 pc of French people used the plane for their latest short break (week-end or less than one week), and only 2 pc used a LCC. Even a strong LCC development may not radically lower French inward tourism. But it may encourage more and more people, which had not necessarily the budget to fly, to look abroad instead of staying in their country. The Secretary of State Luc Chatel prefers to consider the new foreign tourists EasyJet could bring to France : « The development of low cost will allow us either to attract new customers, or to attract customers who will, by reducing their transportation budget, spend more in accommodation and purchasing in France », he said.

Another ambiguity is linked to the social status of easyJet’s employees. In 2007, there was a struggle between the airline and the French state concerning the country in which employees had their employment contract: Great Britain, where social charges are lower, or France. Even if a November 2006 executive order forces foreign airlines which employees are based and live in France to pay French social charges, LCCs always tend to prefer foreign working conditions, generally more attractive. The problem is that high that some companies, as Brussels Airlines, even think of « outsourcing » their pilots to countries with better tax conditions : in fact, many pilots leave Brussels Airlines in Brussels to work in Charleroi for

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BIRD’S EYE VIEW SWOT TEAM

SWOT Analysis of French Low Cost Carrier Market Introduction

most romantic capital in the world.

The phenomenon of low cost carriers has completely changed the face of the airline industry in Europe and has been instrumental in creating new markets, jobs and business opportunities. Its innovative low cost-low fare model revolutionised air travel by bringing this ‘premium mode of travel’ within the reach of the low and middle income travellers. There are number of players in this industry (about 50) representing almost every region and country of this continent with Ryanair leading the way, followed closely by easyJet and Air Berlin. But surprisingly, in this great revolution, France has remained a mute spectator as opposed to lesser developed countries and new EU members like Hungary, Poland, Bulgaria and Romania. It does not have an original home-grown low cost carrier in spite of being the birth place of Airbus and Concorde. According to national airports association - UAF, in 2006, low cost carriers (LCCs) in France carried a total of 18 M passengers - two-thirds of them to regional destinations, i.e. airports other than Paris. Though this represents an impressive growth of 24.5% over the previous year, the market share of LCCs in France is only 13.2% - the lowest in Europe. It is also surprising to note that none of the LCCs in France belong to French companies. It is this unique state of the LCC market in France - a technologically advanced and progressive nation – that needs to be understood and analysed.

The major asset of France is its beautiful terrain. It is made up of majestic mountains, fertile plains, rolling hills, green forests, lakes and rivers, canyons and an endless coastline. It has the Atlantic Ocean to the west, the North Sea to the north, and the Mediterranean Sea to the southeast. It shares boundaries with Belgium and Luxembourg to the northeast; Germany, Switzerland and Italy to the east; and Spain and Andorra to the southwest. In the northwest, France is separated from England by the English Channel. Today, after Russia and Ukraine, France is the third-largest country in Europe and the largest in Western Europe. It is a producer of cars, aerospace products, and other manufactured goods. It is also a major producer of chemical products. Fashion, textiles and tourism also play a significant role. It has the highest proportion of forested land in the European Union with a strong emphasis on agriculture. It is the largest agricultural producer in Western Europe and one of the world’s leading exporters of farm products.

The Economy of France France is an economic powerhouse, a global trendsetter and a land of everlasting beauty. Although the French population accounts for only 1% of the world’s total, its GNP represents 4% of the global GNP. France is the sixth largest economy in the world in USD exchange-rate terms with a GDP of €1.87 trillion (1.87×€1012; 2006 data). According to World Bank and IMF figures, it is the sixth largest in terms of purchasing power parity and the third largest in Europe after Germany and United Kingdom. The US Census Bureau put the population of France at 60.9 million in 2006. The population is forecast to grow slightly to 62.5 million by 2016. The proportion of the population aged 60-69 is forecast to increase, while the proportion of the population aged below 50 is forecast to decline. France’s five largest cities are Paris, Marseille, Lyon, Toulouse and Nice. Paris, the capital and France’s largest city and main manufacturing centre, is home to about onesixth of the population. Paris is more than 2,000 years old. Today, Paris is the bon vivant of European cities and the

