Air Scoop May 2006
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Highlights in this Issue
Air Berlin IPO: Raising Funds before the Battle Future expansion of Ryanair and easyJet in Europe « Bloodbath » in Central Europe The LCCs Rush to Poland First Central European Aviation Forum in Poland
The Low Cost Carriers Analysis Newsletter
p.2 p.3 p.7 p.8 p.9
AIR SCOOP ANNOUNCEMENTS
EDITORIAL
Get LCC News from our Blog
A
Get all the latest news about European Low Cost Carrier market from our Blog News Portal. This one address sums up all daily news about LCC industry.
ir Scoop Team offers you a special newsletter focused on
Low Cost Carriers in Central Europe.
Central Europe market is seen by many LCCs as the next “Eldorado” for further routes expansion. Headlines news regularly announces new routes and bases opening in this area. Recent airlines conferences and pressure on governments are signs of this interest. After western market, Central Europe market is the natural expansion towards East. In this emerging market, regional LCCs have appeared within last years by structuring their local networks. First arrived on main airports, generally located near big cities and capitals, these LCCs have taken a serious advantage in terms of slots and passengers’ catchments. Most profitable routes are then already occupied. However, most of these local LCCs remain small in size. “Islanders” arrival on the market, and especially Ryanair, is really dreaded. The main advantage of Ryanair comes from its important size and financial power. This weight will be decisive to offer the lowest prices on routes and to conquer them. IATA has estimated that Poland and Czech Republic will be among the world’s fastest growing airline markets over the next four years. With nearly 40 million people, Poland is central Europe’s biggest market. Located as a central crossroads, this country is one of the most, if not the most, competitive battlefield. Rumours about a settlement of a Ryanair’s hub in Wroclaw, and the possible choice of Rzeszow as a technical service centre, point out the interest of the LCC European leader for the country. “The battle is in Poland, and Poland will become a two-player with Wizz taking half and Ryanair taking the other half. Everyone else will be knocked out” has recently declared Joszef Varadi, CEO of Wizz Air. The market is however extremely priced sensitive which curb the projects of many, including easyJet. Even if Ryanair is seen as the main danger for main local carriers, such as Sky Europe or Wizz Air, the game won’t be as easy as on the western market for the Irish airline…
IN THE AIR Latest Rumours...
Check Air Scoop Website for more details on rumors...
Nikki and longhaul flights?
Air Scoop - May 2006
Low cost carriers on Estonian TV
Cyber-cafes in LCCs?
Air Scoop Blog News Portal http://airscoop.blogspot.com Use our RSS feeds to automatically receive all the news on you RSS reader or even by email. RSS Feeds: http://airscoop.blogspot.com/atom.xml
Air Scoop Recruits! We recruit more “correspondents” over Europe to cover regional news and analysis. Your role will be to cover the Low Cost Carriers market in your country and near area. You will write about specific topics and propose your own articles. We may ask you to attend special events concerning the LCCs market occurring in your country or near area. It is a requirement to be a fluent writer in English. Join Air Scoop Team by sending us your CV and a covering letter by email to: [email protected] We look forward to seeing your application soon. FR & U2: New bases in Greece?
Air Berlin: Taking away free meals or preparing long haul flights?
www.air-scoop.com
BIRD’S EYE VIEW Air Berlin IPO: Raising Funds for the Battle German’s second biggest airline, Air Berlin, will be introduced on the Frankfurt stock exchange in May 2006. More than 50% of the company’s shares will be brought to the market. This could be the second most important stock market introduction in 2006 in Germany. Air Berlin aims to collect 700 to 900 million euros, in order to strengthen its number three position among LCCs in Europe, behind Ryanair and easyJet, and to finance its expansion plans to Northern and Eastern Europe. Joachim Hunold, the company’s CEO, made this announcement at the ITB (International Tourism Show) in Berlin, in March. He also announced an increase of capital by 130 million euros. Hunold, who is running the airline since 1991, was thinking for several years to intro-
duce his company on the stock market. At the beginning of 2006, he changed it into a PLC (public limited company), a British legal form of company limited by shares. Air Berlin is the first German LCC to be introduced on the share market. Shareholders are expected to be institutional investors, but also private individuals, among others the company’s customers. Air Berlin is Germany’s fast-growing low-cost airline. First focused on charter flights, it began a few years ago to develop regular low-cost flights. In 2005, it carried 13,5 million passengers (+ 12,5% relatively to 2004) to 55 destinations, and made a turnover of 1,22 million euros (+ 17%). The company owns 52 planes, and has ordered 60 more. It developed strong partnerships with the Austrian airline Niki and with the plane-leaser Germania. Hunold said he does not oppose to other partnerships or buyings. The hard com-
petition in the german sky already led to partnerships between some other carriers, like DBA and LTU, or Germanwings and Condor. Air Berlin’s ambition is not only to challenge the German leader Lufthansa, but also to compete on the european level. Air Berlin is focused on international routes rather than internal ones. Two of its platforms are located abroad, in Mallorca and London, from where internal routes are operated in Spain and the United Kingdom. In 2005, Air Berlin lost 115, 9 millions euros. According to the management, this was caused by several elements like important kerosene prices, the rise of the dollar, the switch to IFRS standards, and exceptional taxes. However, in 2006, the company is expected by its advisors, Commerzbank and Morgan Stanley, to make a profit of 51 million euros, and of 80 million in the following years.
