Air Scoop May 2007

Highlights in this Issue

Air Canada Changes the Fare Game SWOT Analysis of Ryanair Environment and LCCS: Beware of Flying! (R)evolution of Ryanair’s Business Model French Connect: France: A Challenging Market for LCCs

The Low Cost Carriers Analysis Newsletter

EDITORIAL

W

hile LCCs have still difficulties to open routes in France, French Connect 2007 took place in La Baule gathering top executives from French airports and European lowcost carriers (p. 17).

p. 3 p. 8 p. 14 p. 16 p. 17

AIR SCOOP ANNOUNCEMENTS 2007 Ancillary Revenue Airline Conference (ARAC 2007) November 14 and 15 in Frankfurt Air Scoop is proud to be media partner of the ARAC 2007. The Ancillary Revenue Airline Conference (ARAC) is the first global event in the airline industry to completely define and develop the concept of ancillary revenues. Airline Information has teamed up with the leading research consultancy in airline ancillary revenues, IdeaWorks to produce this groundbreaking event.

If France doesn’t welcome LCCs, it is not the case of Central and Eastern European countries. For instance, Romania has now its own LCC with Blue Air (p. 2) and Tcheck Republic proposes many opportunities despite important challenges (p. 6). Headlines about LCCs market point out ‘Environment’ as one of the main issue, if not the most important (p. 14). Therefore, Flybe has decided to lead an initiative by launching soon an eco-label providing more environmental information about airlines and aircrafts (p. 16). Finally, Air Scoop publishes a SWOT analysis of Ryanair (p. 8) as many analysts predict an evolution, if not a revolution, of its business model in the coming years (p. 16). Meanwhile, rivals have sued the Irish carrier for unfair competition and misleading advertising (p. 14).

President of IdeaWorks and chairman of ARAC, Jay Sorensen defines ancillary revenues as “Revenues beyond the sale of tickets that are generated by direct sales to passengers, or indirectly as a part of the travel experience.” This definition includes the commissions earned by many airlines on the sale of hotel accommodations, car rentals and travel insurance.

http://www.airlineinformation.org/conferences/2007_ARAC/arac_intor.html

French Connect 2008 Next year, French Connect will take place from 9th to 11th April 2008 in Courchevel. Keep checking www.FrenchConnect.net for updates on the new programme format.

Air Scoop - May 2007

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BIRD’S EYE VIEW Exclusive Interview of Gheorghe Racaru (General Director of Blue Air)

Gheorghe Racaru General Director of Blue Air

Romania’s single LCC, Blue Air has been created in 2004 and is operating four aircrafts. Blue Air is a young company. How is your evolution since your creation? Our first destinations from Bucharest were Timisoara, Milan, Barcelona and Lyon. We now offer 18 destinations, in Italy, Spain, Germany, Belgium, France, Turkey and Portugal. For some of them, we also start from the Romanian cities Bacau, Arad and Cluj-Napoca. We had 55 employees at the beginning, and now over 240. In 2005, we carried more than 240,000 passengers and a little more than 443,000 in 2006. Our turnover exceeded 24,000,000 Euros in 2005 and 47,000,000 Euros in 2006. For 2007, we expect 80,000,000 Euros, and over 800,000 passengers. All our destinations, including the new ones, have a good load factor. For 2006, our total load factor was 77%. Romania has a fast-growing economy and a strong Diaspora, but it still has weak wages, a small penetration of credit cards… How do you adapt your model to this reality? We offer our clients a large number of possibilities to purchase tickets: Blue Air tickets can be bought not only online or through our call-centres with a credit card, but also in cash from our ticketing agencies and over 2000 tourism agencies, in Romania and abroad. For our Romanian clients, we also offer the possibility to book the tickets and pay them at the bank. Romania has entered the EU in 2007. How does Blue Air react to the growing amount of European low-cost airlines flying to Romania? Will your company be able to compete? The entrance of Romania in the EU has opened the sky for everyone. This competition will ultimately increase the quality of service and lower the prices. Since October, you are operating internal flights in Romania, challenging the national company Tarom. Do you plan to develop this strategy? At the moment, we do not intend to introduce other domestic flights. We are focusing on strengthening our current destinations and open new international routes. In 2007, we intend to introduce flights to Stuttgart, London, Zurich, Greece and Cyprus. Will small companies like yours be able to survive on the low-cost market in Europe? It will depend on the markets they are operating on, and how smart they will be to take advantage of market potentials. My own point of view is that, in the near future, we will see a kind of consolidation on LCCs operations, most probably on the regional level.