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The Travel and Tourism industry of France France remains the largest travel and tourism market in the world in terms of the number of incoming tourists, with more than 75 million arrivals in 2006, considerably ahead of second-ranked Spain. France ranks 4th in the world in terms of spend on international travel, and in recent years the market has grown steadily. French airports have reported strong traffic figures for 2006, with low cost passenger numbers growing by 20%. Overall there was growth in passenger numbers of 4.5%, to give total passenger figures of 146 million. Most of this growth was a result of a 6% increase in international passenger numbers, with more than 64% coming from outside France. The Paris airports took the lion’s share of traffic, with over 80 million passengers, followed a long way behind by Nice airport, with around 10 million passengers. Regional airports saw a growth of 4.8%, reaching 54 million passengers, and accounting for 22% of all passenger traffic in France. Most of this growth was made up by the increase in low-cost airline traffic, which grew by nearly 20% to 12 million passengers. Notably high increases occurred at La Rochelle, Bergerac, Pau, Nantes, and Carcassonne. Traditionally French people have been spending their holidays within France but now outbound trips are increasing and are forecast to grow in the coming years. The French traditionally favour long touring holidays over the summer and have one of the highest holiday entitlements in the

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BIRD’S EYE VIEW world. However, an increasing trend for shorter more frequent breaks is emerging. Like many countries, the most popular type of outbound holiday for French people is a beach holiday. However, both touring and city holidays are popular, as they enjoy learning about different cultures and discovering new places. Transport System of France: The transportation system in France is very extensive and varied with connections to every part of the globe. It has a system of large navigable rivers that criss-cross the country and a well developed water transport system. Several sea routes link France with other countries. But it is dominated within Europe by its high speed, efficient and affordable SNCF, the French national railroad company, (TGV and regional trains) that connects about 1400 cities throughout the continent. This is also aided by the metro rail and trams in Paris which is the country’s main bus and rail hub, with services to/ from every part of Europe. Eurostar speeds you through the Channel Tunnel, one of Europe’s biggest infrastructure projects to date, between England and France. The Channel also has high-speed shuttle trains that whisk cars and coaches from England to France. Several international airlines along with Air France, the country’s national carrier, link Paris with every part of the globe. Bordeaux, Lyon, Marseille, Nice, Strasbourg and Toulouse are other cities with direct international air links. Most urban centres are linked by domestic airlines, but flying is expensive. Buses are used extensively for shortdistance travel within regions, especially in rural areas. The most popular low cost carriers in France are Ryanair and Easyjet. Hoewever their passengers are mostly inward bound. In 2006, the market share of low cost carriers was 13% though initially the LCC market share grew rapidly in 2001 & 2002 by 85%. But this situation is gradually changing. The substantial market share of railways in the French domestic travel market (over 80% in 2004), has had a very dissuasive effect on low cost carriers. easyJet dropped its service to Marseille after two years of operations, as it could not compete with SNCF’s promotional price of 19 Euros. The Paris-Marseille line, a 600-mile stretch, can be covered by train in less than three and a half hours. Also the LCCs have not been made very welcome by either the aviation industry in France or by the Government. But lately the picture has been changing. French Airports: Airports in France are in a unique situation because of the market dominance of Aéroports de Paris (ADP), the Paris Airport Authority. It has 14 airports under its purview and controlled 60% of all passenger traffic in 2006. ADP went public in the spring of 2006, and the other major regional airports are following the same trend.