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BIRD’S EYE VIEW Air Scoop Special Central Europe Analysis Future expansions of Ryanair and EasyJet in Europe Expansion of “Islander LCCs”, Ryanair and easyJet (that we will call “Islanders”), has been in three phases till now.
1. In the first one, these low cost carriers opened routes inside their local and regional area, mainly in Ireland and in the United Kingdom.
2. Then during phase 2, the “Islanders” opened longer routes to and from continental airports. West Europe was a totally new market with no major competitors yet. Legacy airlines had difficulties to counter this new airline business model, so Ryanair and easyJet were quickly able to open new bases and routes on the continent. 3. Facing saturation of slots and airports capacities, “Islanders” had to find new attractive destinations towards East, North
and South Europe. This led them to Scandinavia, Central Europe and northern Africa. We are currently in this third phase. What about the next step? LCCs business models imply to always open new routes and densify in order to maintain the growth. Central Europe represents an important market for LCCs future, and is also a necessary stop before eastern countries market (Belarus, Ukraine, Russia…). But entering these new markets will be a much harder task for “Islanders” as they will face stronger resistance of local LCCs, already deserving the area. In Central Europe, “Islanders” will face organised airlines such as Air Baltic, Wizzair, Sky Europe or Estonian Airlines, which we will call “Centralers”. Even if these companies have different business plans and strategies (as we will see later), they are strong on their lands due to their networking. As we know, the first to set routes has better chances to win the market. On the Western european market, “Islanders” could justify secondary airports because prices were cheaper there and competitors were mostly legacy airlines, more expansive. This approach is no longer possible in Central Europe with local LCCs offering low prices from and to main airports. Slots are already taken by these airlines, and routes have been tested and approved.
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Air Scoop - May 2006
‘CENTRALERS’
‘ISLANDERS’
Two opposing ‘blocks’ “Islanders” didn’t face much resistance till now. Therefore, their expansion appeared quite easy and their growth was important. However, “Centralers” had sufficient time to observe and copy “Islanders” models and strategies. Taken individually, “Centralers” are still not strong enough to maintain their position, but as a block, they appear sufficiently strong to contain the absolutely necessary “Islanders” eastern expansion. Facing “Islanders”, here are some of their main “Centralers” competitors:
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BIRD’S EYE VIEW
Air Baltic With around 20 airports each deserving at least 10 routes, Air Baltic has a networking strategy. Through a variety of alliances, Air Baltic offers a wide range of destinations. Partnership with Spanair opens routes to Spain, Blu1 gives access to Finland market, and AtlasJet, with one route Riga – Izmir, leads travellers to Turkey. The business model of Air Baltic is to link eastern cities (St Petersburg, Moscow, Minsk, Kiev, Dnepropetrovsk, Odessa, Baku, Tbilisi…) to Westerns (Helsinki, Stockholm, Oslo, Copenhagen, Hamburg, Dusseldorf, Berlin, Vienna, Munich, Milan, Barcelona, Paris, Brussels, London, Manchester, Dublin…). Air Baltic transports its passengers to main business cities, with important catchment’s areas. Tallinn, Riga and Vilnius are located between these two blocks and connect both eastern and western cities. They play a hub and access point role. Warsaw and Budapest are also located between these two ‘blocks’. Currently only three routes are deserved from these airports, but further openings should logically occur there in a near future. Air Baltic start to include its LCC strategy once Ryanair really threathened its own market. Even if Air Baltic lost some market shares in Riga, its PAX rises thanks to Ryanair arrival. Air Baltic has adapted its strategy to a mix model: LCC and legacy in the same flights, like others in the area such as Estonian Air for instance.
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BIRD’S EYE VIEW Wizz Air Like most of LCCs, Wizzair has developed its own model specificities. When “classical” LCCs offer point to point destinations, Wizzair has started few routes with connecting flights. For instance, passengers from Copenhagen/Malmö can flight to Sofia going through Budapest. This line is a typical example of inter-european cities connections and networking strategy of Wizzair. Warsaw is Wizzair’s another hub offering to Kaunas (Latvia) passengers flights to western and northern Europe destinations (London, Paris, Dortmund, Stockholm…). Wizzair has taken from both networking and densification strategies. All destinations south of Budapest, such as Barcelona, Roma, Athens, Split, Sofia…, don’t have more than two routes. This networking strategy is a necessary step to allow further expansion in this southern area. By occupying airports in major cities (Milan, Split…), and in capitals (Ljubljana, Zagreb…), Wizzair anticipates airports saturation and affirms its presence, absolutely necessary in order to get more slots and then develop the densification phase. Routes above Budapest (included) are far more numerous. Organized around three major hubs (Budapest, Warsaw and Katowice), Wizzair covers both regional routes in Central Europe, and main European western airports. Wizzair can’t be seen just as a local LCC any longer, and must be considered as a “global Europe provider”.