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DOWN TO EARTH Air Canada Changes the Fare Game with a la Carte Pricing Coverage continues this month on the “click and buy” method of selling travel to airline consumers. Last month’s column reviewed the marketing innovations introduced by Australia’s low fare airline duo of Virgin Blue and JetStar. The topic remains the same, but the airline presented here is a very different breed. This article reviews the a la carte pricing program developed by a legacy airline based in the Northern Hemisphere - - Air Canada. The airline’s decision to make a radical redesign to its pricing strategy was prompted by the SARS epidemic in 2003. Bookings on Air Canada plummeted after the World Health Organization advised travelers to avoid the airline’s primary hub city of Toronto. Top management at the airline had previously discussed plans to revamp the complicated fare structure that was symbolic of a legacy airline. The extreme revenue drop created by the SARS epidemic lowered the risk of introducing a new fare scheme; the airline’s financial fortunes could only be helped by a change in strategy. The result could be best described as a hybrid offering simple one way fare structure of Ryanair and the cabin class branding savvy of Virgin Atlantic Airways. Air Canada likely leads all other airlines in the effort taken to explain an unbundled pricing program to consumers. The airline offers four fare brands to its domestic and CanadaUSA travelers: Tango, Tango Plus, Latitude, and Executive Class. The first three fare brands apply to the economy class cabin, with the Executive Class brand providing a seat in the cabin of the same name. Similar fare brands have been created for the airline’s routes to Europe, Israel, and the Caribbean. Air Canada plans to continue expansion of the simplified fare structure to more destinations worldwide. The following describes the brand personalities created by Air Canada for its a la carte pricing strategy. The image is from a page at Air Canada’s web site that provides consumers detailed descriptions of the features associated with each fare brand.

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‘‘IDEAWORKS AISLE’’

by Jay Sorensen (President of IdeaWorks)

www.IdeaWorksCompany.com

The pricing strategy designed by Air Canada is complex but great care has been taken to present it in a consumerfriendly manner. The airline took a unique path by only offering these fares at the Air Canada web site; the fare brands are not available to offline consumers. This permits the airline to have complete control over the sales process and to maximize ancillary revenues. The number of features provided by each fare brand is determined by the amount paid for a ticket. Lower priced fares provide fewer features, while higher priced fares provide extra service and perks. Consumers are encouraged to “move up” to a higher fare brand through the promise of more service and features. But even within a fare brand, the consumer is tempted with modestly priced a la carte features that are the retail equivalent of the impulse items stocked by grocery stores in check-out lanes. Air Canada’s pricing strategy appears to be working. Revenue per available seat mile (ASMs) in the domestic market has increased by more than 22% since the strategy began in 2003 (1). Additional statistics provided by Air Canada reveal 48% of consumers do “buy up” to the higher priced fare brands. Tango is the lowest priced fare brand and is designed to compete with Air Canada’s primary low cost competitor, WestJet. In a recent presentation to bankers, Air Canada stated it would not be undersold, and made direct reference to a quote attributed to Clive Beddoe, the President and CEO of WestJet: “Air Canada matches us, dollar for dollar on every single fare, every single minute

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DOWN TO EARTH single day.” This demonstrates the importance of the Tango fare brand as Air Canada’s tool of choice for competing with low cost carriers. Consumers choosing the lowest-priced option receive a basic transportation experience. Readers should note, unless otherwise described, all prices in this report are presented in U.S. Dollars. Tango requires the consumer to rely on selfservice, as booking a ticket through the call centre will cost an extra $17 per passenger. The service fee even applies if rebooking is requested at the airport for changes that don’t occur on the day of departure. Advance seat selection costs $13 each way, and a $7 (Canadian) snack voucher can be pre-purchased at the reduced price of $4 (or $5 Canadian). Tango (and Tango Plus) travelers also accept a lower rate of accrual for Aeroplan frequent flier program mileage as a tradeoff for a lower fare. The a la carte options are presented to the consumer as they navigate the booking process on the web site. The choices may at first seem overwhelming, but conversations with Air Canada reservation agents indicate most consumers are quick to grasp the concept. Consumers may customize their choices for the outbound and return trips of a travel itinerary. The following table (2) offers a sampling of some of benefits associated with each fare brand for domestic Canada, and Canada-USA travel. “Yes” indicates the feature is included as a feature of the applicable fare brand.

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DOWN TO EARTH Air Canada has an exceptional buy-on-board food and beverage service. The pre-purchase option provides a tangible savings incentive to the consumer, and allows the airline to better plan the provisioning of a flight. Consumers may view menus at the Air Canada web site. The choices offered include fresh foods such as Subway sandwiches, sliced carrots and apples, chicken Caesar salad, and hot entrees. The airline has even borrowed the concept of value meals from the fast food industry by offering onboard savings for sandwich, chips and bar beverage purchases. The pricing strategy is especially innovative due to the op-

Additional marketing elements have been integrated into the booking process. The Tango fare brand may detract from the effectiveness of the Aeroplan frequent flier program by allowing consumers to opt out of mileage accrual. However, the Latitude and Executive Class fare brands strengthen Aeroplan’s allure by allowing hotel and car rental partners to make highly-targeted offers to upscale travelers. The airline likely realizes additional ancillary revenues through the commissions paid by partners when travelers choose special offers. Air Canada’s pricing strategy has evolved since its introduction in 2003, and will probably continue to change as the carrier learns how to best market and sell airline tickets and ancillary services through its web site. There is room for improvement, but the current strategy appears to already surpass the efforts of most low cost carriers, and probably all legacy airlines. It’s an amazing achievement for an airline that was once on the precipice of extinction and was not regarded as an industry innovator. Clearly, Air Canada has changed the fare game in the Canadian marketplace, and perhaps has influenced how legacy airlines compete with low cost carriers.