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Until recently, French airports were publicly owned, with the state delegating their management to the regional Chambers of Commerce and Industry (CCI). This system is changing rapidly at the instigation of the CCIs, paving the way for privatization of regional airports. Nice was privatized at the end of 2007. Lyon, Marseille, and even Toulouse are working towards the same objective, which will doubtless lead to an increasingly competitive atmosphere among major regional airports. The only alternative for regional airports to combat competition is to attract low cost airlines. The aim of these regional airports is to be as different as possible from one another. Because of the preponderance of traffic that comes through Paris, the major regional airports serve only 3 to 6 million passengers each per year, with only Nice reaching the 10 million passenger level. Typical features of French Travel: The top four outbound destinations for the French traveller are: Spain, UK, Italy and Morocco. The four most popular types of holidays are: sun and sand, touring holidays, city breaks and countryside holiday. The travelling season is between April and August. The French norm is an annual five week holiday usually taken between July and August but is now being divided throughout the year due to the growing importance of short breaks in recent years. Most French have preferred to spend considerable amount of their holidays in France itself, though that is also gradually changing. The most important source market is Paris and the surrounding region of Ile de France with ten million inhabitants, producing the biggest number of outbound travellers and having the highest income in France. South-East France (Rhône-Alpes) comes in the second place, followed by Brittany and Normandy. But price is one of the most important factors influencing the French traveller’s choice of destination. The importance of the transportation cost has increased markedly with the advent of low-cost airlines, which have created a whole new market for low-cost short break holidays. French travel patterns increasingly seem to include individually researched destinations and tours rather than the traditional ‘package tours’. This industry is witnessing the emergence of a breed of consumers that demands more personalised travel opportunities fitted to their particular lifestyles and values. France’s smaller cities are enjoying a boom as short-break holiday destinations thanks to the explosion of routes by low-cost carrier and new direct Eurostar services. French online travel market: Online penetration of the French travel market has been steadily evolving, and has not been explosive, partly due to the absence of homegrown low-cost carriers. Internet usage in France has risen to 48% of the population. Travel products are the 2nd most popular items purchased online with approximately

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BIRD’S EYE VIEW 21% of French Internet users purchasing travel via the web, and a third of these living in Paris. 47% of online reservations are made at most one month prior to departure. This means that 53% still book in advance, and these are either for taking advantage of early booking offers, for example low-cost airline deals, or for booking with an operator or going direct. The type of holiday booked also has an effect on when the booking is made. It is dependent on the cost and the length of time spent on a holiday. A touring holiday to a country would be booked in advance than a city break holiday to a nearby city. French Aviation Industry France had made a global impact on the aviation industry from the first flight of Clement Ader in 1900 to the construction of the Concorde. It is one of the leading countries in civil aviation. It has built a strong reputation in aircraft technology by building the Airbus and the Concorde. Besides its engineering accomplishments, France is a country where exports and imports have also played a major role in its economic progress and this has been facilitated to a great deal by its aviation industry. Another important factor that makes France such a strong player in the aviation sector is the fact that it is one of the main tourist destinations of the world. Over 70 million people visit France every year and most of them travel by air. Two later developments which have impacted this industry are low cost carriers and the volatile fuel prices. Low-cost airlines are definitely bringing more travellers to the industry that is further developing the interest in the aviation sector. The increasing fuel price and intense competition has made it imperative for airline companies to replace old aircraft types with new more fuel-efficient aircraft. The aviation industry in turn is making a huge impact on the French economy since it generates avenues for employment. Air France is the country’s main scheduled airline. It possesses an extensive network around the world and has played an important part in projecting Paris as a major hub for the whole world and connecting it to more than 200 locations around the world. easyJet is currently France’s second largest airline with a 6% market share. Air France currently controls 55% of the market. Ryanair is the third prominent airline in the market. The Low Cost Airline Industry in France There has been record number of airline bankruptcies in France. Many low cost carriers have come and gone without a trace, thus proving the limitations of this concept, in France where the market structure is different from that of other advanced countries of Europe. There is not a single home-grown independent low cost carrier to this date.