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BIRD’S EYE VIEW Sky Europe Like Air Baltic, Sky Europe has few cities acting as main hubs as they are historical centers of expansion of the carrier. Almost all routes deserved by Sky Europe are from and to these hubs, and not between cities outside Central Europe area. With a “star” development around Poland, Czech Republic, Slovakia and Hungary, Sky Europe has become a major local actor, deserving main western cities routes. Salzburg and Innsbruck are currently two emerging hubs with routes linking cities inside western block (Amsterdam, Paris, Barcelona and Manchester). Located in Austria, these two airports are not linked to historical hubs (except Salzburg to Warsaw) contrary to other western destinations. By developing these autonomous hubs and by expanding new routes and flights numbers, Sky Europe directly competes with “Islanders” on their market. A next move could be the development of current airports (Cologne/Bonn; Stuttgart) or the settlement of new ones in Germany deserving more European cities and competing against Ryanair, easyJet and Air Berlin. What are the different options left to “Islanders”? Partnerships with local LCCs. One strategic option for LCCs could be to signed partnerships with local carriers. These partnerships would mainly be focused on slots allocations. For instance, a proximity already exists between Ryanair and Sky Europe; a partnership or even a take over would give Ryanair an access to these markets. “Centralers” partners would also receive slots allocations in western countries which would boost their expansion. On the other hand, “Islanders” don’t have signed yet any major agreement with another carrier, and they don’t have enough cash to buy them. Densifications of current routes. easyJet has chosen a densification strategy by linking its bases to many others with few flights per day. Because of the densification rhythm slowing down, easyJet is now in a sensitive position as it needs to open new airports. The recent routes opening in Morocco, Croatia or Poland are significant of the current situation. easyJet now faces some consequences of its early strategic choices: the lack of available mail airports and slots. With priority put on networking strategy, Ryanair can still raise number of its flights on many routes. Anyway, this option is not viable on long term, especially because the airline will still face the lack of slots and air traffic saturation. New routes to specific airports with important catchments area. “Islanders” look for airports with low fees and important catchments area. These airports will be located outside main cities where airports are already taken by local LCCs. They can also be in secondary cities not yet deserved by “Centralers”. In any case, this option will surely lead to a strong competition between “Islanders” and “Centralers”.
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BIRD’S EYE VIEW The Scandinavian market Could Ryanair and easyJet maintain and develop their current business by targeting Scandinavian market? Scandinavia still doesn’t have strong regional routes networks. SAS has developed its strategy around two main hubs, Stockholm and Copenhagen, leaving many routes free. But many other LCCs are already on main hubs (Copenhagen, Stockholm, Helsinki…) and competition is already strong. Furthermore, even if Nordics travel a lot, is it a sufficient market in terms of passengers? Eastern market Eastern market is probably the logical market development target of “Islanders” strategy: coming from west and moving to east. But “Centralers” block the access to this market and develop meanwhile their own network to eastern main cities (see above with Air Baltic). One option could be to open routes from western bases. But these flights will become middle/long haul, and no frills model will be difficult to maintain. Northern Africa Some LCCs are already offering routes to northern Africa, such as Air Berlin (Morocco, Tunisia, Egypt), or easyJet and Ryanair in Morocco. It is clear that these markets offer many advantages: sunny destinations, cheap vacations packages, European silver age settlement… Routes still have to be created there, but how many? There aren’t that many interesting airports available, penetration of Internet for ticket booking is weak, destinations are outside the European Union which implies rigorous passports checking, rapid 25 minutes turnovers are difficult to hold… Due to their strategic choices, Ryanair and easyJet are not in the same position in front of “Centralers”. Both will need to adapt their model and find original solutions in order to maintain their development. By choosing a densification strategy, easyJet has fewer options than its rival. It appears difficult for the airline to open sufficient new routes to Central countries as local competitors are already there. In addition, a densification strategy implies more slots allocations which could soon be ‘impossible’ due to traffic saturation. Ryanair strategic choices make them more solid. Often first to open routes, Ryanair has a precious anteriority which will be helpful to accelerate a densification strategy. However, the model applied till now will be difficult to replicate to Central Europe market. Local LCCs fly from main airports to main airports offering cheap tickets. Then, passengers won’t really be attracted by secondary airports, far from their cities and business centres, except if prices are a lot cheaper than local LCCs. But can Ryanair afford it?
ANALYST PORTHOLE “Bloodbath” once more… but in Central Europe Due to Central Europe market deregulation and Ryanair’s arrival, “Centralers” (LCCs from Central Europe) will soon begin their consolidation process. Many predicts a new “Bloodbath”… “The industry’s facing big consolidation…and from central Europe, only one will survive, the one with the lowest cost base and the one that can become a European and not just a Central European airline” declared Jozsef Varadi, CEO of Wizz Air.
Jozsef Varadi
Sector experts agree with Mr Varadi and affirm the market is overcrowded. For them, it will be either Sky Europe or Wizz Air which should remain, alongside with Ryanair. Even though, we agree the number of LCCs will reduce, our global analysis is a bit different from this. We believe the Central market has its own specificities, and therefore will not react like Western Europe market. Some “Centralers” have developed their own routes without competition from other local LCCs. As long as they open and densify new routes unchallenged, they will develop themselves. We definitely agree with Mr Varadi about the size of the carriers. The main risk during the 3 to 5 years to come would be to remain a regional carrier. Sooner or later, bigger LCCs, Ryanair first, will attack their network offering lowest prices thanks to their size.