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tional discounts it offers to consumers. Travelers can save $4 each way if they choose not to check baggage. However, once they have accepted the “No Checked Baggage” option, they will be charged $43 at the airport to check two bags each way. Opting out of Aeroplan mileage accrual saves an additional $3 each way. Waiving the ability to make itinerary changes or cancellations saves an additional $6 each way. The following table (3) lists the optional discounts associated with each fare brand offered by Air Canada for domestic Canada, and Canada-USA travel. Blank boxes indicate the discount is not applicable for a specific fare brand.

1. Air Canada management presentations, National Bank Conference, March 28, 2007, AirCanada.com. 2. Information gathered from the Air Canada web site, Simplified Fare Options Page, April 17, 2007, AirCanada. com/en/travelinfo/destinations/simplifiedfare.html 3. Information gather from the Air Canada web site, Simplified Fare Options Page, April 17, 2007, AirCanada. com/en/travelinfo/destinations/simplifiedfare.html Sources used in this article: Unless otherwise noted, the information described in this analysis were gathered at JetStar.com during February and March 2007. IdeaWorks cannot guarantee, and assumes no legal liability or responsibility for the accuracy, currency or completeness of the information.

EVENTS

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

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BIRD’S EYE VIEW SWOT Analysis of Ryanair

SWOT TEAM

Air Scoop launches a new range of articles called ‘SWOT Team’. Each month, we will publish a SWOT analysis of an European low-cost carrier. In this issue, we start with a global SWOT of the market. The no-frills carriers have created new markets, and opened up air travel. A greater proportion of their passengers are people who previously were using other modes of transport for travel, while a certain proportion are from traditional carriers. Relying as they do on linking region to region and by-passing ex¬pensive big-city hubs, lowcost carriers have caused rise in local employment. There is parallel growth in tourism; a rise in property investment and new businesses credited to good, cheap logistic connections. One of the strongest characteristics of the no-frills business model is the ability to adapt rapidly to circumstances. Cost savings of the no-frills business was achieved by effectively supplying a single standard service on all routes and improving both labor and aircraft productivity. Ryanair’s Chief Executive, Michael O’Leary’s, once claimed that “Low-cost airlines are the new Europe». This seems to have been amply proved by the tremendous impact LCC have had on Europe. Ryanair and easyJet are the leading low cost players owning around 50% of the share in the European LCC market. Ryanair is an Irish airline headquartered in Dublin. Its biggest operational base, however, is at London Stansted Airport. It is Europe’s largest low-cost carrier and one of the world’s largest and most successful airlines in terms of profits, number of flights and number of passengers flown. Ryanair is also one of Europe’s most controversial companies, praised and criticized in equal measure; praise for its commitment to low fares, radical management, and its willingness to challenge the ‘establishment’ within the airline industry and criticized for its trade union policies, hidden «taxes» and fees, and limited customer services, and misleading advertising. In October 2006, Ryanair was voted the world’s most disliked airline in a survey conducted among 4,000 of its users by TripAdvisor website. Overview of Ryanair: History and Growth: Ryanair, founded in 1985 by Irish businessman Tony Ryan, started operations as a regio-

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nal flight with a 15 seat turboprop aircraft flying between Waterford and London Gatwick. In 1986, adding a second route between Dublin-London Luton, they carried 82,000 passengers in one year. Today, Ryanair is Europe’s largest low fares airline with 19 bases and 456 low fare routes across 25 countries. It will have 19 European bases by the first quarter of this year. Michael O’ Leary, the current CEO of Ryanair was responsible for launching the first unique low fares, ‘no-frills’ airlines in Europe. Flights were scheduled into regional airports that were keen to attract new airlines, and offered lower landing and handling charges than larger established international airports. Michael O’Leary, known for his pugnacious and aggressive management style, employed a flat management hierarchy and vigorously followed the low cost policy, on all fronts. The EU deregulation of aviation industry in 1997 helped Ryanair’s growth and expansion into Central and Northern Europe. It made a successful floatation on the Dublin Stock exchange and NASDAQ, making it rich in capital enabling it to place a massive US$2 billion order for 45 new Boeing 737-800 series aircraft in 1998. Since then Ryanair has not looked back, but grown stronger and currently is the most dynamic airline in the European markets. Current Status: This year Ryanair Holdings plc (on Feb.12, 2007) has a NASDAQ listed market capitalization of $5.6 billion, which will be used in the NASDAQ-100 Index weighting, and a worldwide market capitalization of $12.3 billion. In the year ending December 2006, Ryanair’s average revenue was $2,190 million, with a growth rate of 28%. Its net income was about $314 million with a 5-year growth rate of 23% approx. The increase in passengers for the rolling 12 month period ending February 2007 was 24%. Over the period Oct 06 - Feb 07, stock value rose by nearly 50%. Increase in EPS was 29% in Q3, 2006. Ryanair currently employs a team of 4200 people and expects to carry approximately 45 million passengers this year, making it the world’s largest international scheduled airline. It operates 134 new Boeing 737-800 aircrafts with firm orders for further 117 new aircraft to be delivered

