Air Scoop October 2006

Highlights in this Issue

Promotional Campaign into a Riot World Low Cost Airlines Congress ClickAir: A Low Cost Adventure Aer Lingus: From IPO to Takeover? Air Berlin’s Battlefield Plan with Consolidation

The Low Cost Carriers Analysis Newsletter

EDITORIAL

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onsolidation of the European low cost carriers market definitely hits the headlines this month. German and Irish markets (p. 9 & 11) are leading the trend, but soon other markets should follow. During the World Low Cost Airlines Congress 2006 (p. 4), many speakers mentioned their vision of consolidation. Debates also considered viability of mixed models (legacy and LCCs), like Clickair (p. 8). Sure similar questions would have certainly risen about Ryanair takeover bid for Aer Lingus. With this bid, Ryanair is looking for a critical mass in order to reduce its operating costs which are threatened by terrorism (p. 10). Another mean to reduce costs is outsourcing. Ryanair’s policy is quite interesting, as the Irish carrier is outsourcing towards its own passengers. For instance, to reduce cost of airport taxes, Ryanair is cutting on check-in desk charges. Charging for checked luggage is lucrative in many ways: the company gains extra money, saves time at the check-in desks and during boarding (fewer luggages to load means less time grounded). Passengers are asked to print their tickets and carry their luggage. In September, with the demo in Spain, Ryanair tried to use a mob of potential passengers for its communication. The deal is quite simple: “remunerate” potential passengers with free tickets in exchange for promotional campaign (p. 3). The concept is not defined yet as the stunt almost turned into a riot, but the idea will surely make good… Last concern is about cultural impact of LCCs industry on countries. For instance, ‘Islanders’ should soon add Malta to their destinations. However, many in the tourism industry fear a potential impact of a different type of tourist profiles for Malta which could become an obstacle for LCCs development. Evarist Bartolo, from Malta Labour Party declared: “The government needs to be more transparent about the composition of the selection board and the criteria used to evaluate the offers made by Ryanair and easyJet to operate four new routes to and from Malta. (…) The incentive scheme to operate these flights will be paid by the tax payers, and therefore it is essential that the decision is taken with the best interest of the nation in mind.” A similar case occurs in Estonia. Last April, we published a rumor in our category “In the Air” about a documentary on Estonian TV (ETV) which should be realized about consequences of low cost carriers (especially easyJet and Ryanair) on Estonian society. During this summer, Oskars Kastens, from Latvia First Party, launched a scathing attack on tourists from Liverpool branded “savages”. The politician fears that Latvian capital becomes a place of cheap beers and easy women with the arrival of young-party-male profile. Is the documentary not only a rumour after all?

Air Scoop - October 2006

p. 3 p. 4 p. 8 p. 9 p. 11

AIR SCOOP ANNOUNCEMENTS Air Scoop is proud to be an Official Media Partner of these LCCs events

Sky Full of Possibilities Bratislava, 26 May 2006

The Low Cost Air Transport Summit London, 12-13 June 2006

The World Low Cost Airlines Congress London, 11-13 September 2006

Air Scoop - OAG Partnership Air Scoop is proud to partner with OAG to continue the growth of its information gathering network. OAG will provide Air Scoop with the latest data on European LCCs. Thanks to OAG, we will be able to provide our readers with the most accurate analysis and trends of the market. OAG provides a suite of solutions for managing, distributing, displaying and analyzing passenger and cargo flight data.

http://www.oag.com/graphics/airscoop.htm

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DOWN TO EARTH Exclusive interview of Chris Mandl (CEO of Sky Europe)