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BIRD’S EYE VIEW The Rush to Poland Poland is in good position to become a regional centre for airline transport, as its market is bigger than its neighbours, Czech and Hungary, and its growth rate is about 25% each year. In fact, in 2005, arriving and departing from Poland airports increased by 31%! In May 2004, Polish government signed the “open skies” agreement which opened the market to competition. Airports network in Poland is composed of one central airport (Warsaw Okecie), one main regional airport (Krakow Balice) and about 50 smaller regional airports. According to Civil Aviation Office (the highest ranking Polish civil aviation authority), CentralWings, a subsidiary of LOT (Poland’s national airline), is still the second budget airline in Poland. CentralWings had to face recent offensive manoeuvres of “Islanders”, especially from Ryanair which declared that by 2007
they will have more passengers than LOT. Like other LCCs (Air Baltic, Estonian Air...), CentralWings quickly counter-attacked by setting a new long term strategy which will include the development of sells by traditional means and through Internet, and by avoiding routes duplication with LOT. Furthermore, an IPO will probably be conducted within a year. European LCCs leader Ryanair started to flight to Poland market in March 2005. Last year, the airline transported 3% of all passengers and 8% of LCC passengers in this market. Ryanair has announced its objectives: to set 3 bases in Poland within 2011. To support this strategy, Ryanair has started an impressive campaign against Polish government to break up the centralised control of airports and to open a second airport in Warsaw in Modlin. Indeed, Warsaw Okecie airport is expected
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to reach its capacity limits by 2010. There are projects to build a second airport for passengers and cargos, either in Modlin or in Mszczonow. Ryanair uses Rzeszow argument to add pressure on the Polish government. Rzeszow is considered as the leading candidate for Ryanair technical service centre which will cost about 84 million dollars. Most municipalities that own and manage regional airports lack necessary funds to develop these airports. Ryanair project is considered as an important opportunity to drag funds in the area. Motivated, Rzeszow has already offered about 30 hectares of land by the local airport with possibilities of serving the intercontinental flights. Final decision will be taken with its partner Singapore Technologies Aerospace (St Aero). Recently, Michael O’Leary declared about this issue: “All we’re asking the government to do is to… stop screwing around at the airports and just deregulate the bloody things.” Other LCCs are quite active too. EasyJet also plans to build a base in Poland in a big airport, like in Gdansk or in Poznan, to add new routes after Warsaw and Krakow. The final decision should be taken in June. Their goal is to raise by 15% the number of their passengers in 2006. Wizz Air has already 3 facilities implemented and plans to create a nationwide network of airline bases. Norvegian recently set its first base in Warsaw deserving 5 European cities (Spain, south of France and Oslo). Sign of this change, its website is now translated in Polish.
Inaugural Air Transport Conference For Central and Southeast Europe Air Scoop is proud to be partner of the Inaugural Air Transport Conference For Central and Southeast Europe organised by EastEuro Link Air Transport. Under the auspices of Ministry of Transport, Posts and Telecommunications of the Slovak Republic, this conference will be held in Bratislava, Slovak Republic, the 26th of May.
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DOWN TO EARTH First Central European Aviation Forum in Poland: A Strong Signal The first Central European Aviation Forum occurred the 11th and 12th of April in Warsaw. LCCs issues were fully covered by many speakers from different European LCCs like Michael O’Leary, CEO of Ryanair, who talked about how its company has influenced and will influence the Aviation Map of the new Enlarged Europe. Other managers, such as Jozsef Varadi, Chairman and CEO of Wizz Air, Christian Mandl, CEO of Sky Europe or Grzegorz Polaniecki, Acting President of Centralwings were there too to present their company strategy and perspectives. Many LCC topics were discussed during this forum such as “How to Make an Airport Attractive to LCCs and Yet Still Make Money?”, “Will well established West European LCCs speed up their expansion on CEE markets?”, “Some
traditional airlines respond to LCCs invasion with their own LCCs: is this the right strategy?”, “Regional governments’ financial support for airports and LCCs coming to those airports: is it in line with fare competition?” During the forum, Rzeszow has been analysed as a case study of development of regional airports. It is interesting to note that Rzeszow is currently under the spotlights as it is considered as the leading candidate for Ryanair technical service centre. Another Air transport conference for Central and Southeast Europe will be hold in Bratislava the 26th of May: Inaugural Air Transport Conference For Central and Southeast Europe. Both traditional and low cost airlines will be present at this major regional event. Rebuilding European competitiveness in the field of Air Transport will be the central topic of this forthcoming international conference. Air Scoop is proud to be partner of this conference which we will cover from the LCC market perspectives.
UPS AND DOWNS easyJet Shares Sinking
Ryanair’s Check’n’Go Finally Introduced
easyJet shares have reached their lowest point for the last 6 months. Shares in easyJet increased sharply in January as speculation swirled about the motive behind FL Group’s stake in the carrier. But when hopes for a bid faded, shares sunk. The sale came as a blow for easyJet investors, who had been hoping for a takeover bid from FL Group.
Although online check-in system has already been introduced on some European routes, security staff at Dublin airport refused to accept passengers with Check’n’Go tickets ((Air Scoop April 2006). ). After some negociations, the SIPTU (Services, Industrial, Professional and Technical Union) finally agreed to stop blocking the service. Ryanair now waits for the Department of transport’s approval to introduce this online check-in system on all of their Irish routes.
BLOGS TREND
Ryanair & easyJet: Still Leading Blogshere Ryanair still leads the discussions over the blogosphere. Two important peaks occurred mid-April. The first one, around the 12th, corresponds to the bomb alert in Ryanair’s aircraft from Paris to Dublin. The second, around the 18th, is due to the emergency plane landing following an engine failure on Ryanair’s flight. easyJet trend gets higher at the beginning of the month when FL Group sold easyJet stakes. The peak around the 20th is due to the scalded grandmother story. Air Berlin trend remains stable over the months. The IPO development is mainly followed by specialized blogs.
