Air Scoop November 2007

Highlights in this Issue

SWOT Analysis of SkyEurope SkyEurope in Trouble... easyJet and Ryanair to Adapt to French Labor Laws French Airports Uncomfortable With Subsidies Safety and Security Worries for LCCs

p. 7 p. 15 p. 18 p. 21 p. 23

The Low Cost Carriers Analysis Newsletter

EDITORIAL Survival of the Fittest

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ay 2007. Ryanair website crashed due to technical difficulties. There were too many people booking “free” flights. Ryanair made an unprecedented offer of 1 mln free seats hoping to raise money from ancillary income. Sheer generosity? Scarcely. Most likely it was a mass attempt to stimulate demand for the dark cloud of overcapacity has appeared on the LCCs’ horizon. Overcapacity, or in other words a situation when there are more seats offered than passenger demand, shows that LCCs’ growth simply cannot last for ever and ever. Probably, European LCCs have developed to maximum size possible. There are now around 60 no-frills operators in Europe which specialize on leisure destinations or casual travelling. Except for Northern and Central and Eastern Europe, there are too many rival carriers and too many seats available. However, it is demand that basically bolsters LCCs’ development. One of the keys to LCC success is quick turnaround which ensures high capacity, i.e. a certain number of seats bought per km. Therefore, it is hard to survive with demand going down when the whole existence is staked on the load factor. When the low-cost model was just being introduced, the carriers did not have to fight for demand because it had already existed, they opened routes to popular leisure destination and major cities that simply lacked affordable tickets and had a plenty of willing travellers. There have been countless attempts to establish successful LCC; however, it was the pioneers (Ryanair and easyJet) that came to rule the skies. Their example inspired proliferation of even more carriers seeking to capture the market. Rush for the sky has created the situation when popular destination are served by several carriers which operate more than one flight per day. Reasonably, the amount of people willing to travel had to reach its finite point. Hence, the percentage of unsold tickets has gradually begun to grow as new offers appeared. The emergence of low-cost service did generate new traffic especially amongst younger travellers but the initial boom is rapidly descending.

Air Scoop - November 2007

As for the new entrants, all their marketing efforts and advantageous offers look rather helpless and faded against the backdrop of such monsters as Ryanair and easyJet. Neither have they the fleet that could compete nor can they negotiate favourable terms with airports that are already in hands of Irish-UK team. In other words, it is almost impossible for a smaller budget airline - with the exception of those which already serve South-East and Northern Europe - to succeed since there are no more unexplored markets left. The amount of LCCs killed in action or never even started operating is very close to the amount of extant ones. One further thing is the example of the USA where the LCC model failed. In other words, it is high time for new LCCs to stop springing and for successful ones to reconsider their strategy. It is evident now that aggressive development is almost over and leads nowhere. As regards business travel the major shortcoming is that LCCs operate flights to secondary airports which are often far away from the place of actual destination. Merging won’t solve the problem either since merging airlines does not mean reducing fleet; and, therefore, the amount of seats available will remain the same. The conclusion suggests itself. In the nearest future, only a few major LCCs will still be operating flights in Europe. And perhaps two of them are already known: Ryanair and easyJet.

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BIRD’S EYE VIEW Interview of Joachim Hunold (CEO of Air Berlin)

Could you please present Air Berlin to our readers? What are your specificities compared to other European LCCs? What do you do better than your competitors? We never wanted to be a low-frills carrier and never wanted to be like a flag carrier. Where we position ourselves is as a hybrid carrier- in between the competitive European scheduled aviation sector. A sector rife with competition and generally low margins. We have greatly raised the ‘customer experience’ in this sector by creating its own segment, and providing an industry leading high quality service at significantly low fares. The service aspect is at the core of Air Berlin’ strategy as we believe there is a large market who appreciate the value added benefits of our services. Air Berlin’s customer management strategy is to provide the most attractive and ‘best in the market value’ scheduled air transportation services. From the most comfortable,modern fuel efficient aircraft, to inflight menus created by the famous Sansibar restaurant, Air Berlin’s processes are driven with the customer in mind. We firmly believe that quality produces efficiency, by delivering the best product in the market sector and achieving customer retention. The market has understood our strategy and continues to reward us with a consistent buying interest on the stock market. After initial concerns, experts now consider the “Air Berlin model” as exemplary for the sector. So far, we are the only German hybrid carrier, namely a carrier that uses all conceivable sales channels, thereby making itself less dependent on seasonal fluctuations. In the future, we also plan to grow faster than the market in which we do business. For a long time, Air Berlin has considered this market to embrace not only Germany but Europe as a whole How do you analyze the competition in Germany with German carriers (TUI, Condor, Germanwings…)? And especially with Ryanair, easyJet and other LCCs? Which LCC is for you the main competitor? Every airline to fly on the same routes as we do is a competitor. Competition can be tough, but it has to be fair

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Joachim Hunold (CEO of Air Berlin)

– if so, it is good for the business, and can be furtherer of innovation. In Germany, we are the second biggest airline, in Europe the third biggest Low Cost Carrier – but all in all: we differ from every other airline in Europe. We offer much higher customer service levels than all other European Low Cost or Low fare carriers, and most of Europe’s National or legacy carriers. What is your position on environmental issues concerning European LCCs? Air Berlin is aware of its responsibility for environmentfriendly behaviour and adheres to policies designed to keep emission levels as low as possible. One of the central elements of Air Berlin’s environmental commitment is its fleet policy. Our company operates one of the industry’s youngest fleets. Almost all aircraft are fitted with Winglets or Wingtips, to improve the wings’ aerodynamics and contribute to reduced fuel consumption up to 3%. Moreover, the new Air Berlin aircraft also are considerably quieter than comparable other aircraft. Emissions trading in air transport can only be one component of a comprehensive overall strategy to reach the ultimate goal of a reduction in emissions. In particular, this has to include the implementation of new technologies and the creation of adequate infrastructure, both parts of which must be carried out simultaneously. The “Single European Sky” project alone, which has been in political discussion for almost 15 years, would reduce the CO2 emission by up to 12 %. Considerable potential is available here, which should be made use of. The current target date of 2020 is not ambitious enough. The German air transport industry therefore continues to insist on a coherent and well-balanced overall strategy. The European Low cost carriers market has reached a certain maturity which leads to its consolidation. During this transition, what are, for you, the greatest threats to the European Low cost carriers? Fuel rising? Overcapacity? Evolution of airports? Regulation?... The airline industry is highly competitive and this is true especially for the low-cost segment. Moreover, aviation competes with ground transportation options particularly

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BIRD’S EYE VIEW with regards to short haul routes. We see these “risks” as challenges that will be overcome with the successful hybrid business model. Its unique position clearly separates us from other LCC and from the problems of overcapacity, where the battle for market share is carried out almost exclusively through pricing and, as a result, through cost cutting, Air Berlin takes advantage of the opportunity of the accelerating consolidation process. The acquisitions of dba and LTU are examples of such participation. Accounting for approximately 22 per cent of overall operating expenses, aviation fuel represents by far the most significant cost for Air Berlin. Fuel prices are subject to notoriously wide and poorly predictable fluctuations that often enough are only minimally correlated with business developments. Thus, in order to improve planning confidence and to reduce the influence of price fluctuations on profitability, Air Berlin systematically engages in hedging transactions. What are your expansion projects for the coming year(s)? We were never aiming to be big or not big, expansion projects must be profitable and must make sense. In light of the quickly progressing concentration process of European aviation, integrating Condor in 2010 into the Air Berlin Group secures the future for both companies. Together, we will achieve international competitiveness. This step makes sense, especially following the takeover of LTU, since it will enable us to offer our clients a more tightlymeshed long-haul flight network.

Many LCCs look after extra-revenues to offset the low price of their tickets. What are the projects of Air Berlin in terms of Extra-revenues? We successfully integrated additional meals and high-quality service, such as the on top gourmet “Sansibar” meal, which has become very popular among our customers. Additional in-flight products or tickets for ground transportation and our premium partners for our frequentflyer program Top Bonus are further examples from which we and our customers will profit. Do you believe that consolidation of the market will lead to 2-3 main LCCs in Europe, or do you think there will always be many LCCs on niche markets? I think there might be more consolidation, not only in Germany, but also in Europe. There are a lot of low-cost carriers and you don’t know how long they will last and some flag carriers are in a very weak position. Look for example to Austria or Italy. Are you worried about the shortage of pilots and crew hitting LCC market? As we started this year with our own flightschool we can secure our need of pilots. What are the options for Air Berlin to transform its business model in order to make more costs savings? Our expansion and the thereby resulting joint market presence offers cost-cutting potentials and positive synergies.

