Air Scoop October 2007

SWOT Analysis of Vueling Airlines Expected Downturn on the LCC Market... The end of Vueling Airlines? What if Michael O’Leary Leaves Ryanair? Ryanair’s Profit Projection Motivations

Highlights in this Issue p. 6 p. 15 p. 16 p. 17 p. 22

The Low Cost Carriers Analysis Newsletter

EDITORIAL Half of Ryanair’s and easyJet’s Ancillary Revenues Hide Fare Increases

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hen booking a Ryanair flight, you often pay more for services, commissions, baggage fees etc. than for the ticket itself. This is called the « ancillary revenue » strategy: trying to earn as much money as possible with subsidiary services, in order to lower the mere ticket fare. In the past years, it has become European LCC’s obsession. Michael O’Leary, Ryanair’s CEO, even pretended his seats could one day be entirely free (except taxes), if ancillary revenues grow well enough! In the past five years, they do grow well: for Ryanair and easyJet, Europe’s leading LCCs, ancillary revenues doubled. They now represent 10% of easyJet’s revenues, and 16% of Ryanair’s, versus 5% and 7% five years ago. They are high margin, especially when based on a commission (car hire, hotel, insurance...) or on name or flight changes, and become more and more profitable. Ryanair’s margin rose from 45% to 71% in five years, and ancillary revenues now generate about 55% of the airline’s profit! But a recent ABN-AMRO study tends to shade these outstanding figures. First of all, it establishes that contrary to what is usually believed, Ryanair’s and easyJet’s ancillary revenues per seat are quite similar. Officially, Ryanair’s are 23% higher than its challenger’s; but actually, Ryanair reports its onboard sales on a gross basis, whereas easyJet and other LCCs do on a net basis. « This tends to flatter Ryanair’s ancillary performance », the study notices. Ryanair’s unit ancillary revenue finally appears to be only 5% higher than easyJet’s... But the most interesting conclusion of the study is to show that most of those revenues are not « genuine ancillary revenues », but only « hidden fare increases ». Genuine ancillary revenues are drawn from « offering the consumers a useful service or product related to their air travel »: sale of hotels, car hire, bus and rail tickets, travel insurance, onboard sales, flight and name change service, priority booking... Hidden fare increases are, in contrary, « new charges introduced for something which was previously free », or which is not useful for the passenger: credit card booking fees, infant fees, excess baggage, sporting goods charges... « We consider 60% of easyJet and 40% of Ryanair ancillaries to be hidden fare increases », the analysts write. They also show that since 2002, Ryanair’s hidden fare increases rose faster than genuine ancillaries (+26% yearly versus

Air Scoop - October 2007

+20%), and that more than half of easyJet’s ancillary revenue growth hides fare increases. They conclude: « We think the importance of ancillary revenues in supporting profits is overstated. » From the consumer’s point of view, this means Ryanair and easyJet increase their fares almost secretly. At the same time they pretend rising oil costs have no impact on their fares... This study allows us to put the LCCs outstanding economic growth in the past years into perspective. Their economic health is not only resulting from efficient business model and economic performance, but also from those kinds of accounting tricks. The companies’ ability to reduces fares seems not to be as important as they pretend, as an important part of this reduction is just transferred into the « ancillary revenues » category, where prices have often been climbing : one kilo excess baggage on a Ryanair fly costs 8 € today, versus 4 € in 2002! Part of the customers may have been tricked by this strategy, and would perhaps not even have flown with those companies if the « real » fare had been clearly displayed. The analysts warn: « Whilst the use of hidden fare increases has probably allowed management to draw more revenue from the strong market than it would have had if it purely applied fare increases, we think these hidden fare increases could cause yields to be more volatile in a down cycle. » The explanation: « As the market becomes tougher, we do not expect low cost carriers to lower charges for items such as credit cards, infants or excess baggage. Therefore the impact of the weaker market will fall entirely on the fare, making yields more volatile than they might otherwise be. » In the future, it would therefore be more secure to rely on « genuine » ancillaries, « rather than applying to the concept of unbundling to the point of nearly charging for in-flight use of the lavatories. » The third European LCC, Air Berlin, has no ancillary revenues strategy similar to Ryanair’s and easyJet’s. Its ancillaries have not grown between 2002 and 2007, and represent only 3% of total revenues, 27% from which are « hidden fare increases ». According to the study, the German company has « huge potential to develop its ancillary revenue performance. »

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BIRD’S EYE VIEW Interview of Chris Mandl (CEO of SkyEurope)

Chris Mandl (CEO of SkyEurope)

Your financial results are getting better as you reduced your deficit. How did you manage to reduce your defi- It was important to concentrate the fleet because we can cit? reduce our costs by having fewer bases. So we have decided to enter Vienna, and we are growing tremendously in We are benefiting from new aircrafts which allow us to Vienna, we have two aircrafts during the summer season, reduce operating costs. We have also significantly increased and we are going to grow to six aircrafts during the winter their utilization by flying many more hours per day. Also season. We have identified Austrian airline as a relatively our network becomes more mature and we have taken weak competitor and we can actually combine our Eastern some drastic measures. First, on the revenue side with a European cost structure and the Western European reveload factor active policy by being much more aggressive nue potential. Therefore, in order to take these opportuniby the way we promote the airline and by developing a ties, we simply had to take the aircrafts from somewhere much better yield management, and introducing better fo- else which doesn’t mean that we won’t go back to these recasting tools which enable us to predict in advance what markets one day. But at the moment, we really had to be will be the demand and what we have to stimulate. On rational and try to put the capacity where it could deliver the cost side, we are embarked on a quite aggressive cost the best margins. cutting program and we try to see how we can simplify the business, and really benefit from what we have, in order to Since September 2007, your fuel is not hedged. What become more efficient. could be the impact of it on your activity? SkyEurope’s EBIT is negative (-5.2m Euros), how do you plan to finance your growth in the future? We have had a capital increase in September 2006, and we have very large investors in the company. But at the moment, we are in lines with our budgets, and we will deliver an EBITDA positive this year for the first time. It shows that we are able to be profitable. How do you see the Central and Eastern market as you left Budapest and Krakow, especially with your competitor WizzAir?

We have done a pretty good fuel hedging for 2007. Indeed, during the summer 2006 the fuel prices were close to 80 dollars then it went down in November and December to 55 dollars. We hedged at a time when the spot price was at 55, and because you normally pay a premium when you make a long-term hedge, we hedged at 62.5 dollars per barrel. Our experience over the last two years showed us that fuel prices tend to be high during the summer because of speculation, and they tend to go down by the end of the year when hedge funds take their profits. So we still intend to hedge, probably close to the end of the calendar, and try to repeat basically what we have done last year.