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BIRD’S EYE VIEW over next 5 years. This increase in fleet would permit Ryanair to expand passenger base from 45 million in 2007 to 85 million in 2012. Among Ryanair’s main low-cost competitors are easyJet, Monarch Airlines, Bmibaby, Air Berlin, Germanwings, Transavia, Jet2, SkyEurope, Vueling, WizzAir, Flybe, Thomsonfly and TUIfly. In 2004 approximately 60 new low-cost airlines were formed. Despite traditionally being a full-service airline, Aer Lingus moved to a low-fares strategy from 2002, leading to much more intense competition with Ryanair on Irish routes. On Oct 5, 2006 Ryanair launched a €1.48bn (GB£1bn; US$1.9bn) bid to buy Irish carrier Aer Lingus. Aer Lingus rejected the offer as unsolicited, opportunistic and too low and later EU stalled it. Ryanair has raised its stake in Aer Lingus to 25% in Nov 2006 and plans to make a second bid later this year. Alliance of Aer Lingus shareholders - including the government, Aer Lingus pilots and an employee trust hold more than 45%. Business Model of Ryanair: Ryanair’s business model is stated to be a disruptive model within the European aviation sector. A disruptive business model challenges the strategies used by the existing, often well-established businesses in the market. Its primary focus has been on price sensitivity of customers. The major features of this LCC are: 1. Lowest ticket prices to any place in Europe. 2. Differential pricing of fares. 3. Usage of secondary and smaller airports. 4. 100% E-tailing of air tickets. 5. Flying only single model of aircraft 6. Increased capacity of airplanes and lowest threshold to travel to achieve highest seat density 7. Short turnaround and maximum utilization of aircrafts. 8. Every additional service is charged 9. A flat management structure 10. Non-unionized labor force 11. Aggressive fuel hedging 12. Continuous innovative measures to increase ancillary earnings* 13. Stringent cost-cutting measures employed. 14. Main Base location in high traffic zone (London-UK) 15. Focus on routes with large non-business potential *Ancillary income generation and cost cutting measures: Money generated by tickets has never been sufficient to

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cover operating expenses of Ryanair. To sustain growth of operating margins and reassure shareholders, Ryanair has adopted stringent cost cutting measures and strengthened ancillary activities. Some of the cost cutting measures are: 1. There are no window shades, no seat-back reclines and seat-back pockets, thus leading to increased number of seats and reduced cleaning and repair costs. 2. The staff has to pay for their own training, uniforms and meals and the staff is not allowed to unionize. 3. Very short turnarounds of aircraft which increases aircraft utilization. 4. Staff takes on multiple responsibilities like cleaning the passenger cabins and also welcoming passengers on board. 5. Aggressive fuel hedging to offset fluctuating fuel prices. Sources of ancillary income are: 1. Customers are charged for priority boarding and assigned seating. Families would end up paying priority boarding fee as they would wish to sit near each other. 2. Food, water and drinks are sold to passengers at a price on flights. There are no exceptions in catering services even when passengers are stranded due to flight delays or cancellations. 3. Ryanair was the first airline to charge a fee for check-in baggage. This deters passengers from carrying extra luggage and reduces baggage handling costs. Charges are increased for checking in baggage over telephone or in person. 4. There is an ‘Irs & Wchr’ levy (insurance & wheelchair) added to all passenger ticket fares. 5. A new ‘pay as you weigh’ policy has been introduced this year. Under this policy, passengers exceeding the airline’s recommended flying weight will be charged an increasing scale of penalty charges for the extra fuel costs they incur the airline. Ryanair customers will be required to give details of their height and weight at the point of booking. 6. Ryanair earns from its website, (15 million unique visitors each month), commissions from sales of Hertz rental cars, hotel rooms, ski packages, and travel insurance. 7. Ryanair planes have become giant billboards, displaying ads for Vodafone Group, Jaguar, and Hertz. Ads will also be featured on seat back trays. 8. Flight attendants sell everything from scratch-card games to perfumes and digital cameras. 9. On arrival at any of its secondary airports, the passengers can buy a bus or train ticket to travel to city/town centre from Ryanair. 10. It has also launched online gambling on its website and plans to offer them on flights, after the introduction of on-