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DOWN TO EARTH ‘‘IdeaWorks AISLE’’ Is airline branding a waste of money and do airlines really care? 91% of airline executives in a worldwide survey say the power of an airline’s brand can attract more customers, but 56% admit funding for branding initiatives is a problem. Michael O’Leary, the CEO of Ryanair, may have tried to remove luxury and romance from the airline industry with this comment, “Air transport is just a glorified bus operation.” (1) The cost-cutting behavior of many airline executives tends to support Mr. O’Leary’s premise; travelers have witnessed the removal of niceties such as headrest covers, pillows, blankets and even that venerable industry icon - - the peanut packet. But has this activity also removed the essence of what is a brand?

by Jay Sorensen (President of IdeaWorks) www.IdeaWorksCompany.com

The following pie chart displays the global representation of survey participants. All regions of the world are represented with 80% of respondents outside the United States and Canada. The large concentration of respondents from Europe and Russia is likely attributable to the London location of the conference.

Recent advertising by Southwest Airlines mocks this uncompromising attack on amenities by suggesting other airlines might someday charge for use of a window shade. Of course, the joke doesn’t apply to Ryanair - - which long ago stripped their aircraft of window shades in a campaign to reduce weight and save fuel. The “lowest cost wins” mantra (another quote from Mr. O’Leary) (2) may suggest to some marketers that brand building is a luxury the airline industry can’t afford. Have low cost carriers, along with the rest of the airline industry, tossed the idea of brand building onto the scrapheap of history? Or, has the concept of branding evolved with the growth of the low cost carrier sector? To answer these questions, IdeaWorks, in cooperation with airline conference organizer Terrapinn, recently distributed a survey on the topic of branding to airline executives all over the globe. The survey was distributed online and attracted participation by over 140 airline managers. It was prepared in anticipation of the World Low Cost Airlines Congress hold in London on September 17-19, 2007. Representatives from more than 110 airlines will gather in London, making it the largest event designed for the low cost airline sector. Airlines sending representatives range in size from major carriers such as JetBlue, Southwest Airlines, easyJet and Japan Airlines, to smaller carriers such as Air Baltic (Latvia), Nok Air (Thailand), and Sky Express (Crete). Jay Sorensen, president of IdeaWorks, will lead a panel of airline executives in a debate on the topic of branding initiatives. Joining Mr. Sorensen on the panel will be Brett Godfrey (CEO of Virgin Blue), Paul Simmons (Head of Brand Marketing for easyJet), and Andrea Spiegel (VP of Marketing at JetBlue).

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The survey contained five questions on the topic of airline branding, the response rate per survey item ranged from a high of 142 respondents, to a low of 81 respondents. Brands are created in the consumer’s mind The discussion of branding is best begun with a few definitions of a word that is understood by all, but difficult to describe exactly. Walter Landor, the founder of Landor Associates, once said, «Products are created in the factory, but brands are created in the mind.» (3) Jack Trout, a leading marketer and originator of the concept of product positioning, defined it this way, “So, dear reader, if you want a simple definition of branding, here it is: It’s all about establishing a name for your product and a differentiating idea in the mind of your prospect.” (4) David Ogilvy, the famous advertising copywriter and ad agency founder, defined brand as: «The intangible sum of a product’s attributes: its name, packaging, and price, its history, its reputation, and the way it’s advertised.» 5

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DOWN TO EARTH These definitions suggest that brands can be defined by factors other than the inclusion of extra services and amenities. Airline branding is alive and well The public perception of airline quality, and by extension the reputation of airline brands, remains the subject of jokes by comedians, a hot topic in the media, and an easy target for politicians. Given this “excess baggage” it may be surprising that airline executives believe in the power of their brands. The results of the survey generally describe a marketing environment in which brand building is practiced at airlines throughout the world. The responses to Question 1 indicate 99% of respondents report some level of branding activity occurs at their airline; only 1% indicate branding is not relevant. The responses by 59% of the executives suggest branding has been integrated into the company culture and the services provided to passengers. Economics may suggest branding efforts are largely directed to business travelers, who an airline’s most profitable passengers. Surprisingly, 70% of the respondents to Question 2 placed equal importance on “all” passengers. Only 28% said branding was of greatest importance to business travelers. Contrarian marketers might identify an opportunity from the responses to Question 2. While measurable importance is placed on branding for business travelers, the importance associated with a pure leisure audience is virtually nil. It would appear airlines have created brands that appeal to a broad audience, but also emphasize higher yielding business travelers. It would be ironic if leisure travelers, who represent the bedrock customer group of low cost carriers, have become neglected. The responses to Question 3 support the concept that branding is beneficial to a broad spectrum of customers . . . and airlines. The overwhelming majority of respondents indicate branding not only offers benefits to their airline, but also to all types of carriers. Question 3: Does the importance of a brand vary for different types of airlines? Branding is an important factor for all airlines, regardless of type. 83% Branding is most important for full-service or legacy airlines, and offers fewer benefits for other types. 11% Branding is most important for new airlines or low cost carriers, and offers few benefits for other types. 6% Branding is not an important factor for any airline. 0% As in Question 2, not a single respondent rated branding as unimportant from the perspectives of customers and management. This is an important result, as it reveals branding can include the low cost airline sector - - in which price is paramount, and amenities can be non-existent.

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Branding has the power to attract passengers Marketing legends fervently believe in the effectiveness of good branding. But CFOs are quick to ask if branding-related expenditures generate additional revenue. The responses to Question 4 provide a resounding “yes” to this question. 91% of the airline executives surveyed said branding conveys a commercial advantage that delivers additional ticket sales. Nearly half, or 45% of respondents, say branding can prevail even when competitors offer lower fares. Question 4: Which response would best describe the importance of the brand of an airline when compared to ticket prices? If the ticket price is the same for 2 airlines, the airline with the stronger brand will attract more passengers. 46% The brand strength of an airline can attract passengers from another airline, even if the ticket is more expensive. 45% Lowest price always wins regardless of brand strength. 9% Branding naysayers, or perhaps those who don’t consider price leadership to represent a true branding attribute, subscribe to the notion that lowest price always wins. These airline executives are clearly in the minority and only comprise 9% of survey respondents. Question 5 merges the sometimes separate worlds of marketing and finance. While the overwhelming majority (95% of respondents) indicate branding activities are included in their budget, the majority of these executives say additional funding is unlikely, or express the concern that existing budgets could be cut. Question 5: Please describe the likelihood of increased funding for branding initiatives at your airline. Branding initiatives are an existing part of the marketing budget, but additional funding is not likely. 45% Branding initiatives are an existing part of the marketing budget, and getting additional funding is likely. 44% Branding initiatives are always in danger of being cut. 6% Branding initiatives are not part of the budget, and new expenditures are not likely. 5%

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DOWN TO EARTH Conclusion and Observations While practically all respondents expressed support for branding initiatives, the perception of its effectiveness varies among airline executives. The similarity of the responses to Questions 4 and 5 is compelling. The 45% of respondents that indicate “The brand strength of an airline can attract passengers from another airline, even if the ticket is more expensive” likely represent the 44% that said they could get more money in their budget for their branding activities. The results from this global survey provide a strong answer to the question posed by the title of this report: “Is airline branding a waste of money?” Branding widely practiced at airlines worldwide and is a valuable tool for attracting more passengers and gaining revenue. Its allure is not without limits, with approximately 45% of respondents saying it can be more powerful than pricing, but a nearly equal group saying it’s only a deciding factor when prices are equal. Amazingly, not a single respondent said, “Branding is not an important factor for any airline.” Traditional airline branding may have assumed its primary purpose was to romanticize air travel and to extol the virtues of amenities and services. Today, many consumers believe “travel and romance” is nothing more than a quaint artifact from another era - - lowest fare is most important to them. The definition of branding has obviously changed for the majority of airline marketers; the absence of amenities and services can be used as attributes to define a company’s brand. Perhaps Mr. O’Leary’s intent to define his brand as a “glorified bus operation” may be one of the most successful branding statements in the marketplace today.

Sources used in this Industry Analysis: Unless otherwise noted, the survey results described in this analysis were collated from the surveys completed by airline executives. The survey was conducted during July 2007. Multiple surveys (based upon IP address) from any one individual were not accepted. Disclosure: IdeaWorks makes every effort to ensure the quality of the information in this report. Before relying on the information, readers should obtain any appropriate professional advice relevant to their particular circumstances. IdeaWorks cannot guarantee, and assumes no legal liability or responsibility for the accuracy, currency or completeness of the information. World Low Cost Airlines Congress: More information is available at this link: http://www.Terrapinn.com/2007/ wlca Endnotes: 1: Michael O’Leary, Ryanair’s chief executive, quoted in BusinessWeek Online, 12 September 2002. 2: Ryanair May 31, 2005 Press Release, “Ryanair Celebrates 20 Years of Operations,” Ryanair.com. 3: Tales From The Marketing Wars, ‘Branding’ Simplified by Jack Trout, Forbes.com, April 19, 2007. 4: Tales From The Marketing Wars, ‘Branding’ Simplified by Jack Trout, Forbes.com, April 19, 2007. 5: Ogilvy, D. (1983), Ogilvy on Advertising, John Wiley and Sons, Toronto, 1983.