QUOTE of the MONTH “We are currently cautious on Air Berlin. Whilst we like the long-term equity story, we think that the continuing delay to the consolidation of LTU will mean that the company misses out on LTU’s peak season profits and on the yield enhancement that could come from jointly managing the capacity of Air Berlin, dba an LTU. We therefore think Air Berlin will be unable to sustain its guidance of a 6% margin for FY06 and that a profit warning is highly likely.” Andrew Lobbenberg (ABN AMRO), Ancillary revenues or hidden fares?, July 2007, p. 35

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DOWN TO EARTH ‘‘IDEAWORKS AISLE’’ Buckle Your Seat Belts - Airline Executives Predict More Fees and Plan to Sell More Services via Their Web Sites 63% of airline executives in a worldwide survey say charging fees for services - - instead of including benefits in the price of a ticket - - will become more prevalent. Mae West, the abundantly buxom Hollywood philosopher, once warned a group of passengers to “Buckle up, gentleman, it’s going to be a bumpy night.” Today’s consumers might heed her words when contemplating the fees they might be asked to pay in the future for assigned seats, checked baggage, and paying by credit card. Most airlines currently don’t charge extra for these benefits. But survey results suggest airline executives will charge for these, and other services, in the future. While frequent travelers may consider extra fees a major annoyance, airline executives have another phrase in mind - - they call these fees ancillary revenue. For airlines, this new revenue stream provides welcome relief to fill the gap between rising fuel costs and falling fares. Consumers could benefit from the evolution of all-inclusive pricing, to a process that allows them to enjoy the lowest fare and to add services a la carte. How far has this practice spread among airlines? What new fees are airline executives planning for the future? To answer these questions, IdeaWorks surveyed airline executives all over the globe. The survey was distributed online and attracted participation by over 140 airline managers. The pie chart displays the global distribution of survey participants.

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

What is ancillary revenue? Unfortunately for the amusement of readers, Mae West didn’t offer a quote to define ancillary revenue. IdeaWorks defined the term in an earlier report: “Revenues beyond the sale of tickets that are generated by direct sales to passengers, or indirectly as a part of the travel experience.” 1 IdeaWorks further defines ancillary revenue using these categories: 1) a la carte features, 2) commission-based services, and 3) frequent flier activities. This report focuses on the a la carte category. Legacy airlines bundle many amenities into the price of an airline ticket. Low cost carriers, and especially those outside the United States, are already un-bundling the travel experience. Under this scenario, consumers purchase basic airline transportation and can choose to pay extra for services such as advance seat assignments, checked baggage and onboard snacks and drinks. This includes the a la carte features and benefits that passengers may purchase before or during their travel experience. Ancillary revenue activities also include the commissions earned by airlines on the sale of hotel accommodations, car rentals and travel insurance. The commission-based category primarily involves the airline’s web site, but it can include the sale of duty-free and consumer products on board aircraft. The frequent flier category is defined by the sale of miles or points to program partners such as hotel chains and car rental companies, co-branded credit cards, online malls, retailers, and communication services.

All regions of the world are represented with 80% of respondents outside the United States and Canada. The survey contained six questions on the topic of ancillary revenue; the response rate per survey item ranged from a high of 142 respondents, to a low of 55 respondents.

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DOWN TO EARTH Unbundling has become more prevalent IdeaWorks asked airline executives about industry trends regarding the unbundling and bundling of amenities. The survey results are shown in the table below.

Clearly the industry has embraced ancillary revenue as a pricing strategy. Even more dramatic is the zero level of response to “bundling is becoming more prevalent.” This combination suggests airlines are very focused on a need to boost revenue and cut costs. Product unbundling is a prerequisite for generating ancillary revenue from service fees. The strong trend toward unbundling demonstrates the growing prevalence of a la carte pricing. But the degree of participation varies from airline to airline. Graph 1 displays the results from the question, “How are features currently provided to your customers; is a fee charged, or is it included in the ticket price?” The survey results provide a picture of how airlines have adopted a la carte pricing and product unbundling.

and includes pre-assigned seats, early boarding, and boarding passes issued via the web site. Based upon their appearance at the bottom of the graph, some amenities appear to enjoy a type of “protected status.” Airline executives seem reluctant to charge for web site bookings, checked baggage, and pre-assigned seats. The number of airlines opting to charge fees for these activities is low and only ranges from 5 to 13%. Checked baggage provides an excellent example of an amenity that could easily convert to a la carte pricing. This amenity has clearly defined costs such as added fuel expense and airport staffing. Airlines already have procedures for collecting excess baggage fees. Airline executives seem to embrace the practice of charging customers for call center support. The 52% survey result reveals this amenity has the highest fee-based penetration of the survey. This practice offers the attractive alternative of encouraging travelers to book via the web site of the airline. But nearly half the respondents indicate their airline continues to provide the benefit without charge. Complimentary airline food, which long ago declined in popularity with travelers, has also declined in popularity with management. It’s the second most popular fee-based amenity among the survey respondents; 39% indicate their airlines sell meals and sandwiches on board aircraft. Prevailing wisdom suggests food quality has improved since the introduction of a la carte pricing. The choices offered on board must be enticing enough to encourage travelers to open their pocketbooks and to skip the temptation to buy food in the terminal prior to boarding. While charging for pre-assigned seating seems taboo, airlines are beginning to adopt a subtler alternative. Savvy travelers know certain seats on aircraft are better than others. Exit rows offer more legroom and the front rows provide a fast exit upon arrival. 29% of airline executives revealed their airlines now charge a fee for premium seat assignments.

Features that are candidates for unbundling fall into two categories: 1) expense based or 2) convenience oriented. Expense-based features incur a meaningful cash cost to the airline. Examples include onboard snacks and drinks, call center bookings, and checked baggage. Convenience-oriented features can be provided to passengers at little or no cash cost. By definition, this category is a bit more limited,

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Low cost carriers in Europe may have initiated the practice of assessing extra fees for payments made by credit cards. This reflects a desire to recover the expense of credit card merchant fees paid by the airlines. Of the airlines opting to charge, most waive the fee for payments made by debit cards.

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DOWN TO EARTH The desire to reduce merchant fee expenses has prompted some airlines to offer innovative payment alternatives such as PayPal and even allowing tickets to be charged to mobile phone accounts. Conclusion and observations The phrase “ancillary revenue” might be new, but the concept of a la carte pricing is well established in the airline industry. PeopleExpress Airlines, which ceased operations in the United States during the 1980s, was ridiculed for charging customers for amenities such as checked baggage and a cup of coffee. Travelers are well acquainted with excess baggage charges and virtually all airlines charge extra for alcoholic beverages. The sales generated from this activity were typically reflected on the income statement under the “passenger revenue” or “other revenue” categories. So what has changed beyond the words used to describe this activity? What appears to be unique about today’s competitive environment is the eagerness of virtually all airlines - - throughout the world and regardless of classification - - to seek ancillary revenues. Low cost carriers have clearly chosen to distinguish their product by offering rock-bottom fares and a la carte pricing. Traditionally, major airlines fought this competitive threat by hyping the value of the amenities included in the price of their tickets. Even Southwest Airlines mocks the practice of charging additional fees. Southwest’s recent advertising campaign suggests other airlines have installed coin slots for using tray tables or lowering window shades.

Southwest Airlines has admitted it might consider new a la carte pricing schemes in reaction to moves made by new entrant airlines. The trend is clear, but these conflicting messages do indicate the presence of some unsettled waters. But there seems to be another element that has supported the ancillary revenue movement - - consumer acceptance. Younger internet savvy consumers, who are unfamiliar with a bygone era of air travel luxuries, happily embrace low fares and the ability to create customized travel through a la carte pricing. The combination of economic need and consumer acceptance, when considered with the survey results described in this report, suggests ancillary revenue has moved from being a fancy phrase to becoming an industry practice. 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. Endnotes: 1. Europe’s Top 4 Low Cost Carriers Generated 470 Million Euros (US$593 Million) From Non-Ticket Sources in 2005, October 10, 2006, IdeaWorksCompany.com.