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BIRD’S EYE VIEW board mobile phone service this year. All these extra-revenues are essential to Ryanair to meet rising fuel prices, to offset low revenues from the tickets and to show good results at the stock market. ISSUES: Ryanair has transformed itself from an industry minnow into one of Europe’s biggest airlines over two decades. However, its obsessive focus on the bottom line has dented its public image. Chief executive Michael O’Leary has been an outspoken critic of rivals and the industry. The airline refuses to recognize trade unions and has opted not to join industry groups such as the International Air Transport Association, which accounts for 94% of the world’s air traffic. Ryanair does not recognize the Irish Airline Pilots’ Association (IALPA), although it is the largest pilots’ union in Ireland. It prefers to plough a lone furrow, targeting rivals with relentlessly aggressive advertising campaigns. Some of its major issues are: 1. Misleading advertisements and cluttered website 2. Its negative public image contributed equally by both its aggressive CEO and unfriendly staff. 3. Immature handling of sensitive issues (environmental

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impact, criticizing politicians , disabled passengers) 4. Latest absurd ancillary charges (fat tax, wheelchair charge, check-in baggage charges, refund handling charges etc.) 5. Its strict policy of communication to passengers only through e-mail, while passengers can reach it only by premium rate phone line 6. Poor services to passengers in and off the flights 7. Leadership succession issue SWOT ANALYSIS: The SWOT analysis given below should help Ryanair to achieve their mission and goals by capitalizing on opportunities using their strengths and eliminating their weaknesses and threats. The vision and goals of Ryanair are: - to be the biggest and most profitable low fares airline in Europe”. - to make Low cost is a “management religion” and be air fare passive. - to target growth, actively manage load factors and the cost base, and - growth will be based on opening new airports.

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BIRD’S EYE VIEW

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BIRD’S EYE VIEW

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BIRD’S EYE VIEW Challenges and Recommendations for the future: 1. Low-cost carrier market expansion will probably slow significantly in the next five years as new opportunities become more limited. As this growth slows, labor costs will continue to rise for the low-cost carriers, in all likelihood reducing the advantage they once enjoyed. Ryanair must be prepared for the inevitable convergence of costs and conditions, but it will still retain the ‘no-frills’ advantage of high seat density and aircraft utilization coupled with lowest fares in any market. 2. Ryanair’s domination in the low-price market segment will continue but to become the biggest player it will have to expand into more popular routes which will entail better service and good customer relations. This will require high employee retention which is key to customer satisfaction. The business philosophy should be ‘smile, charge and serve’. 3. Stock market earnings are totally based on growth, expansion and high operating margins. This can be sustained by Ryanair in the existing market conditions. But these conditions are dynamic. Competitions with other established modes of transport in the low price segment will intensify in certain regions. Hence growth will slow down. The current major growth areas in Europe are in the Eastern regions. So it will have to launch new operations in non-European territories like Russia and Turkey. This would require off-base (like crew lodging in areas not having home bases) service operations increasing operational costs. This will cut into its operating margins. On the other hand, improved service image can have a positive impact on share prices. Hence the Stock market earnings will continue to be vulnerable to market dynamics. 4. Rapid growth of secondary airports will definitely increase noise pollution and carbon emissions in remote areas

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which is an environmental hazard. Hence Ryanair has to combat it with pro-nature conservation moves. 5. The economy traveler segment can be divided into lowest price segment and value-price segment. Ryanair is already the leader in the lower price segment, but would have to cater to the rapidly growing value segment for total domination in the economy segment. The value segment constitute travelers interested to optimize time, comfort and price. This would mean preference for city-centric airports, convenient departure and arrival times, and basic service coupled with the willingness to pay little more for the comfort. 6. Competitors like easyJet, Air Berlin, Basic Air, BMIBaby are catering to the Value market segment and have established slots at some primary airports and providing basic cost effective services. Acquisition of Aer Lingus or a merger with a similar airline would enhance Ryanair’s showing in stock markets and also facilitate quicker expansion into value-oriented market segments without comprising its top position in the low-price segment. Conclusions Ryanair is the only airline that has been completely focusing on Low Price segment and with the creation of this segment has shown staggering growth rates of 30% and more. Combined with an excellently executed low cost business model and high profitability, Ryanair will emerge as one of the clear winners from future market consolidations. The key challenge for Ryanair in the next couple of years therefore is developing a successful strategy for not only winning the war in the Low Price segment but gaining a solid position in the Value segment and in new non-European markets.