EVENTS International IIR Conference LCCs Evolving Business Models November 6 and 7 2007 in Cologne Low cost carriers are facing challenging times: they struggle with cut-throat competition, search frantically for promising niches, seek the most compelling business model and agonize about the ideal strategy. Alexander Tamdjidi from PA Consulting Group shows how to master the pitfalls of a strongly competitive and potentially saturated European low cost market. He advises on different business models, presents a holistic picture of the European low cost market, points to attractive niches and introduces a ground- breaking tool that rapidly evaluates options and possible strategies for a sustainable, long term positioning against competitors. Visit the website to view the agenda and register: www.aircraft-conferences.com/index_lowcost.htm

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BIRD’S EYE VIEW SWOT Analysis of SkyEurope Introduction Central and Eastern Europe (CEE) is one of the most dynamic marketplaces in the world. Eight CEE countries joined the European Union in 2004 and at the beginning of 2007, Romania and Bulgaria joined. The key facts driving passenger traffic in this region are EU enlargement, strong economic activity and stability, the increase in leisure tourism, and the ongoing liberalization of civil aviation in the region. Low cost air travel in CEE has blossomed primarily from the new EU members, as their entry allowed carriers to operate freely among all the member states without the restriction of bilateral agreements limiting the number of flights and favoring national airlines. The trend spread farther east and into the bloc’s neighboring countries, with several LCCs launching services into Croatia, Bulgaria and Romania. The citizens of Central and Eastern Europe, along with the local and multinational businesses operating there now have a dizzying array of airline choices available. Besides the well-known state carriers like Poland’s LOT, CSA Czech Airlines, and Malev Hungarian Airlines, low-cost European airlines like Ryanair, SkyEurope, Centralwings, Wizz Air, EasyJet, SmartWings etc have a significant presence in this region. In the New EU member countries, current market share stands at 80% traditional carriers, 20% LCCs, and by 2010 it is predicted that LCC market share will grow by 8% to 28%. This figure is similar to the UK (currently 79%:21%, to increase to 72%:28% in 2010) where the LCC market is the most developed in Europe. SkyEurope airlines is the largest and first multi-based low cost airline in Central Europe. It was established in 2001 and started operation in the following year. It had five bases in Czech Republic, Hungary, Poland and Slovakia. The airline uses Bratislava’s Stefanik airport in Slovakia as its home base. The airlines principal activity is to provide international air transport to passengers and cargo in Central and Eastern Europe. Since 2002, the company has been gradually growing and dominating the Slovakian air transport market. Currently, there are three international airports in the Slovakia that are served by a low-cost carrier: Bratislava,

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SWOT TEAM Košice and Poprad-Tatry. Bratislava is by far the most significant of these, since the bulk of the traffic is concentrated at this airport. Košice is served only by SkyEurope; daily domestic flights connect the city with Bratislava. Similarly, Poprad-Tatry, which is a popular tourist resort, is served solely by SkyEurope and regular flights are offered to London. Its other unique flight routes include: from all hub cities to Catania on the island of Sicily, Italy; and a direct route between Copenhagan and Budapest (this route has currently been suspended). In 2006, 1.93 million passengers landed or departed from Bratislava, 94% of them traveled on international routes. SkyEurope carried 48% of total passengers, Ryanair took 24%. Their largest base, Bratislava, is located approximately 50 kilometers from Vienna, which is also their base, thereby providing access to Austria, one of the most mature air travel markets in Central and Eastern Europe. They operate a leased fleet of 14 aircraft, comprising of fourteen 149-seat Boeing 737-700 (Next Generation) aircraft. The twelve Boeing 737-700 (Next Generation) aircraft delivered between March 2006 and May 2007 have been acquired by GECAS and leased to the airline under operating leases, each with a term of eight years. Central and Eastern Europe is a high growth area, and a host to several low airlines, sometimes operating the same routes (SmartWings, Centralwings, Wizz Air, SkyEurope...) and a growing amount of Western companies. The battle could become very intense as some of these carriers have some financial weakness. Also high fuel prices and tough competition have put pressure on low-cost carriers around Europe, and analysts predict Central and Eastern European LCCs need strong balance sheets to compete with deeper-pocketed rivals such as Ryanair and easyJet. Will SkyEurope, introduced on the Stock Exchange in 2005, be able to defeat its local challengers and to resist Ryanair and easyJet, in a « Centralers » Vs « Islanders » fight? The Firsts’ of SkyEurope: In 2002 SkyEurope became the first LCC to start operations in the CEE region. It was also the first to operate low-fare flights from London Stansted directly to Budapest in November 2003. In September 2005, SkyEurope became the first low-cost airline to fly to Romania when it launched flights to Bucharest that winter. In the same month, SkyEurope became the first and only publicly listed airline in Central and Eastern Europe, and one of the only five low-cost airlines, together with easyJet and Ryanair, listed in Europe.

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BIRD’S EYE VIEW In October 2006, SkyEurope became the first airline that paid its passengers for flying for a stated period of time. In October 2007 it also launched the first intra-Austrian service to be operated by an LCC. On October 23rd, SkyEurope Airlines engaged Seattle, Washington-based Naverus to prepare required navigation performance (RNP) approaches to airports in its network, making it the first airline in Europe to do so. Awards and Records In December 2004, Christian Mandl (Chairman & CEO) was awarded Entrepreneur of the Year in Austria. SkyEurope was awarded best Low Cost Airline in Hungary in February, 2005. It also won the Superbrand Award in the same year in Hungary. In November, 2005, the airline was awarded Bronze “Effie Award” in Poland. During the same period it was also awarded the “Airline of the Year 2005” by Austrian Business World Magazine. On January 27, 2007 SkyEurope brought in first, its 2007 Boeing 737-700NG after record-breaking flyover of 8 382 miles without any fuel stop. Nonstop flight from Seattle to Prague breaks the current world record in distance flown of this type in commercial configuration. SkyEurope brings its 10th Boeing 737-700NG and breaks world record in distance flown when landed in Bratislava without any fuel stop in 10 hours and 27 minutes on March 18, 2007. Overview of SkyEurope History: SkyEurope Airlines was established in September 2001, founded by two entrepreneurs in 2001: Christian Mandl and Alain Skowronek. The airline began flying passengers on a single domestic route in the Slovak Republic in February 2002 using a 30-seat Embraer 120ER aircraft, becoming the first LCC to commence operations in Central Europe. The airline’s business development strategy initially sought to serve unsatisfied demand and stimulate additional demand in the Slovak Republic for air travel services and also subsequently start flights to Central and Eastern Europe. Gradually, it expanded its reach beyond the Slovak Republic and established additional bases in other countries with the potential for additional demand stimulation. In the early part of 2003, a consortium of investors consisting of private equity funds funded the development of SkyEurope Airlines. Investors in these funds include the European Bank for Reconstruction and Development (EBRD), the European Union and ABN AMRO Bank. The airline then operated a fleet of 2 Boeing 737 and 4 Embraer 120 aircraft. It later changed the composition of its fleet from the regional 30-seat Embraer aircraft through longer-range 133-seat Boeing 737-500 (Classic) aircraft towards 149-seat Boeing 737-700 (Next Generation) aircraft.

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SkyEurope and KLM E&M signed a Total Care package, which would take care of all aspects of maintenance on the SkyEurope fleet including heavy maintenance and spare parts supply. SkyEurope has JAR145 certification for its bases in Bratislava and Budapest, which means that its own engineers take care of line maintenance at those two airports. KLM E&M helped SkyEurope set up the entire operation and trained most of their engineering staff. Growth: In July, 2003, SkyEurope started flights from London Stansted to Vienna Bratislava. Bratislava airport is only 30 miles away from Vienna and a SkyShuttle bus took travelers from the Bratislava airport to Vienna. Services from Budapest to London-Stansted and Paris-Orly started in November 2003, and to Milan-Bergamo and Zurich from December 2003. Also in November it opened its second base in Budapest. SkyEurope launched services from June 2004 into and out of Warsaw competing with Airpolonia. Austrian Airlines and Lufthansa also announced services into Bratislava and with SkyEurope adding more services out of Budapest, the whole region was being awakened to a sudden change from a drizzle to a shower of airlines. In September 2004, it opened its base in Krakow, Poland. SkyEurope Holding AG completed its initial public offering in September 2005. It raised €60 million (gross) of new equity capital and the shares were simultaneously listed on the Vienna and Warsaw Stock Exchanges, reflecting the Central European focus of its operations. The founders beneficially owned 8.8% of the company. The other major shareholders included Endavour Holdings, East Capital, Merrill Lynch and Griffin Capital. The free float amounted to 57.3% at that point in time. SkyEurope became the first low-cost airline to fly to Romania when it launched flights to Bucharest from Bratislava in December 2005. The airline operated three flights a week from the Slovakian capital, Bratislava, to Bucharest. On Feb. 14, 2006, SkyEurope Airlines became the third air carrier to establish a base at Prague Ruzyně International Airport, in addition to flagship carrier Czech Airlines (ČSA) and Czech low-cost airline SmartWings, which is operated by Travel Service. The airline based two new Boeing 737-700 aircraft in Prague. During April 2006, SkyEurope started scheduled services from Prague to airports serving seven European cities: Amsterdam, the Netherlands; Barcelona, Spain; Naples, Milan’s Bergamo airport and Rome’s Fiumicino in Italy; and Nice and Paris’ Orly in France. SkyEurope`s load factor reached 84.2% in July 2006 and achieved highest monthly passenger volume in the airline’s history. The load factor for the 12 months ended July 2006 reached 75.3%.