Chris Mandl , CEO of Sky Europe

Air Scoop: Could you please present SkyEurope to our readers? What are your specificities compared to other European LCCs? What do you do better than your competitors? Christian Mandl: We operate one of Europe’s fastest growing low-cost lowfare passenger airlines, with a focus on services to and from Central and Eastern Europe. From our five bases in Bratislava, Budapest, Krakow, Prague and Warsaw, we offer short-haul ‘‘point-to-point’’ scheduled services to 37 cities in 19 European countries over a network of Italian illy espresso and cappuccino on 73 scheduled routes. The populations board, no weight limit for hand lugof the four countries in which our ba- gage, etc. Moreover, we keep opening ses are located, the Slovak Republic, new attractive destinations (recently Hungary, Poland and the Czech Repu- Turin, Grenoble). blic, collectively comprise more than 85 percent. of the total population of One of your strategic initiatives is the countries that acceded to the EU “Go East” which consists in devein May 2004, which we believe pro- loping East-East connections. How vides significant growth opportunities do you plan to manage such strategy for us. In addition, our largest base, with inherent difficulties due to this Bratislava, where we also maintain area (countries not yet in the Euroour operational headquarters, is loca- pean Union, lack of Internet and creted approximately 50 kilometres from dit card penetration…)? Vienna, thereby providing us with access to Austria, one of the most ma- Our « Go East » strategy is oriented ture air travel markets in Central and at developing markets in those counEastern Europe. We target both lei- tries that will soon join the European sure and business travellers, as well as Union. As the largest low cost airline in travellers visiting friends and relatives Central Europe we have a first mover (‘‘VFRs’’). Our network comprises rou- advantage in this region. Five years ago tes that connect cities within Central SkyEurope was founded in Slovakia, and Eastern Europe as well as between we then opened bases in Hungary and Central and Eastern Europe and Wes- Poland and recently expanded with a tern Europe. SkyEurope Airlines was new base in the Czech Republic. Theestablished in September 2001, and se markets have different characteriswe began flying passengers on a single tics than the Western European ones. domestic route in the Slovak Republic For example, the internet penetration in February 2002, becoming the first is lower, and customers usually do not LCC to commence operations in Cen- have credit cards, therefore we cootral and Eastern Europe. We currently perate with Travel agencies, offer the operate a fleet of 16 Boeing 737 aircraft option of call centre bookings and also and have ordered up to 32 brand new allow cash payments in local banks. Boeing 737-700 Next-Generation air- This local know-how and service difcraft to be delivered by 2010. Our stra- ferenciate us from Western European tegy is to fly to convenient airports, so LCCs. there is no need for extra transfer costs. Our added value is always to come up “Islanders” (Ryanair and easyJet) with innovative new services for our need to find new attractive destinaclients that make flying an even more tions to maintain their growth; Theenjoyable experience: reservation con- refore Central Europe represents an firmation via sms, assigned seating, real important market for these LCCs.

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Who are your most dangerous competitors: ‘Centralers’ (WizzAir, CentralWings, Estonian Airlines…) or ‘Islanders’: Now? In a near future? The level of competition among airlines is high. Airlines compete primarily on the basis of routes, fare levels, convenience of airports, timing and frequency of flights, reliability of service, brand recognition, passenger amenities and the availability and convenience of other passenger services. The principal LCCs with which we compete include Centralwings, easyJet, Niki, Ryanair, Smart Wings and Wizz Air. The main LCC competition within the Vienna-Bratislava catchment area comes from Ryanair and Niki, in Hungary we compete with Wizz Air, in Poland we face competition from Centralwings, easyJet, Ryanair and Wizz Air. At our youngest base Prague as the main competitor is Smart Wings. 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?... All airlines are affected by high fuel prices, as it takes some time to adapt fares to reflect higher fuel cost. However, low-cost airlines are less affected than traditional airlines, as thanks to their strong growth, they are able to at least partially offset higher fuel prices

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BIRD’S EYE VIEW by efficiency gains in other cost categories. Concerning potential overcapacity, this is still not the case in Central & Eastern Europe. On the contrary, many markets are still underserved by low-cost airlines. Usually, the secret of success is to find a strategic positioning with a new model in a new market and achieve from the beginning a significant market share as a result of the first mover advantage. Many LCCs look after extra-revenues to offset the low price of their tickets. What are the projects of SkyEurope in terms of Extra-revenues? We provide our customers with a complete offer of additional services that bring ancillary revenues. All of them bring added value at discounted prices to our passengers. SkyEurope.com is a travel portal that offers in a one stop shop a 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 www.skyeurope. com. Also, SkyEurope differentiates itself by offering high quality products onboard: Italian illy cafe, hot soups and pizzas, tasty sandwiches, etc. It is necessary to constantly develop the product offering to bring more choice and value added services to our customers. We introduced for instance the option to book against a small fee a pre-assigned seat in our booking process, and offer the possibility to get booking confirmation and flight information by sms message on your mobile telephone. 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? The consolidation process is a factor in maturing markets. We are well positioned as the leading LCC in Central and Eastern Europe with a pan-European brand recognised fro linking Western European markets with CEE and providing increasingly also East-East low fare connections. The future will see