Air Scoop is a Registered Trademark of Global Wings Publications. Subscription to Air Scoop: 290 euros for 1 year (12 issues) Copyright 2006 - Unauthorized distribution or reproduction is forbidden. http://www.air-scoop.com ; http://airscoop.blogspot.com (free portal news)
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Air Berlin IPO: Raising Funds before the Battle Future expansion of Ryanair and easyJet in Europe « Bloodbath » in Central Europe The LCCs Rush to Poland First Central European Aviation Forum in Poland
The Low Cost Carriers Analysis Newsletter
p.2 p.3 p.7 p.8 p.9
AIR SCOOP ANNOUNCEMENTS
EDITORIAL
Get LCC News from our Blog
A
Get all the latest news about European Low Cost Carrier market from our Blog News Portal. This one address sums up all daily news about LCC industry.
ir Scoop Team offers you a special newsletter focused on
Low Cost Carriers in Central Europe.
Central Europe market is seen by many LCCs as the next “Eldorado” for further routes expansion. Headlines news regularly announces new routes and bases opening in this area. Recent airlines conferences and pressure on governments are signs of this interest. After western market, Central Europe market is the natural expansion towards East. In this emerging market, regional LCCs have appeared within last years by structuring their local networks. First arrived on main airports, generally located near big cities and capitals, these LCCs have taken a serious advantage in terms of slots and passengers’ catchments. Most profitable routes are then already occupied. However, most of these local LCCs remain small in size. “Islanders” arrival on the market, and especially Ryanair, is really dreaded. The main advantage of Ryanair comes from its important size and financial power. This weight will be decisive to offer the lowest prices on routes and to conquer them. IATA has estimated that Poland and Czech Republic will be among the world’s fastest growing airline markets over the next four years. With nearly 40 million people, Poland is central Europe’s biggest market. Located as a central crossroads, this country is one of the most, if not the most, competitive battlefield. Rumours about a settlement of a Ryanair’s hub in Wroclaw, and the possible choice of Rzeszow as a technical service centre, point out the interest of the LCC European leader for the country. “The battle is in Poland, and Poland will become a two-player with Wizz taking half and Ryanair taking the other half. Everyone else will be knocked out” has recently declared Joszef Varadi, CEO of Wizz Air. The market is however extremely priced sensitive which curb the projects of many, including easyJet. Even if Ryanair is seen as the main danger for main local carriers, such as Sky Europe or Wizz Air, the game won’t be as easy as on the western market for the Irish airline…
IN THE AIR Latest Rumours...
Check Air Scoop Website for more details on rumors...
Nikki and longhaul flights?
Air Scoop - May 2006
Low cost carriers on Estonian TV
Cyber-cafes in LCCs?
Air Scoop Blog News Portal http://airscoop.blogspot.com Use our RSS feeds to automatically receive all the news on you RSS reader or even by email. RSS Feeds: http://airscoop.blogspot.com/atom.xml
Air Scoop Recruits! We recruit more “correspondents” over Europe to cover regional news and analysis. Your role will be to cover the Low Cost Carriers market in your country and near area. You will write about specific topics and propose your own articles. We may ask you to attend special events concerning the LCCs market occurring in your country or near area. It is a requirement to be a fluent writer in English. Join Air Scoop Team by sending us your CV and a covering letter by email to: [email protected] We look forward to seeing your application soon. FR & U2: New bases in Greece?
Air Berlin: Taking away free meals or preparing long haul flights?
www.air-scoop.com
BIRD’S EYE VIEW Air Berlin IPO: Raising Funds for the Battle German’s second biggest airline, Air Berlin, will be introduced on the Frankfurt stock exchange in May 2006. More than 50% of the company’s shares will be brought to the market. This could be the second most important stock market introduction in 2006 in Germany. Air Berlin aims to collect 700 to 900 million euros, in order to strengthen its number three position among LCCs in Europe, behind Ryanair and easyJet, and to finance its expansion plans to Northern and Eastern Europe. Joachim Hunold, the company’s CEO, made this announcement at the ITB (International Tourism Show) in Berlin, in March. He also announced an increase of capital by 130 million euros. Hunold, who is running the airline since 1991, was thinking for several years to intro-
duce his company on the stock market. At the beginning of 2006, he changed it into a PLC (public limited company), a British legal form of company limited by shares. Air Berlin is the first German LCC to be introduced on the share market. Shareholders are expected to be institutional investors, but also private individuals, among others the company’s customers. Air Berlin is Germany’s fast-growing low-cost airline. First focused on charter flights, it began a few years ago to develop regular low-cost flights. In 2005, it carried 13,5 million passengers (+ 12,5% relatively to 2004) to 55 destinations, and made a turnover of 1,22 million euros (+ 17%). The company owns 52 planes, and has ordered 60 more. It developed strong partnerships with the Austrian airline Niki and with the plane-leaser Germania. Hunold said he does not oppose to other partnerships or buyings. The hard com-
petition in the german sky already led to partnerships between some other carriers, like DBA and LTU, or Germanwings and Condor. Air Berlin’s ambition is not only to challenge the German leader Lufthansa, but also to compete on the european level. Air Berlin is focused on international routes rather than internal ones. Two of its platforms are located abroad, in Mallorca and London, from where internal routes are operated in Spain and the United Kingdom. In 2005, Air Berlin lost 115, 9 millions euros. According to the management, this was caused by several elements like important kerosene prices, the rise of the dollar, the switch to IFRS standards, and exceptional taxes. However, in 2006, the company is expected by its advisors, Commerzbank and Morgan Stanley, to make a profit of 51 million euros, and of 80 million in the following years.