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BIRD’S EYE VIEW In August 2006, SkyEurope sold €56.3 million worth of shares and bonds to fund growth. The stock was down 56% that year, giving the Bratislava, Slovakia-based carrier a market value of €43 million. The airline raised €38.8 million from an investment by York Global Finance and €17.5 million from a public offering of shares. Londonbased York bought around 9 million new shares at €1.75 a share. York also bought about €6.7 million worth of bonds “mandatory” convertible into 3.8 million new shares. If such conversion takes place, York’s pro forma equity stake in SkyEurope will rise to 29.9 percent. It also purchased €17 million worth of bonds that need not be converted into shares. The share sale follows an agreement on August 24th for a long-term loan from the Bank of Scotland to buy four new Boeing Co. 737-700 airplanes for delivery in 2007. This would expand its current fleet of 12 Boeing 737 aircraft to 16 by 2007. In October 2006 at Prague, SkyEurope Airline cut ticket prices to minus 10 koruna (US$0.44; €0.35), claiming to become the first airline that paid people to fly with them. The cuts applied to tickets for flights between Nov.1Dec.15 and Jan.9-March24 and these tickets were to be booked between Oct. 17, and Oct 22 midnight. In December, the airline announced that it would fly from Vienna to 16 cities in Europe starting on March 25th, 2007. The cities include Amsterdam, Brussels, London and Paris. The move was aimed at boosting efficiency and profitability. It was also cutting spending and eliminating unprofitable routes after posting a euro57.3 million (US$75.6 million) loss in the last fiscal year. The Year 2007: Erhard Schmidt, SkyEurope’s Chief Financial Officer left SkyEurope as of 31.12.2006. Effective with January 2007, the position of the Chief Financial Officer was held on an interim basis by Lane Zirnhelt, the company’s current Finance Manager. At the beginning of 2007, two Austrian businessmen, Ronny Pecik and his partner George Stump, took over 16.5% of the Bratislava-based company, quoted on the Vienna Stock Exchange. SkyEurope launched its SkyCorporate initiative in early Feb-07, offering a range of services aimed at encouraging business travelers to use the carrier, as well as extending the service options that the carrier offers to corporate customers. SkyEurope secured aircraft financing in February 2007

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from Bank of Scotland Corporate. It extended its support to SkyEurope Airline with the conclusion of a committed pre-delivery payment loan facility for five new 737-700 aircraft to be delivered in 2008. In February 2007, Avis Europe signed an exclusive threeyear partnership with SkyEurope. As per the deal, SkyEurope customers booking through the airline’s website can reserve a rental car with Avis. On March 25, 2007 SkyEurope started to serves 16 destinations from International Airport Schwechat in Vienna to Hol¬land, Greece, Spain, Belgium, Italy, France, Romania, Bulgaria, Cyprus and Croatia, and became the second biggest airline in terms of flight network right after Austrian Airlines. In Vienna, SkyEurope competes with the local low-cost leader, the German-Austrian alliance Air Berlin - Niki. In April, Nick Manoudakis, a founding member of easyJet, was appointed as SkyEurope’s Chief Financial Officer. Alain Skowronek, SkyEurope’s co-founder and Chairman, stepped down from his executive functions with the Company. Christian Mandl became the Chairman and CEO of SkyEurope Holdings AG and Jason Bitter became CEO of SkyEurope airlines. In the 12 months ended May 2007, the load factor increased by 4.9 percentage points and reached 81.0%. On 25th July 2007 SkyEurope Airlines introduced the first directly-purchased Boeing 737-700NG into service. This brand-new aircraft registered as OM-NGN landed at Bratislava Airport on 19th July 2007 and was being financed by Halifax Bank of Scotland. In July 2007 SkyEurope announced that it would start operating flights into London Luton Airport from later this year. The airline also announced that it would leave Stansted and operate flights from Luton to Košice, Poprad Tatry and Bratislava, in Slovakia, as well as to Vienna. A new service between Dublin and Košice would be added to the airline’s network alongside a route between Cork and Bratislava. In August, SkyEurope shares plummeted on news that private investor Ronny Pecik had reduced his stake in the airline, putting an end to takeover speculation. It crashed 12.94 pct to close at 4.60 euros. In August, the discount airline reported third-quarter losses of 5.24 million euros (7.18 million dollars), a reduction compared with 16.54 million euros net loss in the same period last year. Losses for the first 9 months of the 2006/07 business year fell from 50.2 million euros to 37.6 million euros in the year-on-year comparison. The company’s debts however increased from 79.5 to 121.6 million euros. SkyEurope remains heavily affected by high leasing costs for its 12 aircraft.

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BIRD’S EYE VIEW Operative earnings before interest, taxes, depreciation, amortization, share profits of associates and lease payments (EBITDAR) were 3.23 million euros, up from a negative EBITDAR of 7.09 million euros. EBIT improved from minus 14.5 million euros of last year 3rd quarter to minus 5.2 euros in the corresponding 3rd quarter this year. The losses of the first nine months of the year reduced from 48.8 million euros in 2006 to 35.2 million euros this year. Revenues increased by 26 per cent to 66.6 million euros. SkyEurope said it expected to report a positive EBIT for the fourth quarter. In early September, SkyEurope Airlines announced that it would cease flights from Budapest, Hungary, and Krakow, Poland, at the end of October. Besides all routes from Budapest and Krakow it would also give up its routes from Bratislava to Amsterdam, Barcelona, Basle/Mulhouse and Copenhagen, from Bucharest Baneasa to Rome Fiumicino, from Prague to Barcelona and from Warsaw to Paris Orly. They also planned to sell their airport handling unit at Budapest Ferihegy International airport, for about USD 3.5 million. SkyEurope currently flew to 39 destinations in 19 countries. SkyEurope would have its bases only in Prague, Bratislava and Vienna. SkyEurope also stopped flying to Turin, Italy, due to low seat occupancy and in the winter season there would be no flights between Prague and Barcelona, Spain. The idle aircraft would be used for expansion in Prague, Vienna and Bratislava. SkyEurope would continue to fly to Krakow from Vienna. The reasons quoted for withdrawal were high taxes, drop in demand and seasonality of the markets. On September 14 Analysts at CAIB Research downgrade SkyEurope Holding AG (ticker: S8E) from «buy» to «sell.» The target price has been reduced from €4.6 to €2.6. In a research note published the analysts mentioned that the company continued to face liquidity issues, despite its successful restructuring initiatives. Although the company’s EBIT was in-line with the estimates, its capital expenditure was high and the company’s operating cash flows continued to be negative. SkyEurope Holding AG said that its passenger traffic in September 2007 increased by 18.9 pct year-on-year, while its load factor reached 86.1 pct, up 5.4 percentage points from a year earlier. In September 2007, SkyEurope Holding AG (Vienna: SKY.VI - news) stated that its largest shareholder York Global Finance II had boosted its shareholding in the low-cost airline to 29.9 pct from 23.06. York converted all its Tranche B convertible bonds into just over 3.8 million common bearer shares at a price of 1.75 euro a share.

in October 2007.These are daily flights to Amsterdam, Brussels, Paris, Innsbruck, Warsaw, Thessalonica, Venice and Nice. It also has flights to Krakow and Athens and between Sofia and Vienna. SkyEurope also connected Bergamo Orio al Serio Airport with Vienna. In October the airline became the most convenient carrier between London and Prague after Czech Airlines and Thomsonfly announced their withdrawal from the routes between Prague and London during this month. SkyEurope planned to attract more business travelers in Central and Eastern Europe by making Vienna its principle base. SkyEurope would increase it’s VIE fleet from two 737700s to four and add flights to 12 destinations while boosting frequencies on existing routes like Amsterdam and Sofia. It also would launch the first intra-Austrian service to be operated by an LCC, a twice-daily VIE-Innsbruck flight. SkyEurope also became the first airline in Europe to operate satellite navigation-guided precision approaches, when it engaged Seattle, Washington-based Naverus in October to prepare required navigation performance (RNP) approaches to airports in its network. This would ensure more efficient operations under any weather conditions, reducing flight times and fuel consumption but enhancing safety. On 5th October, shares of SkyEurope surged 9.76 pct to 2.25 euros, which was helped by the improved liquidity outlook through the sale of its two jets. In the following week SkyEurope shares jumped 8.89 pct to 2.45 euros on the news that the low-cost carrier has been upgraded to ‘hold’ from “sell” at UniCredit with a new target price reduced to 2.45 euros from 2.60 euros. Although the conversion of York Capital’s convertibles had improved SkyEurope Holding’s equity situation, the analyst of CAIB Research said that the company’s capital position continued to be tight. Commencing 28 October 2007, SkyEurope Airlines further expanded the London Luton Airport route network into Central Europe with 3 destinations in Slovakia and also flights to Prague in the Czech Republic. Challenges: 1. Would SkyEurope survive the winter credibly? 2. Will it show a positive EBIT in the last quarter? 3. How can it improve its overall load factor? 4. What is the game plan for progress once it survives this winter?