Ryanair’s Promotional Campaign Turning into a Near Riot Ryanair’s marketing strategy is definitely aggressive. This aggressiveness is a whole part of the culture of the Irish carrier, and Michael O’Leary, its CEO, has always been the first one to show the way. Indeed, Mr O’Leary is well known throughout the world of airlines for his frankness and offensive declarations. Many times, Ryanair has conscientiously published advertisings to shock opinion, and few times it backfired on the airlines (Ryanair was fined last June in France and in Denmark for misleading advertising, Sweden’s Prime Minister sued the company last April…). This time Ryanair went one step further. The objective was to organize a promotional campaign in Barcelona against the Spanish national carrier, Iberia, and indirectly hit Clickair (Iberia’s LCC) which has just been launched. The principle was simple: potential passengers were told to gather at Plaza de Cataluña with placards criticizing Iberia or supporting Ryanair if they wanted to get free travel vouchers from them. This stunt, which has been conside-

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definitely the further development of a few large and globally oriented LCCs and smaller LCCs that serve purely niche markets. Are you worried about the shortage of pilots and crew hitting LCC market? We are proud of having an international crew that loves flying for SkyEurope. We pay adequate salaries, provide excellent career possibilities and a truly international, dynamic working environment. Our brand new fleet of Boeing 737-700 NG is an additional very important factor that are a good reason to fly for SkyEurope. What are the options for SkyEurope to transform its business model in order to make more costs savings? We are exchanging our fleet to more cost efficient planes 737NG that save on fuel consumption, maintenance costs etc, we are expanding to reach critical mass which again will reduce costs, and are increasing productivity by further increasing the utilization of our fleet.

red as a crowd manipulation and propaganda of old times by some communication experts, didn’t go off as planned. Indeed, Ryanair’s members had 500 vouchers to offer, but hundreds more people unexpected arrived at the meeting, and they quickly ran out of tickets. Ulled, Ryanair’s Spanish PR company, tried to appease the crowd with photocopies of tickets. But it appeared to be even worse as these tickets turned out to be unusable. Mrs Sinead Finn, Head of Sales and Marketing for Europe, who was in charge of the promotion, has been quickly surrounded by an impressive and furious mob there to get their free tickets. The situation was so tensed that Mrs Finn had to be protected and escorted by armed police to the nearest police station. Witnesses affirmed that the promotion would have turned into a riot if police weren’t there. Some of the angry participants rewrote their placards changing them to antiRyanair messages. A police source declared they were very surprised to find out that this entire situation was just generated by a campaign of Ryanair against a competitor. Consumer associations have opened an investigation after receiving about 150 complaints. Ryanair realised the difficulty to set up a «non spontaneous» and indirectly paid

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BIRD’S EYE VIEW

The World Low Cost Airlines Congress 2006 The latest edition of the World Low Cost Airlines Congress took place in London the 11th to 13th of September 2006 at Queen Elizabeth II Conference Centre. Air Scoop is very proud to be media partner of the most important European LCCs event. The Congress lasted three days divided in two phases: Workshops and Conferences. Themes of workshops were really close to current LCCS concerns: Best Practice Revenue Management, Airport Deal-Making, Low Cost Technology, In Flight Revenues, but also Impact of Terrorist Threat on Low Cost Carriers. During the two days conference, many interesting questions were raised by attendees. Among them… “Low cost carriers”: Marketing or cost differentiation?, LCCs: Cooperation or Coopetition (cooperation and competition)?, Part of ancillary revenues per passenger?, Consolidation of the European LCCs Market?, Shortage of Pilots and Maintenance Personnel?, Increase of capacities: Impact on price fares?... The first speaker of the Congress was Andrew Harrison (CEO of easyJet). Oil price has a deep impact on activity, so easyJet has decided to smooth edging policy with short-term predictability. But contrary to what Ryanair has declared about difficulties for this coming winter, easyJet is confident: there will be no change. Mr Harrison expressed his concerns about UK Government’ security measures in airports following Augusts’ terrorism threats. “Government needs to tailor police help to control airports. At easyJet, we engaged an intelligent and constructive discussion with the government. But for the moment, it’s not really encouraging. Current security checks are not sustainable”, he declared. Vincenc Marti, Chief Commercial Officer of Vueling, the Spanish LCC, talked about Vueling future and LCC competition in Spain. - What are your projects for the near future? “We will first celebrate our 5th million passenger this week. Then we will remain on continental and south market, but still exploring costs of new exploiting routes. We will also possibly open a 3rd base to face competition. It will be hard, but interesting. We have the spirit of competition!” Willem Hondius (Commercial Director of Transavia) answered the following questions: - What are your plans and strategy? “Transavia sells its tickets twice thanks to our model: once to the operator, and then directly.” Mr Hondius believes “there will be a consolidation and we will loose some carriers on the way, between 10 and 20. The configuration should be 2 or 3 bigger ones, around 10 smaller, and niche players like Transavia”. According to him, bases in Europe are an issue for further development: “There are not a lot of bases left in Europe.”