Established airlines face challenging economics that are chiefly controlled by spiraling fuel costs and plunging fares. This dynamic has forced them to consider a la carte pricing. Many have timidly experimented with ancillary revenue methods, while others, such as Air Canada, have fully embraced this new world of airline economics. Even

EVENTS Airports 2007 has been hold in Warsaw the 19-20th September 2007. This year’s edition of Airports 2007 Conference was dedicated to extension of airports and challenges that every airport should equal to with reference to EURO 2012 that was granted to Poland and Ukraine. We’ve invited representatives from Portuguese and German companies, that not long ago had an occasion to organize huge sport events like EURO 2004 and Mundial 2006. Our intention is also to invite representatives of Ukrainian ports so they can share with their plans of airport infrastructure extension. More information: http://www.actiaconferences.com/www/index.php?pid=_en

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BIRD’S EYE VIEW SWOT TEAM

SWOT Analysis of Vueling Airlines Introduction Spanish LCC Market: Spain is the second most-visited tourist destination in the world after France. In 2006 it received 59mn tourists. The main attraction for these visitors is the ‘sun & beach’ factor that characterizes Spain. This phenomenon has resulted in large number of flights arriving in the main coastal regions. The top five regions visited by tourists are: Catalonia, the Balearic Islands, the Canary Islands, Andalusia and Valencia (83% of the total). The main origins of visitors to Spain are: the UK, Germany, France, Italy and the Benelux (73% of total). In these countries, the use of low-cost airlines is much more extended, and Spain has become one of the main destinations of their flights. Now Spanish travelers are also increasingly visiting other countries, particularly in Europe. Most of these travelers are young because of which Spain has become one of the preferred markets for low-cost carriers to operate, resulting in around a 30% gain in their market share of international flights in just a few years. In the past five years, LCCs have enjoyed substantial growth (a 34% CAGR) in the number of passengers transported to Spain, continuously outstripping the growth rates of traditional airlines and charters (almost flat). LCCs’ market share rose from 7% in 2000 to 32% in 2006. Vueling airlines: It is a low-fare airline based in Barcelona, Spain founded in February 2004. It has operating bases in Barcelona, Madrid and Seville, from where it serves the main routes in southwest Europe. Its other major hubs are at Valencia Airport, and Paris-Charles de Gaulle International Airport. Its General Manager is Lázaro Ros; Carlos Muñoz is the CEO.

Current Trend: Shares of European airlines, in Euro terms, have soared 82 per cent in the past two years, propelled by resilient passenger demand and rising yields. There are signs, though, of clouds on the horizon. Demand for Ryanair and easyJet flights seems to have softened. Also in Spanish markets, after the summer of 2007, budget carrier Vueling has warned of major fall in yields the reasons for which will be analyzed in the later sections. Awards: Vueling was declared Passenger Airline of the Year by Amsterdam airport on March 25th, 2007, in a competition that saw Vueling succeed out of a list of more than 120 competing carriers operating at Schiphol airport. Vueling has been recognized by Amsterdam’s airport for its distinctive way of entrepreneurship. On April 27, 2006 Vueling was declared one of the most valued airline companies among European consumers by a recent study based on 8,600 surveys made among consumer organizations in Spain (OCU), France, Belgium, Holland, Italy, and Portugal. Among a total of 8,600 surveyed, Vueling ranked the best Spanish airline with a 7.16 rating. Also, out of the 110 airlines analyzed, Vueling came in 23rd position, way ahead of other Spanish airlines. In June 2005, more than 12 million travelers from 94 countries took part in the independent passenger survey conducted by the London consultancy firm Skytrax. In the European rankings Air Berlin was in the first place, followed by Vueling (Spain) and easyJet (UK). Points were awarded for check-in, boarding procedure, on-ground and on-board service, cleanliness, punctuality and condition of the aircraft. Overview of Vueling

Vueling offers low cost seats with quality service. It has three main USPs: direct online sales through its website, and to a lesser extent through its call centre and travel agents; new planes designed to save on fuel with efficient operating systems; and a flight crew that is permanently based in the city of departure. During its first year and a half, Vueling experienced magnificent growth; the number of employees rose from 90 to more than 570, the fleet increased from 2 to 14 airplanes and it flew more than 4 million passengers. Vueling Airlines targets cost-conscious business flyers. It first recorded a profit in December 2005, only 18 months after commencing operations.

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History: Carlos Munoz, who is an MBA from Harvard and Lazaro Ros decided on flying a low-fare carrier based at Barcelona’s El Prat Airport based on the fact that the low cost airline industry was growing fast and there happened to be a vacuum in Southwest Europe. The airline was incorporated in February 2004 with € 30 million in capital. The initial enthusiasm came from North America when JetBlue’s Barger invested 7%, which sparked interest in Europe. London-based capital venture fund Apax Partners took 40%, Inversiones Hemisferio, a subsidiary of Spain’s largest media and publishing conglomerate Grupo Planeta, had 30%, while Munoz, Ros and other members of the management team held 30%.

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BIRD’S EYE VIEW The LCC began selling tickets in May 2004 with a campaign offering flights at € 10 and sold more than 50,000 tickets in 15 days. The first commercial flight, from Barcelona to Ibiza, occurred on July 1st. The initial fleet comprised two new A320s operating 16 daily services on four routes including Brussels and Paris. One year later it operated six A320s on 20 daily routes. Between September 2005 and Christmas it added three more A320s with plans to have 16 by the end of 2006. In December 2005 Vueling signed a contract with Amadeus to list its flights in its Global distribution system. This agreement allowed traditional travel agencies to sell Vueling tickets. It benefited from Spain’s flag carrier Iberia pulling out of most non-stop markets from Barcelona in the face of low cost pressures from northern Europe. This, plus the success of the operation it started in Madrid – from where it served Paris, Brussels, Rome and Barcelona – helped it earn positive net income in the second half of 2005 on revenues of € 136 million, well ahead of plan. Growth: In 2006, Vueling flew to 41 destinations with 16 aircrafts in six countries (Spain, Portugal, France, Italy, Belgium and the Netherlands), averaging around 100 flights per day, always using primary airports. The revenue breakdown was around 50% from the domestic business and 50% from the medium-haul segment. It transported more than 3.5 million passengers, with a load factor of 70%. The company reached sales of €235 million, doubling its revenue, and its operating margin increased by 10 points in year of 2006, although the company maintained average ticket prices during the year. This increase was due to Vueling’s optimization in managing costs and from increases in additional revenue sources. Additional revenue (hotels, insurance, car rental, etc.) increased 268% with respect to figures reported for 2005. These figures reflected spectacular growth over the last year. EBITDAR (earnings before interest, tax, depreciation and fleet rental) was €28.01 million, and increase of 1,614% with respect to the €1.63 million reported in 2005. The company maintained a very solid cash position of €136 million after successfully completing an IPO on the Madrid Stock Markets in December, 2006. Vueling was listed on the Spanish market at an initial price of €30.00/share. The offering included raising an additional €100 million of new capital for the company to further finance its expansion plans, which included opening a third base out-