Low-cost airline SkyEurope launched new direct flights from Bulgaria to 11 European capitals and major cities

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BIRD’S EYE VIEW Business Model of SkyEurope SkyEurope, operating one of Europe’s fastest growing lowcost low-fare passenger airlines is focused on services to and from Central and Eastern Europe. They offer short-haul “point-to-point” scheduled services currently to around 35 destinations in approximately16 countries and operates on 95 routes. The Group’s operations are carried out through two segments: Scheduled flights and Charter flights. Its hubs are: M.R. Stefanik Airport (Bratislava); Ruzyne International Airport; Vienna International Airport. Some of its major destinations are: Amsterdam, Athens, Barcelona, Brussels, Dublin, London, Milan, Paris, Rome, Vienna etc. The Top Management team comprises of : Christian Mandl – Chairman and CEO of SkyEurope Holding AG; Jason Bitter – CEO of SkyEurope Airlines; Nick Manoudakis – Chief Financial Officer; Karim Makhlouf – Chief Commercial Officer; Klaus Niedl – Chief People Officer. Strategy: SkyEurope targets both leisure and business travelers, as well as travelers visiting friends and relatives (“VFRs”). Their network comprises routes that connect cities within Central Europe as well as between Central Europe and Western Europe. The network has been developed using a business model that first seeks to stimulate “point-to-point” local market demand for flights to other destinations already served by existing bases in our network which is referred to as “joining-the-dots” in the network. As this local market demand increases, additional destinations are introduced from a base to satisfy the increased demand. SkyEurope has three strategic priorities: increase frequencies on existing routes, join the dots within the existing SkyEurope network (reducing of marketing investments…), and open new destinations to satisfy the local needs of the respective bases. The choice of new destinations is based on destinations which are under-serviced, which are in the optimal range of two hours flight time (because of the rhythm of two or three rotations a day), and which may be served from more SkyEurope bases. SkyEurope management focuses on profitability and not just passenger volumes. Its flight schedules reflect seasonal changes in customer demand whereby flights are operated to attractive ski resorts in winter and increasingly to warmer destinations like France, Italy, Spain and Croatia. Features: SkyEurope unlike few of its counterparts believes in providing service with a smile. Operating the youngest fleet in the world consisting purely of Boeing 737-700NG with an average age of 8 months per aircraft, SkyEurope is the first lifestyle and business airline with an innovative and stylish product. Besides flying modern

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aircrafts with leather seats, to convenient major airports and having outstanding on time performance, SkyEurope has added some specials on board. The major features of its business model are presented below: 1. Online Booking: SkyEurope.com is a travel portal that offers a one stop shop as solution to all travel needs: car rental, hotels, hostels, travel insurance, access to airport lounges, downloadable city guides, audio travel guides, in winter ski equipment rentals etc. These services can be booked together with your flight on our website www2. SkyEurope.com. The purchase of airport lounge access, trip insurance, and seat assignments has been seamlessly inte¬grated into the booking process. The site also allows customers to arrange airport transfers, hotel accommodations, car rentals, and even ski rentals. Customers can add fee-based baggage services for pet kennels and sporting equipment. SkyEurope does not charge for regular pieces of checked baggage. 2. Pre-Assigned Seating: SkyEurope introduced seat selection on all its services. Passengers can book their seats when the reservation is made. Price for the new service will be E5 per pre-assigned and will be charged if selected together with the flight. Customers are presented a seat map that is color coded with 3 zones. Assigned seats in the first row are priced at 10 Euros, window and aisle seats are 5 Euros, and the dreaded middle seat is priced at 2 Euros. SkyEurope charges a 5 Euro fee per passenger for payments made by credit card. Infants under the age of 2 years (on the date of travel) are carried for £8 when not occupying a seat - that means they sit on an adult’s lap. A separate seat if needed for an infant, the passenger must purchase a ticket similar to that for a child. Children over the age of two years are charged the same fare as an adult. 3. Confirmation of ticket on the mobile: SkyEurope started the SMS booking confirmation service for the customer while booking a flight. It comes as an option during the ticket booking process with a charge of €1 plus VAT per booking. If chosen, all the relevant information will be (reservation number, flight details) sent directly to the customer’s mobile handset. Customers may also choose to receive confirmation via facsimile for an additional one Euro fee. SkyEurope is a ticket less airline so all one needs to fly is your passport for international flights, or photo identity card for domestic flights, your confirmation number, and a visa, if applicable. 4. Changes in reservations: Change of destination and time of departure can be made until up to 2 hours before the scheduled departure of the flight against payment of a fee specified on its website and payment of the difference between the original fare and the lowest possible fare available at the time of reservation change. This service can be availed only at its reservation center and is not available online. The change in name of the passenger can be made

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BIRD’S EYE VIEW until up to 2 hours before the scheduled departure against payment of a fee. The change of name is only possible if no part of the journey has been made. The change fee per passenger per flight is 25 euros. 5. Variable modes for ticket booking: The airline offers different modes for booking the ticket for its passengers. He or she can book the flight ticket online, through call centers or via a cash deposit system with some of the largest local retail banks as well as through travel agents. Its website is available in seven languages while it operates an eight-language call center in Bratislava with local access numbers in each country. 6. SkyCorporate: SkyEurope launched its SkyCorporate initiative in early Feb-07, offering a range of services aimed at encouraging business travelers to use the carrier, as well as extending the service options that the carrier offers to corporate customers. The program offers improved reservation options, including a new option via its website, through a business-to-business ID number and password, as well as through its existing phone reservation system. 7. SkyShuttle: The Vienna and Bratislava hubs of SkyEurope are supported by its SkyShuttle airport bus connection. The sale of bus tickets has been integrated into the reservation system as a code share operation. Passengers traveling to Vienna can choose direct flights to Vienna Schwechat Airport, or fly to Bratislava and connect to Vienna on a one-hour bus trip. Similar airport bus service is offered between Bratislava Airport and Vienna’s city center. The SkyShuttle is a key component in SkyEurope’s dual-hub strategy to tap into a regional population of 6 million people. 8. SkyDelights: SkyEurope differentiates itself by offering high quality products and services onboard. Buy-on-board services, branded as SkyDelights, include an extensive menu of hot and cold snacks, and a full selection of alcoholic and non-alcoholic beverages. The airline has introduced authentic Italian espresso and cappuccino drinks on all its flights. The espresso (3 Euros) and cappuccino (4 Euros) drinks are served individually in Illy branded porcelain cups, accompanied with a little chocolate square and a glass of water on a personal tray adding consumer allure and generating higher onboard sales activity. The SkyDelights menu also features “Fly to Win” scratch cards that are sold on international flights for 3 Euros. Prizes include credit vouchers for onboard purchases and SkyEurope tickets. The airline promotes a 1 in 5 chance of winning a prize.

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Sources of Ancillary Revenue: Ancillary revenue includes fees and charges (including credit card surcharges, excess baggage charges, seat assignment fees, sporting equipment charges, infant fees, change fees), profit share from in-flight sales (including food, beverages, and boutique items), cargo, and commissions received from products and services sold (such as hotel bookings, car rental bookings and travel insurance). SWOT Analysis SkyEurope claims to be the first lifestyle and business airline with an innovative and stylish product. In the words of their CCO “We guarantee lowest fares, the most innovative quality product and the most stylish way to fly at convenient airports.

Conclusion SkyEurope seems to have a long and harsh winter ahead of it. The major obstacles to its survival are its critical cash reserve position and the fragile share value levels. The major reasons for being in this situation are its initial over-rapid growth and its policy of using leased new aircraft over an extended period of time. Whether SkyEurope will come out of this winter with minor scratches or with fractures remains to be seen.