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BIRD’S EYE VIEW Maunu von Lueders (CEO of FlyNordic) (Read our Exclusive interview – Air Scoop July 2006) discussed about the crossed benefits between FlyNordic and Finnair: “We are a strategic tool for Finnair to penetrate new markets. We are complementary to Finnair, and we get a lot of benefits, especially respect, because we have a very good owner.” - What is FlyNordic recipe to survive? “We focus on the Scandinavian market as we cannot use our model to another place. We listen to business needs and expectations (Read below). If we satisfy these needs, we will win!” - What are your plans and strategy? “We have short flights, so it’s hard to sell products on board. But there’s a market outside the plane: we would sell onboard and then send the products directly to our customers’ home.”

Most important choice criteria by the decision-makers (Travel Managers, Finance ) and the travelers (employees).

Mike Rutter (Director of Flybe) believes in a strong consolidation within 5 to 7 years with stronger entities. “Ryanair will still be there, followed by “value carriers” driven by prices, and legacy carriers organized around their hubs”. - What are your plans and strategy? “Gambling, in-flight calls, charging for check-in at the airport desk. Ancillary revenues are at the core of LCCs model!”

Daniel Skjeldam (Director Network and Revenue of Norwegian) declared that “most of our traffic comes from business travelers, so we need frequencies to be competitive on those markets. For our leisure travelers, we first create traffic and as the volume increases, we add frequencies. We have to build the market to make routes sustainable, and sustain our growth.” - What is your Norwegian’ situation about pilots and maintenance personnel shortage? “This shortage will make it more difficult in the next years.” - Will the increase of capacities have an impact on price fares? “If you miscalculate your growth, you can affect your load factor and price average.” Bernard Berger (Director New Route Development of Ryanair) answered these following questions: - Will Ryanair change its business model because flights now last 3 hours? How far will Ryanair go? “Over the years, the average time has increased. For instance, a flight from Dublin to Malta lasts around 4 hours. Our objective is to maintain short time flights with some long time on specific routes, as we may fly from Germany to Cyprus.”

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BIRD’S EYE VIEW

Chris Mandl (CEO of SkyEurope) explained its strategy: “First modernize the fleet (fuel efficiency, leather seats, pre-booking on website, winglets…). Then, we are still looking after emerging markets, such as Russia and Ukraine. To back our growth, we have raised 56.3 million euros. Our aircrafts are tuned to flight for 2 hours. As long as we have 2 hours routes, we will try to focus on these routes.” - How strong is the competition between LCCs? “We are also in competition for money. The best company will also be the best funded one.” For further details, read our exclusive interview page 2. Jozsef Varadi (CEO of Wizz Air) described Wizz Air’s market in Central Europe: “Wizz Air has 36% of LCCs’ market in Poland, 27% in Hungary and 54% in Bulgaria.” - What are the key factors to success? “Unit cost, aircraft (A320 with narrow body aircraft), secondary airports, distribution through the Internet, latest technology, efficiency… Through the Internet, we sell tickets, but also additional services.” At last, but not least, Maciej Kwiatkowski (President of the board of CentralWings) expressed some concerns about the shortage of pilots: “We start to have a problem with pilots.” As always, Terrapin Team has been very efficient to prepare this incredible Congress. A lot of professionalism mixed with a relaxed atmosphere, like the paper plane contest on Tuesday evening. The World Low Cost Airlines Congress 2007 will held the 17 - 19 September 2007 at Queen Elizabeth II Conference Centre in London. Booking and information on Terrapinn’s website: http://www.terrapinn. com/2007/wlca/

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BIRD’S EYE VIEW ANALYST PORTHOLE LCC and Regional Airline Perspectives 3 questions to James Parker, Managing Director of Raymond James.

by James Parker (Managing Director of Raymond James)