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side Spain and acquisition of up to 40 aircrafts. In early 2007, Vueling’s market capitalization ranged from €500 to €700 million. Vueling predicted continued strong growth in 2007 with plans to transport up to 6 million passengers and fly to 50 destinations. The airline also had plans to end the year with a fleet of 25 aircrafts. Revenues were forecast to rise to €425 million plus. With investor confidence, a compelling product, low costs and more aircraft on the way, the future appeared promising for this well-managed airline. In November 2006, Vueling had progressively increased its market share in Spain, reaching a 10% market share at El Prat Airport in Barcelona and a 2% share at Madrid-Barajas Airport, enabling it to reach the seventh position in the overall ranking of airlines and fourth among low-cost carriers. Vueling was only surpassed by the big three European LCCs: Ryanair, easyJet and Air Berlin. The only cloud on the horizon was the response of Iberia, one of Europe’s better-run flag carriers whose market share was affected by Vueling’s success. Competitive Scenario: Vueling’s home base is the BCN airport, where it started operations in July 2004. The capacity-constrained airport has seen a major expansion program, which would lift both its runway and terminal constraints. Aircraft movements are planned to rise from 58/hour in 2005 to 90/hour in 2008, a 55% increase, with more growth beyond that as further slots are released later in 2008. At the same time as the BCN infrastructure was changing, the competitive scene had altered markedly. Ryanair and easyJet: In mid 2003, Ryanair announced a 3-aircraft base at Gerona, some 45 minutes (90km) to the north of Barcelona. At BCN, first easyJet and then Vueling started flights, and subsequently Ryanair began flying to Reus, another secondary airport 103km to the south of Barcelona. When Vueling began its operations, Ryanair was already well established and easyJet had also started operating flights in Spain. The Vueling operation had not only survived this very competitive start-up environment, but, had also prospered. In Q2 2005, Vueling averaged 18% passenger market share on the routes where Ryanair was present (from Gerona) – a year later, that had increased to 23%, despite competing against Ryanair. On routes where easyJet was present, Vueling’s market share rose from 20% to 22% over the same period. By comparison, on routes where the only competition was a network airline (Iberia or Spanair), Vueling’s market share rose much faster, from 11% to 20%.

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BIRD’S EYE VIEW In November 2006, Ryanair opened a new base flying 14 routes to destinations outside Spain, mainly to secondary airports with a frequency of 70 flights per week. Ryanair was now putting four more aircraft into the Gerona base, taking it to seven planes. Moreover easyJet has opened a new base in Madrid in February and operated 15 routes with a frequency of 360 flights per week. Madrid is Vueling’s second base, contributing 23% of the total passengers transported in 2006. Iberia: The step-up in LCC activity in the Barcelona region caused significant problems for the incumbent network carrier, Iberia which after 9/11, had become a mainlinecost point-to-point carrier. Unfortunately, with little business class traffic, this exposed Iberia to the full force of the growing LCC incursion into north eastern Spain. After several rounds of cost reduction at BCN, Iberia decided that a more radical change in strategy was required, like downsizing Iberia’s mainline operation and substituting a partially-owned ‘in-house’ LCC in its place to challenge Vueling. Clickair: This LCC start-up of Iberia, started taking bookings on 7th September 2006, with its first flight in early October. At commencement, it had 3 leased A320s configured with 180 seats, with the business plan showing it at 5 planes by the end of 2006, and growing to over 20 by the end of 2007 and 30 by the end of 2008. Its early planes come from Iberia – its oldest A320-100s. Its initial routes were from its Barcelona base to Zurich, Geneva, Lisbon and Seville, and a non-base route Seville/Paris Orly. Subbases identified by Clickair for the future clearly include Seville and Valencia, and also Bilbao. The number of routes being served by the 30 planes at the end of 2008 is planned to be 70, to 55 Spanish and European cities. Clickair has no plans to operate at MAD, as this is Iberia’s connecting hub with a significant traffic proportion. During the last quarter of 2006, competition intensified in the Spanish airline markets. The Spanish low-cost sector expanded dramatically as airlines EasyJet and Ryanair ramped up operations in Spain and added routes. The number of available seats in Spain over the last year had jumped 75% while the number of passengers had grown only 32%. Clickair Chief Executive Alex Cruz was quoted as saying: «We are at a point of saturation in Spain that is unsustainable, and it is only going to get worse. Some Spanish carriers could be in trouble soon.” The Events of the Year 2007: In January, a decision was taken to plan for a non-Spanish

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base although they were already operating a number of flights to international airports. The options for a base city included Paris, Milan, Rome and Amsterdam. A decision was to be taken by the end of February 2007. The new base would involve major start-up costs. In February, Clickair launched new routes from its Barcelona base directly competing with Vueling. Paris(Charles de Gaulle) was announced as Vueling’s new base outside Spain which they would start operating from April. Requests were made for additional landing slots at Paris for end of March. It also announced the decision to construct its first hanger in Barcelona International airport the, which would start by end of 2007. In March three flight routes starting from its Paris base in April-May was announced. Later in the month 8 other routes were also announced. In April, Spanish media reported that Apax Partners, which owned 21 percent shares of Vueling was preparing to bid for Iberia which was up for sale. Later, the CEO, Carlos Munoz said in an interview with a Spanish newspaper that Vueling was not interested in buying Clickair in the event of it getting demerged from Iberia as a result of the sale. In May the Barcelona-based carrier reported first-quarter losses of €22m, more than double of last year’s loss of €9.7m due to rising fuel costs and expensive advertising. Flights commenced from the new Paris CDG base on 16th May. This could help Vueling to become less dependent on the Spanish domestic market. On 7th June Apax Partners placed their entire 21% shares in Vueling up for sale. The stock trade reacted sharply lower the next day on fears of weak demand for Apax Partners’ placement of its 20.97% stake in the carrier. Vueling was down EUR3.01 or 8.9% at EUR 30.81, off a low of EUR30.55 and a high of EUR31.75, on volume of about 339,000 shares. The IBEX35 index dropped 151.8 points to 15,280.1. It was expected that the final price would be EUR30.50/share. On 12th June Vueling announced Atalaya Inversiones had acquired 747,615 shares in the carrier, representing a 5% shareholding. During the same period, there was an incident in the air which unnerved the passengers on a Vueling flight from Lisbon to Madrid. They noticed that all but three of the 32 rows on one side of the plane were taped off. The captain addressed the situation on the plane’s intercom system by reportedly saying: «We will not be able to use that part of the plane because we have a safety problem with the door at the front. Don’t worry, it’s only a safety problem.» Some