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BIRD’S EYE VIEW

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BIRD’S EYE VIEW

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BIRD’S EYE VIEW SkyEurope in Trouble – Can the Repositioning of its Business Save the Company? This spring major changes took place in the management of SkyEurope Airlines. When Christian Mandl, founder and CEO stepped down from his position, while co-founder and CFO Alain Skowronek also left the management to be replaced by Nick Manoudakis, former CFO of easyJet, it was a clear sign that sooner or later significant strategic changes of the company’s business model would follow. Even though both Mandl and Skowronek were assigned a new position as Mandl kept the leadership role at the Austrian branch of the company, while Skowronek have become an advisor, they are no longer involved in day to day operations and decision-making. Jason Bitter, the newly appointed CEO and Nick Manoudakis did not hesitate long to take far-reaching decisions. On 31 August, the first low-cost/low-fare airline of Central Europe announced in a press conference that at the end of October it would close its bases and entire operation in Krakow, Poland and Budapest, Hungary. Even though rumours had already been spreading about this in the market, SkyEurope consistently declined them until the end of the summer. The company explained to the press that the decision was motivated by the circumstances that became unfavourable in these markets as taxes were high while effective demand was substantially exposed to seasonality and overall, it kept decreasing. Indeed, SkyEurope was flying a total of 2.7 million passengers in the first 9 month of 2007, but the Hungarian market represented only 380 thousand of them. In other words, a rough 20 percent of the routes contributed to a mere 14 percent of the passenger turnover. This is indeed a bad performance, however, last year SkyEurope was able to achieve much better results (approximately 500 thousand passengers flown in the Hungarian market) on less routes offered from Budapest. Does the decline in passenger numbers simply reflect that unlike the other new EU members’ states, the Hungarian economy has been in a serious recession for years? Although the real GDP growth in Hungary this year is estimated to be just slightly over a sluggish 1 percent, which might translate into less demand for air transport, it does not explain why SkyEurope decided to abandon the fast-growing Polish market (5.5 percent growth estimated for 2007) where there are still a lot of potentials. The question is then, what did go wrong? The answer lies in SkyEurope’s cost base, which, compared to the major regional rival, Wizz Air, is highly unfavourable. According to estimates, Wizz Air’s cost per passenger is around €3.7 (only Ryanair is able to perform better with an average expense of €3.4 per passenger), while SkyEurope’s is approximately €5.5. This significant contrast is due to the differences in the business models: similarly to ea-

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syJet, SkyEurope tends to fly to main airports and until recently a large part of its destinations were Mediterranean holiday resorts, therefore the obvious consequence arose that demand was showing great fluctuation due to seasonality. SkyEurope has not been able to take advantage of the relatively constant demand posed by Central European migrant workers to Western European countries, whereas Wizz Air has successfully built its strategy on targeting this niche market. In addition, customers of the Central European region are more price sensitive than in Western Europe, and many of them might choose their holiday destinations based solely on ticket prices. Therefore, SkyEurope may have been losing out on this as well, as on average its prices have been higher than that of the major low cost rivals. The problem is that what easyJet has been able to achieve by taking advantage of economies of scale, SkyEurope has failed to do so with a similar business model due to a much smaller scale of operation in a very different market. One of the most urgent tasks of the new management therefore was to bring under control the cost explosion and improve overall performance by increasing productivity and cutting costs. The withdrawal from Hungary and Poland nearly halved the number of routes offered: while during the summer SkyEurope was flying to 39 destinations on 97 routes, the winter timetable contains only 30 destinations and 52 routes. This has resulted in an approximate cost reduction of 2 million Euros. A further 1.25 million Euros of annual savings is attributed to the move from Stansted to Luton as the company is using this airport since the end of October. Compared to 2006, Sky also decreased staff by a significant 13.3 %. As a consequence, the average staff per aircraft is down to 61 from last year’s 64, which has also translated to cost savings and a higher efficiency. The newly introduced measures by the management have delivered results also in terms of productivity. In the first half of 2007 load factor reached a relatively satisfactory 79.7 %, which further increased in the third quarter of 2007 to 80.7 %. Just to compare with, in the first half of 2006 SkyEurope’s load factor reached a mere 68.4 %, which would be a low performance even for a legacy carrier. Daily aircraft utilisation has also gradually increased from last year’s 8:08 hours to 11:25 hours in the third quarter of 2007. This has contributed significantly to the rise in productivity. All in all, the loss per share decreased from a shocking 0.83€ to 0.13€ but it seems that profitability is still a long way ahead. The new concept introduced by Jason Bitter and Nick Manoudakis is to concentrate on the Czech (Prague), Slovakian (Bratislava and Košice) and Austrian (Vienna)

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BIRD’S EYE VIEW market only and offer higher frequencies to fewer destinations. In other words, the company is trying to expand capacity on the most profitable routes to create a denser network. They also attempt to strengthen the Vienna hub by offering flight connections to passengers, which is rather unusual for a low cost carrier. However, the route portfolio is still lacking a clear focus as the routes from Prague and Vienna seem to lead to destinations in the entire continent and it is only Bratislava which is potentially more clearly targeted to business travellers and migrant workers from France and the UK. Nevertheless, Slovakia has the highest car production per capita in the world and the large production facilities of Volkswagen, Audi, Porsche, Peugeot, Citroen and KIA around Bratislava clearly pose a constant demand for air transport. Further good news for SkyEurope is that in mid-November a motorway will open between Bratislava and Vienna, thereby making the connection between the two bases of the airline faster and easier. Regarding the mid-term prospects, the increasing labour migration and the blossoming property market of Bratislava may translate into higher demands for air transport while the planned introduction of the euro in Slovakia by 2009 may also generate additional demand for flights especially by business people. However, the immediate and most threatening problem is the liquidity of the airline. The already planned entry to the Russian and the Ukrainian market requires a lot of cash as even the purchase of flight licences to these countries amounts to a great sum. In order to obtain cash, the company may have to consider selling an airplane or the Hungarian ground-handling unit. A further threat is that

passenger demand may not keep up with capacity expansion and seasonality will continue to characterise passenger turnover. One of the greatest potential threats to SkyEurope is an entry of a stronger player that is able to offer lower prices that SkyEurope would be unable to compete with in its current situation. Ryanair has introduced a scheduled flight from Bristol to Bratislava and already added destinations such as Stockholm, Barcelona and Dublin that are served from the Slovakian capital. If further expansion takes place in the Slovakian market, the already defensive position of SkyEurope might result in a complete withdrawal of operations. The new business strategy of the carrier does not allow for extending the route portfolio as it is aimed at increasing the market share on the existing routes and in the home market. However, a stronger position is only possible to achieve by further reduction of unit costs and a potential move towards Wizz Air’s business model. This is unlikely to happen in the short run especially since the fleet is being reduced, which does not enable the airline to take advantage of economies of scale. In case price competition increases in the market where SkyEurope is present, it is questionable whether the company will be able to incur more losses. It might be the unfortunate case that SkyEurope is in a stuck-in-the-middle position as it is not a genuine no-frills low cost/low fare carrier but at the same time its service levels are far from that of traditional carriers. Unless the company finds an appropriate market niche that can be sustained in the long run, it is doubtful whether it will survive the forthcoming years. Source of data: Financial Reports of SkyEurope

French Connect 2008

AIR SCOOP ANNOUNCEMENTS

April 9 to 11 in Courchevel

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

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DOWN TO EARTH

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BIRD’S EYE VIEW easyJet and Ryanair are Forced to Adapt to the French Labor Law easyJet will finally pay social charges in France on 100 of its 170 employees based at the Parisian Orly airport. The company made this decision at the end of February, after several months of juridical struggle with the French administration.

However, the French executive order is unlikely to change radically the plans of the two European low-cost leaders in France. Representing only 17% of the air traffic, compared to more than 30% in Europe, the LCC market is still underdeveloped in this country.

Until now, easyJet’s employees in France, benefiting from a British employment contract, were not submitted to the French social security contributions. But since November 2006, an executive order from the French government has forced foreign airlines whose employees (including the navigation crew) are based and live in France to pay those contributions. They also have to respect the French labor law, as regards for instance employee’s representation and unions.

The potential is huge, and easyJet and Ryanair cannot neglect it. In spite of the new juridical situation, easyJet plans to open six new routes from France in 2007, for example Paris-Athens, Lyon-Madrid and Lyon-Rome. The company expects 6 million passengers in France (5.4 millions in 2006), and even thinks about opening a new French base in Lyon. After settling down in Marseille, Ryanair also could open new bases in the next years.

With its important base in Orly, easyJet is particularly impacted by this new measure. And the firm has been quickly called to order by the authorities. In last December, French factory inspectors and officers from the National Health Service made a snap inspection at the airline’s Orly headquarter. They established that the company did not respect the new executive order, and charged it with « hidden labor ». easyJet tried to protest against the law, by asking the Council of State to suspend it. The airline claims for free competition, and argues that its Orly premises are just a restroom for the employees, whose true workplace is the planes. But the request was rejected. A final decision of the Council will occur in the following months. For now, easyJet decided to respect the French law and to pay charges for 100 out of its 170 Orly employees (the rest are members of the navigation crew living abroad). The other company really concerned by the French measure is Ryanair, which opened its new base in the southern city of Marseille, with 70 employees. The Irish airline reacted even stronger than EasyJet, seizing not only the Council of State, but also the European commission, and refusing to pay any social security charges until a final decision would be given by these institutions. French taxes on labor are said to be quite high, and the labor law more binding than in other countries. For EasyJet and Ryanair, employing their French staff with British or Irish employment contracts is a way to reduce their costs and to gain flexibility. And adapting to the French rules could mean, in the worst-case scenario, a small increase in fares for passengers. A very small one, indeed (about one or two Euros), but still too much for these LCC’s, especially for Ryanair’s very aggressive fare policy.