- What is the winning formula? 1. Achieve the lowest unit costs in your market. 2. Build a strong balance sheet with a lot of cash. 3. Have the management discipline to spend whatever cash as necessary to repel competition intrusion. - What about the fuel issue? Fuel is now the single largest expense item for most airlines around the world at 38% to 40% of total costs. Airlines hedge future fuel purchases in order to achieve more stable predictable cash and earnings streams. The purpose of hedging fuel is not to achieve lower fuel costs. In order to hedge fuel, an airline must commit substantial cash collateral because a hedge is a contract for future delivery of fuel. - What about ancillaries’ revenue? Ancillaries are lucrative revenue and earnings producers. Most airlines only sell passengers a seat, thereby neglecting a lucrative incremental source of earnings. easyJet derives

only 9% of revenues from non-seat and cargo sales. Airlines have captive audiences on their aircraft and websites. They use their website as a distribution channel, but they could add a lot of new products soon. The leader is Ryanair which derives some 15% of revenue and 25% of profits from ancillary sales. The carrier uses Ryanair.com as distribution channel which is the largest travel website in Europe (15 million unique visitors per month). Thus Ryanair secures minimum guaranteed revenue and has a potential for increased conversion (Travel insurance, Car hire, Hotels…) but also a new product potential (Online advertising, Cell phone use revenue, Hostels, car parking, aircraft painting, Gambling, property, hotels…)

«Take Control of Booking a Cheap Airline Ticket», by Sam Sellers «Take Control of Booking a Cheap Airline Ticket» has been written to help passengers to find, as quickly as possible, low cost fares with Internet to book airline tickets. Thanks to this 152-page book, readers will be able to find advice for reserving a good seat and preparing for low-hassle travel, as well as information on using frequent flyer miles, credit cards that provide flight discounts, and recommended methods for tracking deals. Appendixes provide links to major airline home pages and flight-route maps, an explanation of the taxes applied to fares, and more. «Take Control of Booking a Cheap Airline Ticket» can be read onscreen or on paper. The onscreen version is a PDF file with hot links to the Web sites mentioned, making it easy for readers to quickly access recommended sites. Although Take Control’s onscreen book design has won over many who previously believed they would never read a book on a computer, a paper version is available for those who prefer to read a bound volume. Written by airline industry blogger Sam Sellers (http://www.airlinebulletin.com), «Take Control of Booking a Cheap Airline Ticket» joins more than 40 titles in the Take Control library, all written by long-standing technology experts. Book Details «Take Control of Booking a Cheap Airline Ticket» by Sam Sellers Ebook price: $10 / Printing cost: $13 (Readers must first purchase the eBook) More info: http://www.takecontrolbooks.com/airline-ticket.html

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BIRD’S EYE VIEW AIRWAY MARKERS

Clickair: Iberia’s Low Cost Adventure After the UK and Germany, Spain has become one of the main battlefields for European LCCs. Iberia, the Spanish national carrier, faces more competition on its own market from ‘Islanders’ and Spanish competitors. To respond to this competitive threat, Iberia decided to launch its own LCC based in Barcelona, under the brand name: Clickair. Clickair has just been launched in this very competitive Spanish market. It will begin operation from three Spanish cities: Barcelona, Seville and Valencia. The airline aims to serve 70 routes to 60 national and international destinations with a fleet of 30 aircrafts by 2008. The network will be primarily composed of point-to-point routes. The airline plans to employ 5 crew members per aircraft, which implies it will hire 300 pilots and 600 crew members by 2008. The company is equally controlled by Iberia, Cobra (which belongs to ACS, a Spanish construction and services group), Iberostar (a Spanish tourism group), Nefinsa (a holding company owned by the Serratosa family) and Quercus (a private equity firm). The setting up of Clickair reflects the long-term strategy of Iberia. The Spanish carrier has realized that LLCs competition was too hard on domestic and European routes, so it decided to focus on international routes, especially to very profitable South America destinations. Clickair will now face other LCCs’ hard competition in Spain: Air Berlin, Ryanair and easyJet carried 57.4% of low-cost service passengers last year with more or less 19% of the Spanish LCC market each. Vueling (Read Air Scoop June 2006) still occupies the sixth position and is the fastest growing LCC as the airline doubles its passenger numbers in just a year and its fleet should reach 25 aircrafts by 2007.