EVENTS

Air Scoop is proud to be media partner this year again of the 2nd Air Transport Conference for CSEE. Following the success of our Inaugural event last year, this year we are continuing in dealing with the issues Air Transport is facing in this region. http://www.transport.easteurolink.co.uk/air_Upcoming.html

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DOWN TO EARTH Environment and LCCS: Beware of Flying! Ecological food and ecology friendly cars were the first. Then companies that seriously care of the environment grew in favour. Apparently, people’s world view is gradually changing towards the idea that it is good to be “green” and a vast number of passengers with nature friendly behaviour is about to emerge. The idea that air travel poses a grave threat to the environment was first scientifically proved in 2004 when the University of York think tank group published its report saying that air industry expansion placed the whole planet under risk. Emission limiting cannot be achieved unless flights are reduced, said the report. Scholars also suggested businessmen using technological advancements such as video and internet conferences and live link-ups instead of traveling. Governments were recommended introducing “environmental taxes” for each flight. Today anyone is offered to offset his/her emission by buying special carbon offsets either with the carrier or at special online shops such as CarbonFootprint after calculating his/her personal CO2 emissions with a carbon footprint calculator. For example, London –Barcelona return flight will produce 291 kg of CO2 and it costs £4.29 per passenger. That money would be invested into tree planting in the Great Rift Valley in Kenya. There are numerous other web-projects that advocate the idea of flights reduction and people changing their consumer behaviour, such as Responsible Tourism Awards and Climate Care. Passengers are encouraged to change their consumer behaviour not only by scientists but by public figures. During the World Economic Forum in 2007, where climate

change was the number one question, Peter Gabriel, for example, assumed that overall flights in the world would be reduced in a short span of time since they would simply become unpopular amongst people. And Prince Charles in turn cancelled his ski trip to Switzerland to reduce his personal carbon footprint. It seems like executives and other Cabinet members are about to accept virtual communication which would undoubtedly have an impact on common people’s mind. Obviously, responsible-traveler-behaviour contradicts budget-traveler-behaviour. With LCCs people could travel more often than they do it with legacies. Shop-tour in Barcelona, culture-vulture-trip to Stockholm, weekends somewhere in the UK have become usual things for many people and not all of them are ready to give up air traveling in favour of alternative means of transport. However, statistics shows that in Britain people are willing to travel slower, longer and less in sake of the environment. No wonder ethic traveling is popular in the UK since the British are Europe ecology pioneers. The question is whether those tendencies will find fertile ground in other countries. Hardly any would doubt the idea that anything good in life is either illegal, immoral or harmful. Such sort of things should be chosen consciously, for people to be ready to pay for them. Apparently, that was the logic of Institute for Public Policy Research that called for a visible warning message to be placed on any product related to air travelling. “Flying causes climate change” will say a travelling line at the end of any airline commercial.

Ryanair Sued by its Rivals Iberia sues Ryanair for 2 Million Euros for unfair competition. The Spanish carrier has accused the LCC of cutthroat competition and denigrating its brand name during a promotional campaign in September 2006. Ryanair promised free flight vouchers to anyone turning up at Barcelona’s Plaza de Catalunya with placards criticizing Iberia. “Ryanair did not write the placards, Spanish consumers did”, Ryanair declared. While thousands arrived asking for their tickets, the crowd turned hostile when Ryanair ran out of vouchers; Sinead Finn, Ryanair’s head of sales and marketing for Europe, even had to be rushed inside a police station for her own protection. The Catalunyan Consumer Affairs Agency opened an investigation after receiving more than 150 complaints. Iberia confirmed that the lawsuit had been filed: “It has nothing to do with being scared. It has everything to do with competing airlines acting within law”. Meantime, LOT has also sued Ryanair for publishing controversial advertisements as they describe LOT’s tickets as “robbery” and “theft”. One of Ryanair’s press release was even entitled “LOT’s fuel surcharge is daylight robbery”. LOT declared that the campaign was dishonest and insulting, and wants written apology for Irish carrier.

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DOWN TO EARTH

Thxxxx Fridaxxxx

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

(R)evolution of Ryanair’s Business Model (part 2) Ryanair is also examining the prospect of expanding into larger airports. Ryanair, unlike its low-fare rival easyJet, has meticulously avoided many central airports due to high fees and longer turnaround times. Ryanair has avoided central airports in numerous cities where easyJet operates from them, including Barcelona, Brussels, Copenhagen, Paris, and Venice. Ryanair also has large operations in secondary airports near Dusseldorf, Frankfurt, Glasgow, Rome, Stockholm, and of course, London. While it’s unlikely Ryanair will enter Heathrow anytime soon, due to its slot restrictions and very high costs, Ryanair may enter primary airports in other cities where it already has bases at secondary airports. Ryanair will try to target travelers who prefer the convenience of a larger airport, typically closer to the city center, and who are willing to pay a price premium for that privilege. That price premium will compensate not only for the higher fees that Ryanair will pay at the airport, but also for the longer turnaround times that Ryanair may encounter. However, Ryanair must target its new customer base carefully. Many business travelers who prefer airports closer to city centers are loyal to legacy carriers because of their frequent flyer programs and spacious seating configura-