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There are several factors contributing to this unique situation which will be presented later in the SWOT. But two major reasons which need to be highlighted are Air France and TGV. This has been aptly expressed in the words of Paul Sies, Commercial Director of Virgin Express who stated, «We’re not even speaking about nationalism here because privately owned airlines like Air Lib and Aeris are allowed to go down. The French government manifestly protects its national carrier Air France and its heavily subsidized prestige project TGV. There is no room for consumer choice.» But the situation is improving for the low cost airlines. The regional airports which are not under the control of the ADP are being privatized. They are now willing to adapt to the needs of low cost airlines and are going all out to woo them. The advent of low cost carriers in France has also contributed in a major way in increasing job and business opportunities, opened up new tourist destinations and ‘second home’ markets for other European countries (especially UK). But the fear is that the legal hurdles between the LCCs and the French Government regarding payment of subsidies to them by airports, could make the airlines withdraw operations from these airports. The subsidies are not usually provided in cash. The airports provide the carrier with a standard service package at reduced price, which include the lower landing fees, cheaper ground handling and mainte¬nance. This form of support is logically illegal and contra¬dicts the EU Competition Law. The future is therefore uncertain. French airport association, UAF, reported recently that, airports in France recorded a 4.9% increase in passenger traffic in 2007, which was attributed mainly to low-cost carriers and international operations. Meanwhile, low-cost carriers operating at French airports reported a 20% increase in passenger traffic to reach 23 million. The most popular low cost carriers include Ryanair (out of Paris’ Orly airport) and Easyjet (out of Bâle-Mulhouse, Orly, Marseille and Paris CDG airports). Current status of French airline industry The following major events have occurred in 2007-2008 which could make or break the low cost airline industry in France in the coming years:  The launch of Transavia.com, a low cost subsidiary of Air France-KLM  Privatisation of regional airports like Nice Airport  Increase in operations on the shorter routes by the TGV at low prices  Opening of the first low cost facility called Marseille Provence 2(MP2) catering exclusively to Low Cost airlines

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BIRD’S EYE VIEW  Ryanair plans to set up its first base at MP2  easyJet sets up a second base at Charles de Gaulle in Feb. 2008  easyJet plans to set up a third base in April 2008 at Lyon which offers low cost facilities  French Online Travel Market Projected to Near 10 Billion EUROs in 2008  Access to new regions in France through LCCs has increased the purchase of second homes by other Europeans  Launch of a new low-cost, high-frills French airline L’Avion across the Atlantic i.e. between Paris Orly and Newark, New Jersey using a single leased Boeing 757-200, which is fitted with 90 business-class seats

Conclusion French airline market has been on the sidelines of the low cost carrier revolution. But it is now apparent that they cannot afford to remain so any longer. Low cost carriers are growing stronger and are here to stay. But there could be a shift in the basic model of the airlines in order to match the rather unique travel needs of the French passenger. In France, a hybrid low cost model of business and leisure which offers transport from regionally close airports, a minimal of two-class seating, allocated seats, one-way fares, online advan¬ce seat selection, transparent pricing through website, frequent flyer programmes, self ser¬vice check-in, customer care in the event of disruption etc. could succeed. Air Berlin is one such airline which if based in France has a fair chance to attract both the business and leisure traveller who seeks comfort and flexibility at a reasonable price. LCCs have definitely ushered in strong growth in revenues to the airports and tourism to the respective regions. But increased taxes and cancellation of subsidies could threaten its continuance due to higher passenger fares and lesser profits for the airline. In the long term the low cost model should evolve to become a more practical and relevant business model that adapts to the emerging periods of environmental taxes, rising fuel costs, economic slowdown and consolidation.