As Spain is easyJet’s second largest market, behind the UK, the airline has logically announced the opening of a base in Madrid in February 2007. Indeed, the carrier plans to take advantage of the big increase of capacity at Madrid’s Barajas airport, which has doubled the number of runways from two to four and has opened a new fourth terminal. Operating in Madrid’s Barajas airport since 1998, easyJet is already the fourth largest operator in this airport after Iberia, Spanair (SAS Group) and Air Europa. According to Andy Harrison, CEO of easyJet: “Spain has excellent opportunities for growth”. “30% of all flights in Spain are low cost, but we believe this figure is sure to rise far more because up to now, a good part of the offering has been tailored towards the tourist and the European passengers. The Madrid base expects to revolutionize this situation”, added Arnaldo Munoz, Head of Southern Europe Operations. This strong competition stimulates Clickair which is confident about its future: “With a start-up capital of 120m euros and a good business plan based on low costs, Clickair will overtake rival airlines easyJet, Ryanair and Vueling, and that it will become the leading airline at Barcelona-El Prat airport” declared Alex Cruz, Clickair’s Managing director.

http://www.clickair.com

UPS AND DOWNS Monarch Gets Bigger! Monarch Airlines has ordered six new Boeing 787-8 Dreamliners which will form the core of its future long-haul fleet. With purchase rights for another four aircrafts, the first Dreamliners will be delivered in 2010. This acquisition, worth 717 million Euros, is relevant with Monarch’s business model which includes both scheduled and charters flights. Moreover, Monarch is in line with the LCCs global trend which consists in buying aircrafts with longer-range capabilities with superior fuel efficiency to reach new destinations and to face high fuel prices.

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Air One: 22 Violations of EU Rules! Air One, an Italian LCC, has been fined 150 000 Euros for cancelling more than 80 flights in August, leaving 9000 passengers stranded across Italy. According to ENAC (Italian civil aviation agency), Air One has committed 22 violations of European Union rules governing compensation and assistance to passengers in case of flight cancellations or delays. Staff shortage at the LCC would be a reason why the airline is unable to cope with an increase of Italian traffic according to labor unions. The company blames a combination of late arrival of aircrafts, bad weather and technical problems. Air One will have to pay within two months, if not, the fine could reach a maximum of about 450 000 Euros.

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DOWN TO EARTH Aer Lingus: From IPO to Takeover? The 5th of October, Ryanair launched a shock bid for Aer Lingus listed just a few days before, and already bought 16% of the Irish company. According to analysts, this move would move Ryanair from a being a pure “no-frills” carrier investment to one with network carrier exposure. This attempt of acquisition is seen as the model for future consolidation in the airlines industry. Indeed, this strategy would link a rapidly growing point-to-point carrier with a long-haul national carrier. With this acquisition, Ryanair would then develop long-haul operations to the United States and other markets (Aer Lingus has 7 Airbus 380 on routes to the United States and Dubai). The idea of Michael O’Leary could be to develop a long-haul “Business Low-Cost Carrier”, like Eos or MaxJet. Contrary to what Ryanair has done in 2003 with Buzz, which has now disappeared, the two airlines would be run separately. Aer Lingus brand would be retained and management would stay on, although they would be assisted by Ryanair management. But an analyst from Citigroup declared: “It’s difficult to argue that the two companies under single ownership will be in true competition.” And “true competition” is these days the master word. Indeed, Ryanair faces many oppositions and hurdles to accomplish this takeover. First, the Irish Government, which still holds 28% of Aer Lingus, disapproves this acquisition. Irish Government is committed to competition in aviation markets and will not sell its shares in Aer Lingus. Ryanair declared there was no problem for the Irish Government to remain on as a significant minority shareholders as long as Ryanair has the majority ownership. Chris Avery, JP Morgan Analyst, considers the government’s opposition a major hurdle. Then, EU antitrust officials still need to approve the takeover. In fact, only EU regulators have the power to stop it. Robert Stallard, Bank of America analyst, suggested: “Although the audacity of Ryanair CEO Michael O’Leary has never been in doubt, we believe that this deal faces significant difficulties in obtaining regulatory approval.” For instance, in 2000, the EU stopped the takeover of Scania AB (Swedish truck maker) proposed by its rival AB Volvo because the combined group would have had a market share of around 90% in Sweden. The new entity, Ryanair-Aer Lingus, would get 78% of traffic between Ireland and Great Britain and create a virtual monopoly in Ireland (over 70% of Irish short-haul market). The two carriers have only 17 routes in common, which seems not sufficient enough to offer a real competi-