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BIRD’S EYE VIEW passengers became nervous. A Vueling spokeswoman explained that one of the plane’s eight emergency exit slides was not working. Aviation rules permitted the plane to fly, she said, but forced the airline to restrict seating on the flight. On 22nd June, Vueling’s Board of Directors proposed the appointment of 4 new members to the Annual Shareholders’ meeting. The new members are Barbara Cassani, Jacques Bankir, Allen Custard and a representative from Atalaya Inversiones SRL, an investment vehicle owned by several Spanish savings banks, which recently acquired a 5% stake of the airline. They joined the Board in substitution of two Apax Partners board members, who had recently resigned after the full sale of their shares. In July, Vueling Airlines SA announced that it was opening its third domestic base in Seville, adding to those in Barcelona and Madrid. The new international destinations from Seville would be Venice, Lisbon, Amsterdam, Brussels and Milan, while the new domestic destination would be Bilbao. On August 3rd, Vueling Airlines SA reported earnings results for the first half ended June 2007. The company reported that EBITDAR - earnings before income tax, depreciation, amortization and rental of non-fleet assets - had swung to a loss of EUR 7.76 million from a EUR 7.38 million profit a year earlier. EBITDAR figure was hit by lower tariffs amid increasing competition, which was only partially offset by increased occupancy levels. Vueling said it had to slash ticket prices by 23% in the second quarter compared to the same period last year in order to compete. Total revenues climbed 57.3% to EUR 149.69 million from EUR 95.14 million a year earlier, while the net losses widened to EUR 33.72 million from EUR 6.52 million. Vueling has now predicted that it will end 2007 with turnover of between €370m and €387m, well below the €400m to €425m, it has forecast in November last year. The company announced that it had revised the ‘optimum level’ of incorporating new airplanes over the next 18 months. It will take on 24 at end-2007, compared with an initial target of 25 and 27-31 in 2008, compared with 37 for the same period. Also during this period it was reported that US carrier Jet Blue had cut its stake in Vueling Airlines SA by around half to 1.9 pct. The operation actually took place on July 27, before Vueling’s Aug 3 release of dire second quarter to June results and full-year profit-warning. Vueling’s share price slumped around 30% as investors took flight. In Madrid during the last week of August, shares in Vueling again came under pressure, with shares in the Spanish

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low-cost airline falling 4.29 per cent to €12.05, the largest fall on the Madrid stock exchange for the session. Vueling’s share price stood 59% below the price at which it made its share market debut on December 1 (€30) and 74 per cent below its all-time high of €46, recorded in February. Morgon Stanley valued Vueling at €10 per share. In September Vueling share value fell 0.33 or 2.73 pct to 11.74, after the resignation of its chairman and two board members over «managerial differences». All three were representatives of Grupo Planeta, which holds around 15.9 pct of the airline. Planeta is rumored to be involved in a bid for Iberia with Apax Partners. If any bid for Iberia was successful, Planeta could be forced to sell its Vueling stake on competition grounds, analysts said. Vueling Airlines SA announces that it would be looking to cut costs by reducing its management down to 18 from 35 and freezing plans to buy 40 new airplanes. The group’s new growth strategy will be to focus more on increasing profits and its mainstream businesses in Madrid and Seville while continuing to maintain headquarter operations in Barcelona. Four directors of Spanish low-cost airline Vueling have bought 0.19 per cent of the company’s shares in recent days. The shares are worth €386,200 at current prices. The largest investment was made by CEO Carlos Munoz, who increased his stake from 5.52 to 5.66 per cent. The others are: Managing director Lazaro Ros, Barbara Cassani and Jacques Bankir, the two independent directors appointed in July. The members of the board currently control 30.6 per cent of the company between them. On 25th September, Barbara Cassani was named new chairwoman. Cassani said Vueling should work on increasing tariffs, which are very low. She said tariffs must reach a level that allows us to make money, noting that with current prices, there is not enough money to cover the cost of the flight. This week, Vueling soared 0.52 or 4.09 pct to 13.22, after Goldman Sachs upgraded the stock to ‘neutral’ from ‘sell’, albeit with a target price cut to €12 from €20. Passenger Load Factor: In absolute terms, Vueling keeps the upward trend initiated last January, with August being the month with the best passenger traffic levels so far during the year. During the month of August, 777,566 passengers flew with the company, (a load factor of 90.3%) which represents an 82.9% increment in relation to August 2006. This represents the highest monthly figure in the history of the company, since its inception. During H1 2007, load factor reached 69.6%, 2.5 points over the 67.1% obtained during the same period of 2006. A total of 3,989,310 passengers have been carried by Vueling during the first 8 months of 2007, 81.9% more than in the same period of 2006. After August results, the aggregated load factor for the first 8 months of 2007 goes up to 76.2%, with

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BIRD’S EYE VIEW a gap of 3.6 points as compared to the same period last year (72.6%). Business Model of Vueling Vueling Airlines was created with the objective of joining major European capitals and the western Mediterranean. It is a Spanish LCC, based out of Barcelona. Their operating model is short-haul and medium-haul. Vueling’s international destinations include: Brussels; Paris-Charles De Gaulle(a base); Milan, Rome and Venice in Italy; Amsterdam of Holland; Lisbon of Portugal. Its domestic destinations are: Alicante (ALC), Barcelona (BCN), Bilbao (BIO), Granada (GRX), Ibiza(IBZ), Madrid (MAD), Malaga (AGP), Menorca (MAH), Palma de Mallorca (PMI), Santiago De Compostela (SCQ), Seville (SVQ), Valencia (VLC). The main features of Vueling’s business model are: � It flies only to primary airports, offering more frequency at rush hours. Vueling aims to attract the average passenger among youths, the self-employed and small business owners. Like easyJet, Vueling also flies to/from primary airports, like Charles de Gaulle in Paris, Fiumicino in Rome, Malpensa in Milano, which are more convenient for passengers and generate higher fares than secondary airports that are a long way from the relevant city. � It has a high level of fleet utilization. Despite having one of its two bases in Madrid, where turnaround times tend to be higher than at other airports, Vueling has managed to reach utilization rates of close to 11 hours/day, which is in the middle of the range between Ryanair and easyJet. Aircraft turn times are not quite as fast as the Ryanair/ easyJet 25 minute model because allocated seating takes a little longer to board, but Vueling’s aircraft utilization (a key part of keeping costs down) is still above 10 flying hours per day. � It offers competitive fares that lies between Ryanair’s and easyJet’s fares. Its average fare was €55/passenger (including the €9.95 booking fee, which Vueling treats as ancillary revenues), compared with Ryanair’s €41/passenger and easyJet’s €60/passenger. Again like easyJet, Vueling’s fares start low and rise as date of travel approaches, but are broadly targeted to be half the competing network airline’s fares. Vueling offers on-line seat selection at the time of booking, and on-line check-in. It also gives flexibility on ticket changes with a flat change fee of €30 per alteration plus the difference in fare. In September 2006, it moved to the fully-inclusive pricing basis on its website (i.e. including all taxes and charges). The Vueling booking charge of €9.95 per segment is therefore already part of the gross pri-