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According to the two LCCs, the French measure to force foreign airlines to adapt to its labor law is a new attempt from the state to protect national leader Air France from foreign low-cost challengers. Air France, which just launched its own LCC Transavia.com, is well-known for its juridical battles to keep LCCs away from the national market. In contrary, from the French state’s point of view, the airlines which do not pay their employees at French conditions are guilty of « social dumping ».

French TV Investigations about LCCs in Europe For French speakers, TF1 has released a documentary about Low-Cost Carriers in Europe. Journalists have investigated to understand how LCCs can offer such low prices. Ryanair “business model” is analyzed in details, especially concerning connections with airports that pay indirect “subsidies” through marketing subsidiaries of Ryanair. Low cost : l’avion pas cher, Droit de Savoir, TF1, November 30th 2007 http://videos.tf1.fr/video/emissions/droitdesavoir/0,,3604403,00-tf1-video-droit-savoir-low-cost-avion-pas-cher-.html

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BIRD’S EYE VIEW Coming Soon: Cheap Trans-Atlantic Flights? March next year the airspace between Europe and the USA will be liberalised in accordance with the Open Sky Programme. Any airline of any member-state of the EU will be able to get flight permission and operate flights to the USA. Perhaps, it will be then that the American airline market will be shattered by low-cost invaders from Europe. Ryanair CEO Michael O’Leary has recently told trade magazine Flight International about his plans to connect the Old World with the New World by launching new low-cost long haul airline affiliated with Ryanair. The service will have been set up by 2010 with flights operating from three main bases in London-Stansted, Dublin and Frankfurt-Hahn to New York, Florida, Dallas, San Francisco, San Diego and some other secondary American airports. The fare ranges from $12 to $280 and the airline will fly fleet of approximately 50 aircraft. Money is the least problematic thing for this project, believes O’Leary. Not only are there many sponsors who are willing to invest their money in the airline, but also there are plenty of ways of raising money on board. Passengers will be offered some additional facilities for extra money. Airline is planning to sell tickets for business-like-class. Selling food, duty-free goods and in flight entertainment programmes promises to be profitable as well. However, there are certain disadvantages in being transatlantic low-

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cost. Fast turnarounds that are peculiar to LCCs are not efficient on long-distance routes since the plane can only be used twice a day. Ryanair’s new airline is coming to incredibly tense market and will compete against serious network airlines, both in Europe and America. It would probably engender back reaction and foster American LCCs to open trans-Atlantic destination as well. History knows several attempts of budget carriers flying long-haul. Oasis HongKong airline flies from HongKong to London; Australian Virgin Blue plans to carry passengers from Sidney to the western coast of the USA in 2008. Canadian Zoom Airlines will open trans-Atlantic destination from London to New York JFK two years ahead of Ryanair. BMI is also rumored to set up USA flights. As far back as 1982 budget Laker Airways operating Skytrain flights between London and New York went bankrupt because of low income and insufficient passenger flow. Apparently, the project airline will have to fight for load factors as well. Michael O’Leary himself does not make any secret of his direct involvement in the project. He is planning to leave Ryanair in three of four years when the daughter company would be on its feet to live independently from the parent.

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DOWN TO EARTH LCCs: Friends or Foes to Malta? While some believe low-cost carriers are the saviors to Malta’s tourism, more believe it is a double-edged sword stabbing at the heart of the country’s economy. Germanwings landed at the Malta International Airport (MIA) as the third low-cost carrier serving the Malta route, following Ryanair, which flies to and from London Luton, Pisa and Dublin, and Italian carrier Meridiana, which operates between Malta and Bologna. In November 2006, the European Commission gave the green light to a scheme launched by the government last July subsidizing a number of new air routes to and from Malta. MIA chief executive officer Peter Bolech said in October last year that LCCs are expected to carry around 230,000 passengers to and from Malta in 2007. Ryanair alone is expected to carry 183,000 passengers on the Malta route. Such start-up aids granted to LCC aim to boost the number of new routes flying to MIA are under criticism that whether it worth risking the survival of Air Malta, which may lead to job slashes, to subsidize foreign LCCs to dominate Malta’s aviation. In an answer to a parliamentary question earlier this year Malta Minister for Tourism and Culture Francis Zammit Dimech said that seats aboard flights to Malta this year are expected to increase by 18%. He defended state initiatives to offer start-up aids to LCC on the ground that the access to Malta via air is considered to be fundamental to the tourist industry. According to the Economic Impact of Tourism in Malta published by Malta Tourism Authority in 2000, the tourism sector is an important generator of sustainable employment. It is estimated that around 20,000 full-time equivalent jobs are registered within sectors directly involved in tourism. Official figures released in February 2005 show that expenditure on package tours was estimated at Lm15.6 million, down 1.1% year-on-year. Thereby, a decrease in total expenditure on non-package travel was recorded over 2004; this amounted to approximately Lm1.4 million or 19.2%. The decline in visitors drive Malta tourism operators to push for incentives to attract LCC in the scrutiny that a UK tour operator was going to withdraw the island from their 2007 brochures, and a survey in the island’s biggest market showed that Malta would be more expensive for British tourists than the Canary and Balearic Islands for equivalent holidays. A July 2006 report by the Malta Hotels and Restaurants Association (MHRA), the industry arm that has been actively pushing for lucrative LCC po-

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licies, said 2,000 jobs stand to be lost in a scenario where nothing is done. It is under such circumstances that both Malta government and MIA roll out the red carpets to lure LCC. Nevertheless, Air Malta remains a major employer and some in the tourist sector feel upswing in new visitors would disturb Malta’s cultural and natural landscapes. The above MHRA report presented by Deloitte read the LCC traffic would generate Lm29 million more revenue annually, with a possible one to 1.5% growth for the economy and Lm3.6 million more towards the VAT coffers. The price is Lm4 million less in the public coffers from the abolition of the departure tax, a condition for Ryanair to start its operations from Malta. A confidential report dated 15 June 2006 requested by government and commissioned by Air Malta on the impact of LCC on Malta was leaked to Malta Today in which Air Malta claims that a 50 per cent increase in visitors in one year is a “high risk” strategy for a self-contained and small destination like Malta, with the advent of the “independently minded” low-cost traveler bringing new strains upon the Maltese infrastructure. According to the report, Air Malta stands to lose Lm23.6 million if Ryanair and easyJet achieve a traffic of 1,540,000 passengers. Among these high risk strains would be the need for hotels to organize more coach transfers for the arrival of 2 million passengers, and for government to increase public transport routes, and get tourist venues such as the Malta Experience, prehistoric temples and other museums to absorb higher volumes of travelers. Conflicting claims unsurprisingly characterize the two reports released by MHRA and Air Malta. When the Maltese wind seems to favor LCC, opposition led by Air Malta is unlikely to fly against it. As Minister Dimech opened stated last year, Malta needs to re-adopt to the new aviation reality of LCC. While trade group include GRTU urges the island not to miss a great opportunity to generate the stagnant economy and find suitable vacancies for the 11,000 registering for work, Malta should work on attracting more high net-worth tourists who may wish to invest in time share or even buy quality residential homes. Some say it is working already-- According to Tribune Properties, a UK based company who specialize in Malta property for sale, property inflation could be in double digits this year.

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DOWN TO EARTH French Airports Feel Uncomfortable With Ryanair Subsidies The French cities of Poitiers and Angouleme are just a hundred kilometers distant. Even though, both of them could soon have their Ryanair flight to London. The Poitiers-Stansted route has already been running for several years, and Angouleme-London is expected to be put into service in 2008. With many other cities of this area (Limoges, Bergerac, La Rochelle) also connected to Great Britain with Ryanair flights, the competition among airports is becoming very harsh in the south-west of France. Consequently, Ryanair can easily impose its rules to those small local airports, most of them being dependent on the Irish LCC, and ask them for important subsidies. They usually do not really have the choice to refuse. Recently, however, premises of a protest against Ryanair’s subsidies appeared in French airports. In June, according to the economic newspaper Les Echos, Ryanair convoked all its French airports to a meeting in Dublin, to ask them to increase their subsidies by 15% to 30%. Some of them rejected the demand. Poitiers, for example, refused to add 60 000 euros to the 500 000 it pays annually. In other cities - Carcassonne, Rodez - , audits by local authorities put into question the subsidies’ efficacy and relevancy. They sometimes describe quite confused situations, with Ryanair being suspected of not fulfilling all the commitments linked to the subsidies: in Rodez, for instance, an audit report wonders if the LCC really spends 350 000 euros per year to promote the city’s region abroad. Is it just a coincidence? In Poitiers and Rodez, two cities where the subsidies are put into question, Ryanair decided to suppress its 2007-2008 winter program. No plane will fly from those cities to London during this period. The official reason: those routes are not profitable enough. Indeed, without subsidies, a Ryanair route could hardly be profitable. Everywhere in Europe, those subsidies paid to the LCC by airports and local institutions to “help” the carrier operating its routes, in return of several conditions (promotion, amount of passengers…), are part of the LCCs business model. The reason why Ryanair recently asked French airports to pay more subsides could be to compensate for the rise of other costs – kerosene for example – and a certain slowdown of the British market.