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tion between them as wished by Regulation Authorities. European Commission regulators usually ask for concessions to create more competition, by forcing merged airlines to surrender takeoff and landing slots. In this case, Ryanair would have to relinquish lucrative slots at Stansted, Dublin and Heathrow airports. Finally, Michael O’Leary has spent many years lambasting European antitrust and transport officials, the same whom will have to rule on his latest move. This aspect should not be forgotten. Unions and employees have voiced opposition to the takeover. Aer Lingus employees fear to be sacked if Ryanair’s takeover succeeds as part of a detailed rationalization plan. For instance, Ryanair would begin by outsourcing Aer Lingus’ entire catering department, which currently employs around 200 people. Employees, through the Employee Share Ownership Trust (ESOT) hold around 10% stake and have discussed various ways to finance an additional purchase of shares. “If the ESOT and other staff shareholders manage to increase their stake by a few percentage points and they form a loose alliance with one other substantial shareholder, the chances of Ryanair chief executive Michael O’Leary getting beyond the key figure of 50 per cent would seriously diminish” said a source advising the opponents of the Ryanair bid. Finally, even if the two companies are Irish, there would be cultural clashes as they are two completely different business models. On one hand, Ryanair is a no-frills carrier with an aggressive strategy, and on the other hand, Aer Lingus is a national carrier with still strong political links to the Irish government. Some analysts have expressed their doubts about such a merging between a LCC and a legacy carrier. The fleet is also another difficulty: Ryanair has Boeing aircrafts and Aer Lingus has an Airbus fleet. Ryanair is the latest European LCC to operate a single fleet, because of operating costs. Switching to a mixed fleet would definitely affect its business model. This surprise takeover bid over Aer Lingus doesn’t seem to have many chances to succeed, but if it does Ryanair would lead the way to further consolidation not only between Low cost carriers, but also between LCCs and legacy companies. This strategy will definitely change the face of the European LCC market.

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DOWN TO EARTH Shortage of Pilots: Vueling, the Seducing Appeal To face general shortage of pilots in Europe, LCCs have increased their attractive strategy toward crew members. Already in April 2006, Ryanair tried to recruit disappointed SAS crew members during an impressive meeting. Vueling also needs pilots. The Spanish LCCs have set up ‘Open days information’ to recruit new pilots to face its growth strategy. Indeed, with 16 Airbuses by the end of 2006, the fleet should reach 23 aircrafts in 2007. To attract new pilots, the company has released a specific advertising called: “7 reasons to join Vueling”. Competent pilots, like slots, are vital for LCCs future.

Terrorism Threats Ryanair‘s Reducing Costs Strategy Airport counter-terrorism measures implemented by British government in August irritate Ryanair. The Irish carrier threatened to sue the government for compensation. Ryanair has estimated to have lost more than 2 million £ from cancelled flights and lost bookings. Security measures taken by authorities are clearly negative to Ryanair’s reducing cost strategy. In fact, through a recent campaign, Ryanair has widely promoted a “carry-on-luggage” policy to reduce boarding time and check-in and ground handling crews’ costs. Moreover, passengers’ body searches, described as “non sense” by Mr O’Leary, take too much time which disrupt quick turnarounds of the aircrafts. More time on the ground means late flights and losses for the company. Despite clear terrorism threats in UK, Ryanair asked the Ministry of Transport to immediately restore “normal” standards of security measures. Otherwise, the airline will claim for compensation worth just over 3 million £.

LCC EVENT

The next French Connect will be held the 23rd-27th of April 2007 in Nantes La Baule. For further information, please check www.frenchconnect.net

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BIRD’S EYE VIEW Consolidation in Germany: Air Berlin’s Battle Plan German airline industry has entered a new phase of consolidation as the whole European sector goes through some difficult time (high fuel costs, terrorism threats…). As we predicted it in our June issue (Air Scoop June 2006), Air Berlin has acquired 100 percent of one of its main competitors: dba (third German LCC) for around 50 million Euros. The cost of the operation will entirely be financed out of income from the stock market flotation of Air Berlin (Air Scoop June 2006). Dba was acquired in 2003 by Hans-Rudolf Woehrl who initiated the consolidation process in February 2005 when the company bought Germania Express and took a major stake in LTU (Lufttransport Unternehmen GmbH). According to Joachim Hunold, CEO of Air Berlin, networks complement each other, as dba serves domestic routes in Germany, and Air Berlin connects the European market. «Acquiring our dream partner was an opportunity not to be missed» M. Hunold said. More synergies will be derived from yield management, joint purchasing and logistics. With the integration of dba, Air Berlin will clearly increase the number of business passengers. The new entity will also gain in flexibility thanks to the different types of aircrafts, and their carriage capacities. At last but not least, Air Berlin will benefit from precious slots of dba, especially at Düsseldorf and Munich airports. More than ever slots are a vital resource for LCCs’ development. However, dba will still be operated as an independent company, but will be re-branded as