tions. Ryanair will probably offer neither in the coming years, and as a result, it may not attract the legions of business travelers it desires, even if it offers significantly lower fares than legacies. Therefore, Ryanair must target leisure travelers and others who prefer larger airports, not necessarily business travelers. It’s unlikely that Ryanair will significantly trim flights at secondary airports if it adds service at primary airports, because the new service will augment the old service by enabling Ryanair to target different consumer groups that currently don’t use Ryanair because of the secondary airport issue. Some service may be transferred from secondary airports to primary airports, but Ryanair will primarily grow its passenger numbers from these larger airports, not simply transfer passengers from one facility to another. Ryanair will need to add longer routes, as well as routes to and from central airports if it wants to meet its fiveyear growth targets. However, Ryanair must do both carefully, in a way that modifies its business model without destroying its cost advantage over other carriers. If it can do so, it will, without a doubt, be Europe’s leading airline, catering to the majority of passengers with substantially lower costs than its competitors.

Sam Sellers provides analysis and commentary on the airline industry at his website, www.airlinebulletin.com. He 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. The ebook provides step-by-step instructions that readers can use to purchase the cheapest airline tickets. It can be purchased for $10 at http://www.takecontrolbooks.com/airline-ticket.html

Flybe: Environmental Label Soon Flybe has announced that it will launch in May a new environmental labelling scheme that will provide passengers with detailed environmental information about aircraft performance of their flight. Flybe is currently investing more than £1 billion in fuel-efficient Embraer 195 aircraft as it looks to reduce per seat CO2 emissions. The aim of the carrier is to provide passengers with better information on airlines who have invested in class technology which delivers a lower impact on local and global environments. Flybe predicts that by 2009 it will have «one of the youngest and most environmentally sensitive fleets in the world», with per seat fuel consumption reduced by more than half.

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BIRD’S EYE VIEW

The 4th French Connect took place on 25-27th April 2007 at the Atlantia Conference Center in La Baule where some 45 French airports and 25 LCCs were present. This unique event offered the opportunity to network with some of the most influential people in European Low Cost aviation. French airports, the legislators and Europe’s low cost operators all in one place with first-class conference facilities, superb hotels and dining, and a relaxed, entertaining business environment.

France: A Challenging Market for LCCs “French market is less attractive because state is disinvesting, high taxation and social issues” François Marie, Managing Director Aeroport Nantes Atlantique “French don’t travel too much because they have a marvelous country” Jacques Sabourin, Delegate General, Union des Aeroports Français Martin Saxton (Director of Commercial Planning, FlyBe) With the acquisition of BA Connect, FlyBe has become the largest regional airline in Europe with 41 routes in France. FlyBe has added UK density in Manchester, Inverness and Isle of Man, but has also a major presence in Paris and Germany, and has increased its slots in main European airports.

Rate of UK - France Routes Opening for FlyBe

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BIRD’S EYE VIEW The challenges of France: - The UK-French market place has a decreasing percentage of daily services - Breaking the seasonal pattern (Exceptionally seasonal; Creating UK inbound market; French market needs to develop short break travel pattern) - Political and Cultural Challenges (Air Transport is not seen as a cheap from of transport; Supportive political environment (regional not radial); Supportive regulatory environment)

Karim Makhlouf (CCO SkyEurope) “Load Factor is the base of LCC business”, Karim Makhlouf The strategy of SkyEurope is to connect main cities of Western Europe, but the company also aims Eastern countries such as Russia or Ukraine. SkyEurope has difficulties to grow in France as the destinations of the carrier are slots restricted and highly competitive, like in Orly airport for instance. Only 12% of French people travel outside of France, and most of the time, they prefer French speaking countries. “There is no real LCC market in France yet as easyJet and Ryanair have 85%”, Karim Makhlouf “Wizz Air has a Ryanair strategy with secondary airports destinations”, Karim Makhlouf François Bacchetta (Regional General Manager France, easyJet) “France has one of the lowest LCC market penetration in Europe”, François Bacchetta “easyJet flies longer routes because Europe is expanding”, François Bacchetta “Joining the dots first if relevant!”, François Bacchetta “We always need to find the right balance between secondary and primary airports”, François Bacchetta Norbert Zoet (Vice-President Business to Consumer, Transavia) Transavia is positioned as a web-based travel brand with air travel as the core activity. This new company is established in France with its head office in the surrounding of Orly airport. Its structure is a limited liability company with a supervisory Board and a Board of directors, and its 4 aircrafts are based is Orly, south terminal. The carrier aims at profitable growth, sophisticated route network and revenue management. Transavia pays maximum attention to customer demands and presents itself the “Low Cost Low Fare with care”.