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cing that the passenger sees on the web – it does not come as a surprise addition later in the booking process and is therefore not a disincentive for passengers comparing prices between airlines. � It generates high ancillary revenues. Non-ticket revenues are becoming a key growth driver for LCCs in general, and for Vueling in particular. Vueling’s average of €19/ passenger is substantially above its peers’, even excluding the booking fee of €9.95. The main drivers are: €30 booking change fee, excess luggage charges, food, insurance, car rental, credit card-linked to the new FFP, as well as the on-board products. With a relatively high proportion of business travellers who change itineraries more readily than leisure passengers change fees will be a major source of ancillary income. Vueling’s travel insurance is offered, opt-in, at €14 per passenger round-trip. Vueling also includes an emission fee of €10/ticket in its gross fare. Although the carrier charges for snacks and beverages, it offers complimentary newspapers and magazines and free online seat selection. In total, ancillary represents an estimated 20% of revenue. � It has no alliances or connecting traffic and flies on nonsaturated routes. Like its main competitors, Vueling does not belong to any international alliances and has no codesharing with other airlines. So it has to keep its independence when deciding what routes to fly. It is focused on southwestern European destinations as its core markets. This strategy seems to avoid saturated markets such as Germany and the UK, where LCCs already control over a 30% market share and even more on connections with Spain. Vueling’s main markets have low LCC penetration rates: 5% in the domestic market, 10% on routes to Portugal and France and 16% to the Netherlands. The only route that shows signs of saturation is Italy (30%). In this respect, Vueling tries to target routes where it only competes with flag carriers). The largest market of these is Spain/France, and Vueling already flies from five Spanish cities to Paris and has Paris as its new international base. Vueling’s tickets are single-class, non-refundable. Choice of seat is made at the point of purchase itself and there is no overbooking of tickets. Although all Vueling tickets are non-refundable, one can change the ticket at a flat change fees plus the total differences in the fares at the time of changing the ticket. Vueling tickets are sold as one-way tickets. around 95% of Vueling’s seats are booked on its website, only just below Ryanair and easyJet. Of Vueling’s 95% on-line bookings, around one third are generated from links to its website (e.g. Google and Zanox), most of which it pays for as on-line advertising. Vueling does have limited participation in the airline GDS booking engines,

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BIRD’S EYE VIEW but only to display its inventory. Travel agents are thus being used in order to broaden the catchment’s net of the relatively young brand, but there are no commissions paid to the agents, who therefore charge passengers a fee for making the booking for them on the Vueling website. Travel agents account for some 5% of bookings today. Vueling also has a limited call centre facility. They don’t advertise as a low-cost airline but as the «New Generation» airline. Vueling operates new leased A320 airplanes, configured with the maximum 180 seats. The A320 is generally regarded as the most comfortable airplane for domestic flights. They have the typical 3 seats - aisle - 3 seats configuration found in the 737, made of leather seats but without much leg-room. On-board entertainment including free press and magazines, and videos for entertainment, featuring the cities they fly to and made by their cabin crew. Vueling also brings its planes back to base every night. Customers of Vueling are 60% leisure and 40% business. Its primary airport bases are in Spain’s top two business locations, which forms a very attractive source for business travelers. The BCN base has a prevalence of smaller and medium-sized companies around it. On its European routes, some 40% of passengers this year come from the nonSpanish end of the route. The customer profile is male or female, between 30-50 years of age, middle/middle-upper class, urban and an Internet user. They are mainly liberal professionals or work for SMEs so are careful about costs when they fly both for professional and personal reasons. Frequent Flier Program-‘Punto’: Flying with Punto: The number of air points you need to fly free really depends on how early you reserve your airfare. The earlier you do it, the more your points will be worth and therefore, the fewer points you’ll need. Punto air points have no flight restrictions. They only depend on seat availability on the flight you choose. Your airfare will be free, with a Punto membership. But you’ll have to pay the fees and taxes. Apart from earning points, if you flew with Vueling more than 25 times over the year and you buy a ticket on points, you will get a ticket free for a friend.

Accumulating points: There are two ways of accumulating air points: 1. When you reserve and purchase a ticket, you get 1 air point for every €2 on the tariff you pay. 2. When you buy gift vouchers, you will get 1 point for every €2 you purchase. SWOT Analysis Vueling’s philosophy: ‘High Quality at the Best Price’. Vueling’s aim & philosophy in their own words: Our aim was to create an airline with which flying became a genuine pleasure, with which paying less was not equivalent to lowering standards in terms of service or comfort and which was open, sincere and user-friendly. So if we tell you there are extremely cheap flights up for grabs then we wish to do so because it is the truth. We wanted an airline with kindly staff who placed no barriers between themselves and the customer, we wanted to operate with new aircraft, to fly to major airports and to neither delay flights nor overbook them. It’s as simple as that. We at Vueling are not arrogant but would like to think of ourselves as Southern Europe’s most dynamic, most innovative airline and work like no other to substantiate these claims. We have bases in Madrid, Barcelona, Seville and Paris and fly to the biggest cities in Spain and Western Europe. Our approach to and vision of air travel is fresh and alternative, which may be the reason we are deemed one of the new generation’s airlines, an airline with which clearly mismatched concepts, such as cheap flights and safe travel in style, come together perfectly. When it all began we were the highest funded airline in Europe with an initial investment which hit €30,000,000 and gave us the impetus required to make an impact from the start.

For a national flight you’ll need a minimum of: One-way: 450 air points Return: 900 air points For an international flight: One-way: 650 points Return: 1,300 points

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BIRD’S EYE VIEW The SWOT:

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BIRD’S EYE VIEW

Conclusion The management of Vueling needs to retrospect on the past months of 2007 and ask itself these questions: 1. Where did it go wrong? What could have been done differently to improve its H1-2007 performance?

4. Are the recently announced change-tactics sufficient for its survival?

2. What were the warning signs?

5. Is there a need for a major shift in management policy and strategy?

3. What strengths can it use to swim across safely?

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DOWN TO EARTH

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BIRD’S EYE VIEW Expected Downturn on the LCC Market, the End of a Model? In May and June 2007, both Ryanair and easyJet, European biggest LCCs, suffered from a harsh decline in their shares. Ryanair lost more than 12% within two months, and its British challenger almost 25%. European number three, Air Berlin, also lost about 25%. The companies’ financial results are not that bad yet. At the beginning of June, Ryanair reported a net income of € 451 million in 2006, 33% more than the previous year. The number of passengers increased seriously to 42.5 million, the revenue too. EasyJet too was successful in 2006, with a € 192 million all-time profit and increasing revenues per seat. Air Berlin also obtained in 2006 its best results ever. The growth perspectives are optimistic. Ryanair expects a new passenger increase in 2007, ordered 27 planes in May and plans to open 50 new routes in the coming year. EasyJet promises investors to increase its profit by 40% this year. They both plan to double their size within five years. But this optimism is just apparent. After two years of hefty growth, the European LCC market is loosing faith and gets ready to go through hard times. Not only investors and analysts, but the companies themselves are concerned. In May, EasyJet warned about « weaker market conditions » and expressed concerns about its summer activity. In June, Michael O’Leary, Ryanair’s CEO, predicted a difficult winter for LCCs. He corrected the company’s expected profit growth for 2007 down to 5%, the slowest rate in four years. He warned about decreasing yields in 2007-2008, combined with rising costs. « We expect a big downturn in the next 12 months », he said. Ryanair and EasyJet both had to launch important fare campaigns to sell their summer seats. Ryanair sold in June more than 3 million £10 seats. It was the third sale in two months, costing the company € 30 to € 65 million. EasyJet also reduced fares and launched promotions for this summer, in order to « sustain high load factors in weaker market conditions », CEO Andy Harrisson explained. Those unusual summer sales show that big LCCs do not succeed in filling up their planes, even during traditionally very dynamic periods. They are getting nervous about their stagnating or decreasing load factors (83% in April 2007 Vs 85% one year before for Ryanair, 83% vs 86% for EasyJet). High load factors are one of the keys of the LCC business model. Some companies even close unprofitable routes, like FlyBe in Bristol. There are several reasons for this downturn. First, the air transport market is cyclical, and after two years of growth and rising yields, it is likely to slow down. As the fares have grown too high, the demand is softening. Secondly, all European LCCs tried at the same time to grow fast and