Air Berlin. Air Berlin’s operation is on one hand ‘defensive’ (to protect itself against strong competitors: GermanWings and ‘Islanders’) and on the other hand ‘offensive’ (to dominate the profitable German market located between western and eastern destinations). The management will compare which has the best cost position and lowest production costs between Air Berlin and dba. Joachim Hunold announced there will be no change of the wage agreement between dba employees and their company. He declared: “If flight plans are optimized, then it may well be that we will reduce capacities. But then perhaps we will also have new flights.” TUI AG is now in difficult position and needs to make a strategic move. The first one will be to merge two of its companies: Hapagfly (charter) and Hapag-Lloyd Express (HLX). Then one “strategic option” could be to create a tie-up between this new entity and Condor, which belongs to Thomas Cook. But TUI is not the only one interested in Condor. With similar business models, LTU could acquire Condor to reduce both operating costs. But on the other hand, LTU could become a target for Air Berlin as their networks are complementary (Air Berlin-dba: short and middle hauls; LTU: long-hauls). Consolidation of the German LCCs market is not over yet. Few others should come as pressure is now on all competitors.

Market Shares of LCCs from, to and in the German Market Source : OAG

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Air Scoop - October 2006

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BIRD’S EYE VIEW Mapping of LCCs German Market Consolidation

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Air Scoop - October 2006

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BIRD’S EYE VIEW Inflight Mobile Telephony: Between Ancillary Revenues and Passenger Satisfaction Ryanair is in deal with OnAir, a communications company (a joint-venture with Airbus and SITA), to provide Europe-wide mobile telephones services during flights to all its passengers. From mid 2007, the system should be installed on the entire fleet, and Ryanair’s customers will be able to call, send SMS messages and check their emails using their mobile phones or smartphones. Ryanair is always looking for new sources of ancillary revenues and differentiate themselves from other carriers with the latest services and technology. The carrier will receive a commission from OnAir on call revenues generated by passengers. Ancillary’ sales already represent around 15% of Ryanair’s global revenues, but mobile telephony is just another step forward. Even if the company had to stop in-flight entertainment system experiment after disappointing level of take-up, Ryanair hopes to trial an onboard gambling solution in 2007 to generate more revenues from in-flight services.

A great majority of business travelers surveyed felt this service was a good idea, especially to access their email and to use their time more effectively during the flight. But not all passengers share this feeling. A few days after the Irish carrier announced its in-flight mobile plans, Monarch released a survey conducted in 2005 which said 67% of passengers claimed mobile phone during a flight would be the most “annoying in-flight experiences” for them. Some passengers do not want to be disturbed by loud in-flight conversations of others. Furthermore, another issue raised will be the cost. OnAir announced it will start next year with prices around $ 3.30 a minute in Europe. By implementing this service on its all fleet, Ryanair makes an important move towards business travelers to the detriment of leisure passengers less interested by such a service.

Monarch Survey in a nutshell Monarch passengers were asked to list the three things that would annoy them the most during a flight: With 78%, the person behind knocking your seat / With 69%, the person in front reclining their seat With 67%, mobile phone use during a flight / With 53%, sitting next to a smelly passenger

BLOGS TREND Ryanair’s Summer High Peaks Ryanair is definitely leading the blogosphere LCCs’ coverage. High peaks noticed during August are due to some specific events: First, Ryanair announced it will allow phone calls, text and emails from passengers own mobile phones or Blackberrys on board in 2007. The revenues generated by onboard mobile telephony will reduce the carrier’s costs according to management. Second peak (the highest): following the arrests of suspects in a plot to detonate bombs aboard trans-Atlantic flights, the UK Government decided to strengthen security measures against terrorist threats. These measures spurred Ryanair to sue the U.K. government for damages from flights cancellations. This radical attitude has not been well understood among bloggers whom widely commented this attitude.

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Air Scoop - October 2006

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