Air Scoop is proud to be Media partner of the Airline Payment Summit 2008, and offers 3 months subscription to Airline Payment Summit 2008 delegates. As airline yields come under downward pressure, Airline Payment Summit (APS) will examine leading-edge low-cost payment solutions within the landscape of traditional forms of payments such as credit cards. Delegates will not only hear about how to drive-down costs through the use of, innovative, non traditional payment methods, but also how to increase revenues with new payment options for the customer. A must attend for airline and travel (Hotel, Car Hire, OTA) executives interested in better managing payments and related costs. More on APS Website : www.airlinepaymentsummit.com

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BIRD’S EYE VIEW SWOT of French Airline Market

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BIRD’S EYE VIEW

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BIRD’S EYE VIEW How Ryanair Achieves Ancillary Revenue Zen in a World Where Airline Profits Might Become Zero IdeaWorks offers an excerpt from its recently released 147-page Ancillary Revenue Guide Ryanair likely leads all other low cost airlines in total ancillary revenue. The carrier recently announced revenue from sources such as car-hire commissions, checked-baggage charges, and priority boarding, increased by 30% (compared to 2006) to €111 million for the quarter ended December 31, 2007. The airline says it is on target to generate 20% of total revenue from ancillary sources within the next three years.

for the first piece when paid in advance at the website, which doubles to €18 when paid at the airport. • An exclusive relationship with Hertz contributed to year car hire revenue of nearly €23 million for fiscal year 2007. Ryanair - The Godfather of Ancillary Revenue was released today as a 10-page Industry Analysis, and is an excerpt from the 147-page Ancillary Revenue Guide by IdeaWorks. More information is available at the website: www.IdeaWorksCompany.com.

Ryanair’s net margin of 21% is a remarkable achievement in an industry, which according to an International Air Transport Association forecast, averaged an operating margin of 5.6% for 2007. The secret to Ryanair’s robust profit can be partially attributed to its ancillary revenue expertise. How does Ryanair achieve these industry-leading results? Here is a sampling of observations from the analysis: • Ryanair’s aggressive a la carte pricing strategy includes a €4 airport fee for passengers that don’t plan ahead and use the website for check-in. • Fees are also charged for checked baggage and start at €9

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

Comparing Airport Subsidies in Europe and the US Specific airports in both Europe and the US are able to offer subsidies to carriers that start new service, though the types of subsidies vary. However, unlike in Europe, many of the largest LCCs in the US don’t receive significant benefits from airport subsidies, even though US airports have more flexibility in the types of subsidies they can offer. This is often because most US LCCs serve routes already served by legacy carriers from larger airports, leaving little reason for these large airports to offer incentives to lure LCCs, whereas in Europe, small airports that are typically bypassed have found success in using subsidies to lure LCCs. In the US, since Southwest and many other LCCs are increasingly focused on serving primary airports (with some notable exceptions), some secondary airports, especially those distant from city centers, find that subsidies are more effective for luring legacy carriers to offer regional jet service. While new regional jet flights will bring additional passengers to a small airport, they pale in comparison to the large number that an LCC could deliver. In Europe, airport subsidies have become an enormous issue, especially as so many small airports across Europe have offered Ryanair subsidies. However, as LCCs expand, subsidies could become less commonplace since of the value of potential traffic at larger airports could outweigh the need for subsidies to lure LCCs to start service. To keep this article simple, I’ll use the example of Southwest in the US. However, some other US LCCs, including JetBlue, Frontier, and AirTran gain different benefits from subsidies, since their smaller jets allow them to serve smaller airports with different subsidy offerings. Most US Airports are public entities, regulated by elected boards that allocate funds. These airports are allowed to offer subsidies, but only if the subsidies are made available to any carrier that qualifies for a specific subsidy program. Airports are prohibited from enacting fee-reduction deals with specific carriers. In most cases, airports cannot discriminate against legacy carriers in favor of LCCs, though they can structure their subsidy programs such that LCCs are more likely to qualify. However, airports