ADVERTISEMENT The 2006 World’s Low Cost Airlines Congress
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BIRD’S EYE VIEW Air Scoop Special Central Europe Analysis Future expansions of Ryanair and EasyJet in Europe Expansion of “Islander LCCs”, Ryanair and easyJet (that we will call “Islanders”), has been in three phases till now.
1. In the first one, these low cost carriers opened routes inside their local and regional area, mainly in Ireland and in the United Kingdom.
2. Then during phase 2, the “Islanders” opened longer routes to and from continental airports. West Europe was a totally new market with no major competitors yet. Legacy airlines had difficulties to counter this new airline business model, so Ryanair and easyJet were quickly able to open new bases and routes on the continent. 3. Facing saturation of slots and airports capacities, “Islanders” had to find new attractive destinations towards East, North
and South Europe. This led them to Scandinavia, Central Europe and northern Africa. We are currently in this third phase. What about the next step? LCCs business models imply to always open new routes and densify in order to maintain the growth. Central Europe represents an important market for LCCs future, and is also a necessary stop before eastern countries market (Belarus, Ukraine, Russia…). But entering these new markets will be a much harder task for “Islanders” as they will face stronger resistance of local LCCs, already deserving the area. In Central Europe, “Islanders” will face organised airlines such as Air Baltic, Wizzair, Sky Europe or Estonian Airlines, which we will call “Centralers”. Even if these companies have different business plans and strategies (as we will see later), they are strong on their lands due to their networking. As we know, the first to set routes has better chances to win the market. On the Western european market, “Islanders” could justify secondary airports because prices were cheaper there and competitors were mostly legacy airlines, more expansive. This approach is no longer possible in Central Europe with local LCCs offering low prices from and to main airports. Slots are already taken by these airlines, and routes have been tested and approved.
3
Air Scoop - May 2006
‘CENTRALERS’
‘ISLANDERS’
Two opposing ‘blocks’ “Islanders” didn’t face much resistance till now. Therefore, their expansion appeared quite easy and their growth was important. However, “Centralers” had sufficient time to observe and copy “Islanders” models and strategies. Taken individually, “Centralers” are still not strong enough to maintain their position, but as a block, they appear sufficiently strong to contain the absolutely necessary “Islanders” eastern expansion. Facing “Islanders”, here are some of their main “Centralers” competitors:
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BIRD’S EYE VIEW
Air Baltic With around 20 airports each deserving at least 10 routes, Air Baltic has a networking strategy. Through a variety of alliances, Air Baltic offers a wide range of destinations. Partnership with Spanair opens routes to Spain, Blu1 gives access to Finland market, and AtlasJet, with one route Riga – Izmir, leads travellers to Turkey. The business model of Air Baltic is to link eastern cities (St Petersburg, Moscow, Minsk, Kiev, Dnepropetrovsk, Odessa, Baku, Tbilisi…) to Westerns (Helsinki, Stockholm, Oslo, Copenhagen, Hamburg, Dusseldorf, Berlin, Vienna, Munich, Milan, Barcelona, Paris, Brussels, London, Manchester, Dublin…). Air Baltic transports its passengers to main business cities, with important catchment’s areas. Tallinn, Riga and Vilnius are located between these two blocks and connect both eastern and western cities. They play a hub and access point role. Warsaw and Budapest are also located between these two ‘blocks’. Currently only three routes are deserved from these airports, but further openings should logically occur there in a near future. Air Baltic start to include its LCC strategy once Ryanair really threathened its own market. Even if Air Baltic lost some market shares in Riga, its PAX rises thanks to Ryanair arrival. Air Baltic has adapted its strategy to a mix model: LCC and legacy in the same flights, like others in the area such as Estonian Air for instance.
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BIRD’S EYE VIEW Wizz Air Like most of LCCs, Wizzair has developed its own model specificities. When “classical” LCCs offer point to point destinations, Wizzair has started few routes with connecting flights. For instance, passengers from Copenhagen/Malmö can flight to Sofia going through Budapest. This line is a typical example of inter-european cities connections and networking strategy of Wizzair. Warsaw is Wizzair’s another hub offering to Kaunas (Latvia) passengers flights to western and northern Europe destinations (London, Paris, Dortmund, Stockholm…). Wizzair has taken from both networking and densification strategies. All destinations south of Budapest, such as Barcelona, Roma, Athens, Split, Sofia…, don’t have more than two routes. This networking strategy is a necessary step to allow further expansion in this southern area. By occupying airports in major cities (Milan, Split…), and in capitals (Ljubljana, Zagreb…), Wizzair anticipates airports saturation and affirms its presence, absolutely necessary in order to get more slots and then develop the densification phase. Routes above Budapest (included) are far more numerous. Organized around three major hubs (Budapest, Warsaw and Katowice), Wizzair covers both regional routes in Central Europe, and main European western airports. Wizzair can’t be seen just as a local LCC any longer, and must be considered as a “global Europe provider”.