issue. Not mentioning the fact that public subsidies have to be approved by the European Commission to be legal and not suspected to lead to unfair competition. On the basis of this argument, several subsidies from French airports were declared illegal, after other airlines instituted legal proceedings against Ryanair. In Strasbourg, following an Air France complaint, the several hundred thousand euros offered every year to the Irish airline were rejected by the French justice. The marketing counterparts the company proposed to promote the Strasbourg area were judged insignificant. In Pau, the 80 000 euros Ryanair was supposed to receive for the opening of a route to London - plus 11 € per passenger were also canceled. In both cases, the company finally renounced to operate flights from those cities. In 2005, a judgment passed by the European Commission concerning subsidies received by Ryanair from the Belgian airport of Charleroi, just a few kilometers from France, enabled the European Union to establish precise rules for subsidies to airlines. Those subsidies are now restricted to new routes or new frequencies. They also have to be limited to five years, and proportionate to the costs of the opening of the route. In addition, they cannot be proposed to a single airline. These rules give the subsidies a legal frame that was missing previously. Thus, the subsidies paid to Ryanair for the opening of a Toulon-London route in 2006 – 500 000 euros per year maximum – received an agreement from the European authorities. For small airports, however, the “blackmail” is still the same: legally or not, no subsidies means no planes. Airports which refuse to pay those subsidies risk having their Ryanair flights transferred to the closest rival platform, like Angouleme for Poitiers. Many of those financially fragile airports therefore want to attract other LCCs, in order to reduce their dependency to the Irish giant - in some airports, like Carcassonne, more than 99% of the passengers are Ryanair customers.

In France, where almost every small Ryanair airports is run by local authorities, and not by a private company, paying subsidies to an airline with public funds can sometimes lead to harsh debates and even become a political

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Air Scoop - November 2007

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DOWN TO EARTH

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Air Scoop - November 2007

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

Safety and Security Worries Remerge for European LCCs Some FlyBe cabin crew and pilots recently reported being sickened by fumes on the company’s BAE-146 aircraft. On ten flights over the past fifteen months, noxious air leaked from the engines into the cabin, causing at least one flight to be aborted. Some crewmembers are so furious that they are boycotting the aircraft. While these incidents involve an older aircraft type that is quickly being phased out of FlyBe’s fleet (FlyBe plans to remove all BAE-146 aircraft from its fleet by February 2008), the problems revive past questions about how much LCCs are doing to protect the safety and security of passengers.

the carrier has preexisting problems that led to the accident, then its reputation could suffer tremendously.

Critics charge that the LCC business model that aims to keep costs to a minimum has led to inadequate pilot and cabin crew training, more aircraft breakdowns, and increased pilot and cabin crew fatigue. All these factors have contributed to a number of close calls over recent years. For instance, in 2002, the Number 2 engine of Ryanair flight 296 caught fire upon landing at London Stansted. While the fire was put out, and the plane evacuated within 90 seconds, confusion and chaos during the evacuation prompted an investigation by air safety authorities. Ryanair was criticized for having inexperienced cabin crew, many of whom trained in Eastern Europe with questionable quality control.

The nuance that carriers need to remember is that the public will make assumptions about why the airline was involved in the accident. If an LCC is involved, often the first explanation will be that the root of the problem is excessive cost cutting, leading to maintenance and safety lapses. If a legacy carrier is involved, the likely explanation will be human or mechanical error. LCCs need to combat this misperception by communicating that maintenance is done in accordance with Part 145 and other EU maintenance regulations. LCCs have done a very good job of making safety and security their number one priority in the past ten years. But if LCCs start de-emphasizing safety for cost or business reasons, then the industry is at risk.

Overall, European LCCs have a very good safety record, but because LCCs want to cut costs, they are seen as more willing to sacrifice passenger safety for the bottom line. Already, public concern for the environment, anger over a swath of new baggage charges, and frustration over variable service standards has made the European public rethink LCCs. A single accident could significantly damage the reputation of an LCC and the entire sector.

Concerns about how an accident would affect a carrier’s reputation aren’t limited to LCCs. SAS has taken dramatic action after the third gear collapse on one of its Q400 aircraft in less than two months. After a landing incident with SAS flight 2867 on October 27, SAS decided to permanently ground their entire 24-aircraft Q400 fleet. SAS’s dramatic action, while potentially very costly, emphasizes to the public that they’re not taking any chances when it comes to safety. Even if the accident were the fault of the aircraft manufacturer, it is the airline that is seen as liable in the public’s eye.

If a major accident by an LCC occurs, it could lead to a tremendous amount of pressure from regulators and the public. The harshness of the reaction will likely depend on the severity of the accident, the carrier’s problems that led to the accident, and the response of the carrier to the accident. The carrier has to appear sympathetic and take responsibility for its mistakes. And if it is discovered that

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Air Scoop - November 2007

For example, in the year 2000, an MD-80 aircraft owned by US LCC Alaska Airlines crashed into the Pacific Ocean, killing all on board. In subsequent investigations, it was discovered that there were serious oversight lapses in Alaska’s maintenance operations. As a result, Alaska’s reputation for safety suffered, which will likely continue until Alaska removes the MD-80 type from its fleet, which it plans to do in 2008, eight years after the tragedy.

Q400 aircraft make up the bulk of FlyBe’s fleet and will comprise even more once their BAE-146 planes have been removed. With a low-cost business model that necessitates high aircraft utilization, would FlyBe be as willing as

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BIRD’S EYE VIEW SAS to ground its Q400s if it discovered a technical problem with the plane? Part of the problem LCCs have in making such a decision is that they typically only operate one or two aircraft types, whereas legacy carriers like SAS operate many. Q400s comprise almost half of FlyBe’s fleet; so such a grounding could be devastating to the company. Moreover, if a grounding occurred with 737- or A320-type aircraft, lowcost carriers around the world could suffer, and legacy carriers could use their advantage to take market share. However, other safety lapses, including pilot and crew fatigue could jeopardize a LCCs reputation. On Channel Four’s Dispatches program about Ryanair, one pilot stated that the airline flies him just under or exactly 100 hours a month, the EU maximum. Flying this way for many months straight left him exhausted. While Ryanair argues that rosters are manually set to minimize the risk of fatigue, it appears that in at least some cases, rosters are set to maximize the utility of pilots, which also maximizes the risk of fatigue. Moreover, cabin crews are not subject to such strict work limits, so they are at an even greater risk of fatigue. For example, one of the Dispatches undercover reporters discovered a cabin crew member asleep on the job, making it difficult for her to respond in an emergency.

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Fortunately for LCCs, if they are laxer in complying with these requirements, the effects of doing so aren’t as significant. Security incidents are rare and typically aren’t as dangerous as safety problems. Moreover, most security incidents don’t create the same levels of negative publicity for LCCs that accidents do. However, that doesn’t mean LCCs shouldn’t do more to improve security. It can be argued that LCCs face a greater risk than legacy carriers of a security threat, because they often operate from small, rural airports with laxer security. If a major publicized security incident occurs involving LCCs, it could threaten not only their reputations, but it could threaten the way LCCs do business as security would be ramped up in the resulting weeks and months. If airports or governments are unable or unwilling to pay for tighter security at airports with only a few commercial flights a day, then LCCs could be forced to move operations to other, larger facilities, adding additional costs from higher airport charges and a greater likelihood of delays. Even if LCCs don’t have to move operations, they could be inhibited from doing 25-minute turnarounds if they are forced to do stricter passport checks, leading to greater boarding delays and lower aircraft utilization.

But perhaps more pervasive throughout European LCCs have been security concerns. The Ryanair Dispatches program uncovered some serious lapses in Ryanair’s security practices and argued that these lapses were a result of cost cutting on the part of Ryanair, particularly its policy of 25-minute turnarounds.

LCCs have had a remarkable safety record over the past decade, with a very low rate of accidents. However, as the Dispatches expose demonstrates, many LCCs operate in ways that are not as safe as their legacy counterparts, and are running a significant risk of an accident. It is uncertain what the effects of a major accident would be on the European LCC sector, but suffice it to say that the failure of one LCC has the potential to damage the entire sector.

In one instance, one of the undercover reporters was chastised by supervisors for taking too long to board passengers, because she followed procedures and verified that the name of the passenger in the passport matched that on the ticket, and that the passenger’s face matched the passport photo. Her actions prevented Ryanair from making a 25-minute turnaround on that flight. Moreover, many Ryanair employees used temporary security passes without following the stipulation that they be accompanied by a permanent pass holder, a security flaw, that if exploited could let a dangerous person on the tarmac or on the aircraft.

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

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Air Scoop - November 2007

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