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can also work with carriers to develop infrastructure that meets their needs. If an airline commits to expanding service at a given airport, the airport board could finance the construction of a new terminal, allowing airlines to start service while paying off the construction costs through future fees. US Airports typically offer subsidies to foster business development, and less for tourism development, as seen in Europe. Airports will often identify routes that they would like to see served, and offer airlines subsidies for serving those routes. These routes are often of some strategic importance to the region’s economy, such as routes to China, Japan, and Europe or to major business centers in the US. Many airports also offer subsidies for airlines that fly routes nonstop where passengers are currently required to take a connecting flight. Other airports offer general subsidies for new airlines to add flights and/or for existing airlines to add flights to any new destinations unserved from the airport, regardless of their perceived importance by the airport authority. Subsidies are typically offered in the form of landing fee waivers, terminal rent cuts, and matching advertising funds to help market the new flights. However, in most cases, airlines don’t get a free ride, and are responsible for some fees. But while Southwest considers subsidies in its expansion decisions, they are not necessarily a precondition to arriving in a new market, and even attractive subsidy packages do not guarantee new service. One example of this is Southwest’s service from the Dallas, Texas area. In 2005, after starting a codeshare agreement with ATA Airlines, the Dallas-Fort Worth Airport tried to lure Southwest to its facility with a significant subsidy package including free terminal rent for a year and up to $22 million USD in incentives (as part of a program being offered to any carrier new to the airport). But, Southwest declined this offer, preferring to expand at other facilities that could better help the carrier meet its goal of attracting more business travelers, and thus higher yields. Ryanair has proven to be extremely reliable in garnering traffic, making it a valuable carrier for airports. As a car-

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BIRD’S EYE VIEW rier that has focused its expansion on smaller airports across Europe, Ryanair has been able to secure subsidies from a variety of these airports eager to attract the carrier. Many smaller airports, in association with local tourism boards, back subsidies for LCCs in order to lure visitors to a region. Of European LCCs, Ryanair has benefited most from these because the company’s route structure purposely avoids larger airports. But sometimes, in the pursuit of Ryanair, these airports go too far in providing subsidies. Ryanair’s biggest subsidy controversy to date has been the aid it was given by Charleroi airport south of Brussels. The airport used EU money to help lure Ryanair to the facility and create a base there by cutting a specific deal with Ryanair to reduce the carrier’s terminal rents and landing fees. Ryanair was eventually forced to repay some of the subsidy money because the EU ruled the subsidy violated antitrust laws. The EU’s ruling on this matter has limited the ways airports can use subsidies to attract carriers. The EU ruled in its Ryanair decision that discounts on landing fees and terminal rents for specific carriers at publicly owned airports are unacceptable, but some marketing assistance from airports is acceptable. Assistance that helps LCCs use airports for rates that are less than the market rate is considered anti-competitive behavior and isn’t tolerated by the Commission. The differing subsidy arrangements of LCCs in the US and in Europe point to a similar problem: the degree to which airports have control over luring airlines to serve their facilities. Ultimately, what both public and private airport owners must realize is that with the rise in LCCs across the world, airports can no longer be works of art, venues for displaying the grandeur of a city. Instead, they must provide basic terminal services, including check-in desks, security, retailers, and seating. Airports don’t need to have wide-open spaces that are unutilized, and at many facilities, they don’t need air bridges or unused runways. It simply adds too much to their costs. Subsidies are a temporary solution; a way to lure LCCs to higher-cost or outof the way airports, but ultimately, higher-cost airports must find ways to bring their costs down. They must reduce the size of terminals and other facilities and provide only what is necessary, because increasingly, passengers only want to pay for that. Public airport authorities have wasted too much of the public funds, particularly in the United States, on frivolous projects that were not warranted by the traffic levels at a given airport, or on projects that racked up massive cost overruns, which ultimately must be paid back by passengers. Out-of-the-way air-

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ports, on the other hand, could be harmed if costs at larger airports were reduced. As a result, these airports will need to use other selling points, such as their high punctuality rates, to lure LCCs and passengers. By compelling airports to reduce their costs, it will reduce the distortion subsidies can cause, and enable passengers to more easily fly to the airports they want to access. Update : The European Commission says it has launched a formal investigation into an agreement between Bratislava Airport and Ryanair… 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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