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BIRD’S EYE VIEW Sky Europe Like Air Baltic, Sky Europe has few cities acting as main hubs as they are historical centers of expansion of the carrier. Almost all routes deserved by Sky Europe are from and to these hubs, and not between cities outside Central Europe area. With a “star” development around Poland, Czech Republic, Slovakia and Hungary, Sky Europe has become a major local actor, deserving main western cities routes. Salzburg and Innsbruck are currently two emerging hubs with routes linking cities inside western block (Amsterdam, Paris, Barcelona and Manchester). Located in Austria, these two airports are not linked to historical hubs (except Salzburg to Warsaw) contrary to other western destinations. By developing these autonomous hubs and by expanding new routes and flights numbers, Sky Europe directly competes with “Islanders” on their market. A next move could be the development of current airports (Cologne/Bonn; Stuttgart) or the settlement of new ones in Germany deserving more European cities and competing against Ryanair, easyJet and Air Berlin. What are the different options left to “Islanders”? Partnerships with local LCCs. One strategic option for LCCs could be to signed partnerships with local carriers. These partnerships would mainly be focused on slots allocations. For instance, a proximity already exists between Ryanair and Sky Europe; a partnership or even a take over would give Ryanair an access to these markets. “Centralers” partners would also receive slots allocations in western countries which would boost their expansion. On the other hand, “Islanders” don’t have signed yet any major agreement with another carrier, and they don’t have enough cash to buy them. Densifications of current routes. easyJet has chosen a densification strategy by linking its bases to many others with few flights per day. Because of the densification rhythm slowing down, easyJet is now in a sensitive position as it needs to open new airports. The recent routes opening in Morocco, Croatia or Poland are significant of the current situation. easyJet now faces some consequences of its early strategic choices: the lack of available mail airports and slots. With priority put on networking strategy, Ryanair can still raise number of its flights on many routes. Anyway, this option is not viable on long term, especially because the airline will still face the lack of slots and air traffic saturation. New routes to specific airports with important catchments area. “Islanders” look for airports with low fees and important catchments area. These airports will be located outside main cities where airports are already taken by local LCCs. They can also be in secondary cities not yet deserved by “Centralers”. In any case, this option will surely lead to a strong competition between “Islanders” and “Centralers”.
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BIRD’S EYE VIEW The Scandinavian market Could Ryanair and easyJet maintain and develop their current business by targeting Scandinavian market? Scandinavia still doesn’t have strong regional routes networks. SAS has developed its strategy around two main hubs, Stockholm and Copenhagen, leaving many routes free. But many other LCCs are already on main hubs (Copenhagen, Stockholm, Helsinki…) and competition is already strong. Furthermore, even if Nordics travel a lot, is it a sufficient market in terms of passengers? Eastern market Eastern market is probably the logical market development target of “Islanders” strategy: coming from west and moving to east. But “Centralers” block the access to this market and develop meanwhile their own network to eastern main cities (see above with Air Baltic). One option could be to open routes from western bases. But these flights will become middle/long haul, and no frills model will be difficult to maintain. Northern Africa Some LCCs are already offering routes to northern Africa, such as Air Berlin (Morocco, Tunisia, Egypt), or easyJet and Ryanair in Morocco. It is clear that these markets offer many advantages: sunny destinations, cheap vacations packages, European silver age settlement… Routes still have to be created there, but how many? There aren’t that many interesting airports available, penetration of Internet for ticket booking is weak, destinations are outside the European Union which implies rigorous passports checking, rapid 25 minutes turnovers are difficult to hold… Due to their strategic choices, Ryanair and easyJet are not in the same position in front of “Centralers”. Both will need to adapt their model and find original solutions in order to maintain their development. By choosing a densification strategy, easyJet has fewer options than its rival. It appears difficult for the airline to open sufficient new routes to Central countries as local competitors are already there. In addition, a densification strategy implies more slots allocations which could soon be ‘impossible’ due to traffic saturation. Ryanair strategic choices make them more solid. Often first to open routes, Ryanair has a precious anteriority which will be helpful to accelerate a densification strategy. However, the model applied till now will be difficult to replicate to Central Europe market. Local LCCs fly from main airports to main airports offering cheap tickets. Then, passengers won’t really be attracted by secondary airports, far from their cities and business centres, except if prices are a lot cheaper than local LCCs. But can Ryanair afford it?
ANALYST PORTHOLE “Bloodbath” once more… but in Central Europe Due to Central Europe market deregulation and Ryanair’s arrival, “Centralers” (LCCs from Central Europe) will soon begin their consolidation process. Many predicts a new “Bloodbath”… “The industry’s facing big consolidation…and from central Europe, only one will survive, the one with the lowest cost base and the one that can become a European and not just a Central European airline” declared Jozsef Varadi, CEO of Wizz Air.
Jozsef Varadi
Sector experts agree with Mr Varadi and affirm the market is overcrowded. For them, it will be either Sky Europe or Wizz Air which should remain, alongside with Ryanair. Even though, we agree the number of LCCs will reduce, our global analysis is a bit different from this. We believe the Central market has its own specificities, and therefore will not react like Western Europe market. Some “Centralers” have developed their own routes without competition from other local LCCs. As long as they open and densify new routes unchallenged, they will develop themselves. We definitely agree with Mr Varadi about the size of the carriers. The main risk during the 3 to 5 years to come would be to remain a regional carrier. Sooner or later, bigger LCCs, Ryanair first, will attack their network offering lowest prices thanks to their size.