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big, opening new routes and buying new planes. Now, the most popular and profitable routes are overcrowded and the transport capacity is huge, if not in overcapacity. What is more, costs are rising - Michael O’Leary complained about the UK tax increase on air transport and higher charges at airports, not mentioning oil prices – and consumers may be less euphoric than before. Environmental concerns, especially, are increasing. Ryanair admitted that environmental campaigns against LCCs do affect sales. Ecology has become a new commercial argument: FlyBe now informs passengers about their flight’s environmental impact. The very profitable Ryanair tries to resist soft market conditions by combining temporary harsh fare reductions and continual expansion. EasyJet seems to be more cautious, and focuses on important West European routes. But what about smaller LCCs? Many of them are weakened by their quick and strained development. Vueling just launched its initial public offering at the end of 2006, and its load factor fell slightly in April and May 2007. SkyEurope, the leading East European LCC, still fails to become profitable because of its expensive expansion policy. FlyBe, which just took over BA Connect, a regional British Airways airline, fell into the red in 2006, in spite of its expanding network. Norwegian lost money too, mainly because of its new routes to Poland and fuel costs. Its load factor on international flights decreased. There are not so many growth possibilities left for LCCs. They can either bear a temporary cost and price war to gain market shares, or develop their offers, by consolidating their existing network, finding new secondary airports to win new customers, or exploring more distant destinations in the South, the East or the North. Ryanair, Air Berlin, Norwegian, Sterling all develop routes to Scandinavia this year. SkyEurope eyes on Russia, Ukraine and Turkey. The next challenge will be long-haul destinations. Unfortunately, distant destinations are also the less profitable. The low-cost boom is probably over. The market will enter a phase of maturation and consolidation. According to a Cranfield University forecast, « the low-cost airlines sector in 2015 will be dominated by 2 or 3 large carriers estimated up to 80 million passengers with circa. 250 aircrafts, plus a number of smaller players ». Two models may increasingly distinguish: the Ryanair one, reducing fares, flying to secondary airports, relying on leisure customers and big ancillary revenues. And the EasyJet / Air Berlin one, « mid-fare » companies flying to main airports, challenging big carriers and gathering leisure and business customers. Let’s see if they can live together.

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BIRD’S EYE VIEW The end of Vueling Airlines? Will 2007 be the last operating year of Vueling? This summer has been tough for the Spanish carrier. Vueling’ shares have lost more than 50% this year, and 30% in one day on August 3rd as the carrier reported a net loss of €33.7 million in the first six months of 2007, widened from a deficit of €6.5 million in the year-ago period. Vueling declared sales would only rise to between 370 and 387 million Euros this year, down from the 427 million Euros it forecasts last November, before its initial public offering. And finally, Vueling will reduce its plans to buy new aircrafts with a fleet of 24 planes this year (instead of 25) and plans 27 to 31 next year (instead of 37). «The results are disappointing and the market has been much more competitive than we expected», declared Carlos Munoz, CEO of Vueling. There are few reasons for such a slowdown for this carrier. Vueling has faced unexpected high pressure of competitors, firstly with Clickair which launch its base in Barcelona like Vueling. This competition had a direct impact on ticket prices of domestic market. The carrier had to slash ticket prices by 23% in the second quarter compared to the same period last year in order to compete. The leaders of LCCs in Europe are investing a lot into the Spanish market. After Madrid and Gerona, Ryanair should open two new bases in Alicante and Valencia, and is currently negotiating with six other airports. These openings should lead to 22 new routes. The carrier aims to be the second airline, behind Iberia, in Spain in 4 or 5 years. Usually, Ryanair and easyJet usually avoid direct compe-

tition on routes. It won’t be the case in Spain, as Ryanair will start flights from Liverpool to Madrid in October. EasyJet currently flies daily on the same route. Competition in Spain will definitely increase these coming months. Alex Cruz, CEO of Clickair, recently noticed that the number of available seats in Spain over the last year has jumped 75% while the number of passengers has grown only 32%. «We are at a point of saturation in Spain that is unsustainable, and it is only going to get worse. Some Spanish carriers could be in trouble soon», said Alex Cruz, CEO of Clickair Tudor BVI Global Portfolio, an investment fund based in the Cayman Islands, has reduced its stake in Vueling from 3.99 per cent to 2.18 per cent through the sale of 1.81 per cent of share capital. The sale followed the news that the airline was revising downwards its full-year forecasts.

AIR SCOOP ANNOUNCEMENTS 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.

French Connect 2008 - Courchevel Next year, French Connect will take place from 9th to 11th April 2008 in Courchevel. Keep checking www.FrenchConnect.net for updates on the new programme format. To have more informations about last edition of French Connect in La Baule, read the full coverage in Air Scoop May 2007.

Visit the website to view the agenda and register: www.aircraft-conferences.com/index_lowcost.htm

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DOWN TO EARTH What if Michael O’Leary Leaves Ryanair? If this statement is false, than it is just a brilliant example of O’Leary’s key to success. Right message at the right time. Being successful means not only gaining far much profit than your rivals do, but also being unpredictable to your fellow competitors so that to keep them in tension and cause uncertainty. That is just the way O’Leary communicates: pointblank and discouraging. The message first appeared in the press in late 2005 and was probably produced to distract attention from Ryanair’s business. Ever since then O’Leary has repeatedly announced his intention to leave the company, remaining indecisive about the exact year: some time in between 2008 and 2010. The statement has brought about confusion amongst other carriers which have suffered from Ryanair’s aggressive expansion, environmentalists who have struggled in vain over making the carrier more green, airports and investors. As for confusion amongst investors, this might have a negative impact on Ryanair’s shares because investors like stability and they can justly worry about Ryanair’s future without O’Leary. If this statement is true, then he leaves, indeed. The idea that he has simply got tired of all that airline business he has been into for more than 15 years sounds shaky. But who knows?! The other thing would be to expect him to formally stay in the carrier as a non-executive person of consequence and investments. However, O’Leary himself refuted this completely saying, according to the media, that he does not want to pull strings in the background. The third more plausible explanation would be that he is actually intending something, perhaps, a new airline. O’Leary has spoken on several occasions about launching LCC that would operate long-distance flights between Europe and the States. It is no wonder than that he plans his leave in 2008, the year when the regulation on the liberation of EU – USA airspace should come into force. It is O’Leary’s achievement that Ryanair evolved into the leading European LCC. He is, reportedly, planning to double the number of passengers in the next five years which will make the carrier as big as now alliance KLMAir France is. It is obvious he wants to leave the company when it is done so that the successor would only have to lead the already stable business that is hard to “spoil” and no one would have worries about the carrier.