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BIRD’S EYE VIEW

Transavia Medium Haul Business Models Analysis

Strategy of Transavia in France: • to build presence on attractive and fast-growing markets • to catch the opportunity of e-tourism development • to compete with other low cost carriers • to strengthen the position in Orly to destinations not presently served by Air France with its own means • to meet expectations of commercial partners expectations (i.e. Club Med, Fram, Accor …)

Transavia Strategy

Transavia Target Groups

“Short turn-overs are not so important for us as we have longer flights, Norbert Zoet

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BIRD’S EYE VIEW Alex Cruz (CEO, Clickair) Clickair plans to carry 10 million passengers by the end of 2008, and around 17 million by the end of 2012. In 2007, Clickair has a fleet of 24 aircrafts and expects to reach 30 in 2008 and 50 in 2012. The carrier has a one-type fleet of A320 with a capacity of 180 passengers in a one-class configuration. The aircrafts are used 12.3 hours per day with a 25 minutes turn-over on the ground on main airports. The Costs per Available Seat Kilometer (including fuel) is currently 4.2 euro cents for Clickair. The carrier aims 3.8 for 2007. Clickair will be ready for France beyond main markets in summer 2008.

“There will be more casualties. The survival will be the one with the lowest structure cost”, Alex Cruz.

Julian Cook (CEO, Flybaboo) Flybaboo is a Swiss low-cost carrier operating from Geneva which had its first commercial flight in November 2003.

Future strategy of Flybaboo will include the implementation of new GDS System (Sabre) by August 2007. The carrier studies the possibility of second base for 2nd half 2008 and to move into new destinations from Geneva (both high density routes & new markets).

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BIRD’S EYE VIEW Alfons Claver (International Sales & Marketing Manager, Vueling) Vueling is a European low-cost airline, headquartered in Barcelona, which had its first commercial flight on July 1st 2004. “Clickair looses business travelers that go to Vueling”, Alfons Claver

“France is a one city country. It’s hard for carrier to serve regional cities”, Alfons Claver

Gilles Gantelet (Deputy Head of Unit Internal Market, Air Transport Agreements & Multilateral Relations, Directorate-General for Energy and Transport, European Commission) Gilles Gantelet explained the simplification of existing legislation in European air transport. The European Commission will revise the “Third Package” (Regulation 2407/92 on operating licences, Regulation 2408/92 on market access, Regulation 2409/92 on air fares) to finally have one single regulation for the internal aviation market. Key Elements of Proposed Revision of Third Package: - Transparent fares (publication of fares incl. all taxes and charges) - Non-discriminatory fares (irrespective of residence) - Streamlining of monitoring of Community operating licences - Clearer rules on Public Service Obligations (more transparent allocation) - Clarifies the framework for relations with third countries (e.g. intra-Community traffic rights to be negotiated at EU level) The European Commission also proposes a Directive on airport charges: - Common principles for airport charges (non-discrimination, mandatory consultation etc) - More transparency - Structured dialogue between airports and airlines - Independent national regulators that can take binding decisions

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Potential of a Common Aviation Area by 2010 (48 states, 900 Million Inhabitants):

European Commission Accompanying Measures to Protect the Environment: - Growing concerns about global warming - Emissions from aviation currently account for about 3% of total EU greenhouse gas emissions, but they are increasing fast (by 87% since 1990) - Commission proposal to include aviation in the EU Emissions Trading System (ETS) as one element - Market-based Mechanism - From 2011 for intra-EU flights, from 2012 for all flights arriving or departing in/from EU airports. - Other Measures: Greener ATM…

Karim Baina (Commercial Director, Jet4you) Jet4you is the first private Moroccan Low-cost carrier. Jet4you had two Boeing 737-400 in 2006 and plan to have a fleet of 10 by 2010. Tourist arrivals to Morocco are steadily growing, reaching an all time high performance 6.5 million in 2006 from 4 main sources: France : 2.577 million (+8% vs 2005), Spain : 1. 444 million (+8% vs 2005), Belgium : 370.000 (+12% vs 2005) and England : 344.000 (+41% vs 2005). Casablanca accounts for 49% of 6.5 million total traffic. Marrakech and Agadir in 2nd and 3rd with 27% and 12% (2006). Jet4you has a strategic partnership with CorsairFly from TUIFly.com on a Code Share agreement. There is a commercial synergy between both airlines on each home market, and a joint communication between Jet4you & Corsair on the Moroccan and French Market.

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BIRD’S EYE VIEW “Only 20-25% of the people have a bank account. Therefore, we will still use travel agency”, Karim Baina

Jet4you has a strategic partnership with CorsairFly from TUIFly.com on a Code Share agreement. There is a commercial synergy between both airlines on each home market, and a joint communication between Jet4you & Corsair on the Moroccan and French Market.

«French Connect brings together senior key speakers to address industry issues during the conference programme, and also provides unequalled networking opportunities for all interested in French aviation», declared Karin Butot, Founder of The Airport Agency. For its 5th edition in 2008, French Connect will take place from 9th to 11th April 2008 in Courchevel. Keep checking www.FrenchConnect.net for updates on the new programme format.

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Air Scoop - May 2007

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