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BIRD’S EYE VIEW The Rush to Poland Poland is in good position to become a regional centre for airline transport, as its market is bigger than its neighbours, Czech and Hungary, and its growth rate is about 25% each year. In fact, in 2005, arriving and departing from Poland airports increased by 31%! In May 2004, Polish government signed the “open skies” agreement which opened the market to competition. Airports network in Poland is composed of one central airport (Warsaw Okecie), one main regional airport (Krakow Balice) and about 50 smaller regional airports. According to Civil Aviation Office (the highest ranking Polish civil aviation authority), CentralWings, a subsidiary of LOT (Poland’s national airline), is still the second budget airline in Poland. CentralWings had to face recent offensive manoeuvres of “Islanders”, especially from Ryanair which declared that by 2007
they will have more passengers than LOT. Like other LCCs (Air Baltic, Estonian Air...), CentralWings quickly counter-attacked by setting a new long term strategy which will include the development of sells by traditional means and through Internet, and by avoiding routes duplication with LOT. Furthermore, an IPO will probably be conducted within a year. European LCCs leader Ryanair started to flight to Poland market in March 2005. Last year, the airline transported 3% of all passengers and 8% of LCC passengers in this market. Ryanair has announced its objectives: to set 3 bases in Poland within 2011. To support this strategy, Ryanair has started an impressive campaign against Polish government to break up the centralised control of airports and to open a second airport in Warsaw in Modlin. Indeed, Warsaw Okecie airport is expected
Source: Wikimedia Commons
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to reach its capacity limits by 2010. There are projects to build a second airport for passengers and cargos, either in Modlin or in Mszczonow. Ryanair uses Rzeszow argument to add pressure on the Polish government. Rzeszow is considered as the leading candidate for Ryanair technical service centre which will cost about 84 million dollars. Most municipalities that own and manage regional airports lack necessary funds to develop these airports. Ryanair project is considered as an important opportunity to drag funds in the area. Motivated, Rzeszow has already offered about 30 hectares of land by the local airport with possibilities of serving the intercontinental flights. Final decision will be taken with its partner Singapore Technologies Aerospace (St Aero). Recently, Michael O’Leary declared about this issue: “All we’re asking the government to do is to… stop screwing around at the airports and just deregulate the bloody things.” Other LCCs are quite active too. EasyJet also plans to build a base in Poland in a big airport, like in Gdansk or in Poznan, to add new routes after Warsaw and Krakow. The final decision should be taken in June. Their goal is to raise by 15% the number of their passengers in 2006. Wizz Air has already 3 facilities implemented and plans to create a nationwide network of airline bases. Norvegian recently set its first base in Warsaw deserving 5 European cities (Spain, south of France and Oslo). Sign of this change, its website is now translated in Polish.
Inaugural Air Transport Conference For Central and Southeast Europe Air Scoop is proud to be partner of the Inaugural Air Transport Conference For Central and Southeast Europe organised by EastEuro Link Air Transport. Under the auspices of Ministry of Transport, Posts and Telecommunications of the Slovak Republic, this conference will be held in Bratislava, Slovak Republic, the 26th of May.
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DOWN TO EARTH First Central European Aviation Forum in Poland: A Strong Signal The first Central European Aviation Forum occurred the 11th and 12th of April in Warsaw. LCCs issues were fully covered by many speakers from different European LCCs like Michael O’Leary, CEO of Ryanair, who talked about how its company has influenced and will influence the Aviation Map of the new Enlarged Europe. Other managers, such as Jozsef Varadi, Chairman and CEO of Wizz Air, Christian Mandl, CEO of Sky Europe or Grzegorz Polaniecki, Acting President of Centralwings were there too to present their company strategy and perspectives. Many LCC topics were discussed during this forum such as “How to Make an Airport Attractive to LCCs and Yet Still Make Money?”, “Will well established West European LCCs speed up their expansion on CEE markets?”, “Some
traditional airlines respond to LCCs invasion with their own LCCs: is this the right strategy?”, “Regional governments’ financial support for airports and LCCs coming to those airports: is it in line with fare competition?” During the forum, Rzeszow has been analysed as a case study of development of regional airports. It is interesting to note that Rzeszow is currently under the spotlights as it is considered as the leading candidate for Ryanair technical service centre. Another Air transport conference for Central and Southeast Europe will be hold in Bratislava the 26th of May: Inaugural Air Transport Conference For Central and Southeast Europe. Both traditional and low cost airlines will be present at this major regional event. Rebuilding European competitiveness in the field of Air Transport will be the central topic of this forthcoming international conference. Air Scoop is proud to be partner of this conference which we will cover from the LCC market perspectives.
UPS AND DOWNS easyJet Shares Sinking
Ryanair’s Check’n’Go Finally Introduced
easyJet shares have reached their lowest point for the last 6 months. Shares in easyJet increased sharply in January as speculation swirled about the motive behind FL Group’s stake in the carrier. But when hopes for a bid faded, shares sunk. The sale came as a blow for easyJet investors, who had been hoping for a takeover bid from FL Group.
Although online check-in system has already been introduced on some European routes, security staff at Dublin airport refused to accept passengers with Check’n’Go tickets ((Air Scoop April 2006). ). After some negociations, the SIPTU (Services, Industrial, Professional and Technical Union) finally agreed to stop blocking the service. Ryanair now waits for the Department of transport’s approval to introduce this online check-in system on all of their Irish routes.
BLOGS TREND
Ryanair & easyJet: Still Leading Blogshere Ryanair still leads the discussions over the blogosphere. Two important peaks occurred mid-April. The first one, around the 12th, corresponds to the bomb alert in Ryanair’s aircraft from Paris to Dublin. The second, around the 18th, is due to the emergency plane landing following an engine failure on Ryanair’s flight. easyJet trend gets higher at the beginning of the month when FL Group sold easyJet stakes. The peak around the 20th is due to the scalded grandmother story. Air Berlin trend remains stable over the months. The IPO development is mainly followed by specialized blogs.
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