Michael Cawley, deputy executive, has been working with Ryanair since 1997, first as Chief Finnancial Officer and Commercial Director, and having then moved upstairs to Chief Operating Officer in January 2003. Before having joined Ryanair team he had been into another transportation business, namely had worked for the biggest Irish distributor of Peugeot and Citroen, Gowan Group Ltd., as Group Finance Director. He is seen is the candidate number one who does not seem to yield to O’Leary in charisma. And he is one of the few who has his public profile. Howard Miller, deputy executive, who has been initially working as Finance Director and then serving as Chief Financial Officer having too been appointed in January 2003. Bernard Berger has been serving for Ryanair starting from 1989 and is responsible for development strategies, yield and scheduling. He is the one who negotiates with airports and governmental bodies when it comes to Ryanair expansion. Berger negotiated Ryanair’s presence in 101 airports for 257 routes. Jim Callaghan is the Head of Regulatory Affairs and the Company Secretary. He primarily deals with legal and regulatory issues negotiating with respective bodies and authorities. His area of specialization is European and competition Law which he had practices in Brussels at Linklatres & Alliance. Sean Coyle, Head of Route Planning and Development, has been keeping in the background but, nevertheless, is referred to as promising and bright and is well spoken of amongst his colleagues. However, it is not necessary that the board will appoint someone from the office. It might as well consider a candidate from other carriers’ executives, most probably Irish Aer Lingus.

The board should decide on whom to succeed O’Leary. It is hard to believe that there are some other executives in the company besides O’Leary since he has been the one and only who would act on behalf of Ryanair. Anyway, there are plenty of potential successors.

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DOWN TO EARTH World Low Cost Airlines 2007 The Low Cost Air Transport Summit 17th - 20th September 2007, QEII Conference Center

EVENTS

In 2007 the World Low Cost Airlines Congress & Budgie Awards became THE world’s Low Cost Airlines convention and awards ceremony. Total attendance was over 700. From this over 264 senior executives from over 132 airlines from every major market in the world attended. Over 40 companies participated as exhibitors and sponsors. Additionally, the Congress and Awards was covered by all the major newswires, including Bloomberg, Reuters, International Herald Tribune… Particularly noteworthy this year was the high representation from CEOs and very senior airline management. Many of these executives arranged a number of meetings with each other around the event, confirming the reputation of this as not just an industry forum, but also a place where real business gets done. The Awards Dinner elevated the event to a new dimension. It was an absolutely superb evening, where the best and brightest of the industry were recognized by their peers in a night packed with fun, food and great entertainment. Karen Hewett, Marketing Director, Terrapinn Ltd

Andy Harrison, CEO of easyJet easyJet was the only LCC to hold a press conference during the WLCA Congress 2007. Its CEO, Andy Harrison, “pledge for an intelligent action”. With the document “Towards greener skies”, easyJet wants to educate and inform the consumers. “If the policy makers don’t take the decisions, the consumers will be enough informed to take it.” The main answer of easyJet to its aircrafts’ emissions is the Eco-Jet (Read Air Scoop July 2007) which should be in the air by 2015-2020. “Our business model is to use the most efficient aircrafts, so we will replace our older aircrafts, about 107, by the Eco-Jet”, Andy Harrison declared. The other great battle of easyJet is the APD (air passenger duty) which is “terrible” because it excludes many flights, whereas it should be based on the type of aircrafts and on the distance made by them, and should include cargo and private jets. easyJet didn’t federate other airlines to subscribe to this policy; the audience is now policy makers and consumers. The Environment Debate: “Are LCCs being unfairly persecuted by environmental associations?”

Greenhouse-gas emissions in 2000, by source

Andy Harrison and John Hanlon, representing easyJet and ELFAA, the LCCs lobby association, were facing Dr Steve Howard (CEO of The Climate Group) and Paul Dickinson (CEO of Carbon Disclosure Project) in a debate about environmental issues and the impact of LCCs on environment. Andy Harrison recognized that global warming was a clear and present danger, and then explained the axis of development for easyJet (Eco-Jet, a new ADP and education of consumers. Read above). Paul Dickinson deplored that a lot of rubbish have been mixed up together which blur the actions to protect environment from being “destroyed everyday”. He added that climate change is a serious problem even if airplane is a great invention.

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Source: Prepared by Stern Review, from data drawn from World Resources Institute Climate. Analysis Indicators Tool (CAIT) on-line database version 3.0.

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DOWN TO EARTH “If the goal is to make more and more people to fly, it won’t just work. It is just not possible”, he finally declared. Dr Steve Howard added that 2 degrees is the absolute above limit we shouldn’t exceed. If we reduce the emissions by 10%, there will be a real impact over all emissions. Therefore, the question he asked: “How can we really change the LCC industry business model?”.

Question from the audience: “Are environmental groups happy with what has been achieved by the LCC industry?” Dr Steve Howard: “It depends on the carrier. (…) Ryanair strategy is particularly counter-productive.” Andy Harrison: “easyJet would be happy to join a green alliance”.

Thomas Winkelmann (CEO of GermanWings) “Marketing of LCCs in Europe should change. If all your advertisings say LCCs are for free, then you provoke a reaction from the media and politicians about environmental issues. Therefore, LCCs need to give the full and entire price.”

Bertolt Martin Flick (CEO of AirBaltic) “AirBaltic is definitely a low cost airline: we have a one way fare, but a business class and we connect. AirBaltic is therefore a new kind of model. We are looking after niche markets, such as Russia or Latvia which has a strong point to point demand.”

The Budgies World Low Cost Airline Awards Over 400 people gathered in London for the Budgie Low Cost Airline Awards. The Budgie Awards were been created to recognize the leaders, innovators, creative talents, and pioneers in the global Low Cost Airlines industry. Its mission is to identify and reward those individuals, teams and airlines who have demonstrated an unparalleled ability to succeed. Judges of the Awards were: • John Strickland, CEO, JLS Consulting • Jay Sorensen, CEO, IdeaWorks • Ian Harbinson, Editor, Low Cost Airlines Business • Peter Harbinson, Executive Director, Centre for Asia Pacific Aviation • Andew Herdman, Director General, AAPA Best Newcomer Winner: Clickair

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Air Scoop - October 2007

Lifetime Achievement Award for Services to the Low Cost Airline Industry Winner: Michael O’Leary, CEO, Ryanair

Best Low Cost Airline Winner: Ryanair

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DOWN TO EARTH Interview of Alex Cruz (CEO of clickair)

Alex Cruz (CEO of clickair)

How do you currently analyze the Spanish market of low-cost carriers? What is the position of clickair in this market? Whilst 2006 worked as the confirmation of the relevance of LCCs in the Spanish market, 2007 has seen a huge investment by all players, particularly Ryanair, Air Berlin, and new entrant, clickair. 2007’s over capacity in the Spanish market and its results have forced all players to revisit their cost structure. Looking at the cost structure and other cost drivers of the different LCCs operating in Spain, it is clear that some have done their homework and others haven’t. As you recently noticed, seat capacities in Spain are 59% while demand is only 44%, how does clickair plan to grow in this “overcapacity” market? Our business plan has anticipated several waves of increased competitive intensity and we are prepared to deal with it from a planning perspective. Having said that, we believe that our product (frequencies, network, service) is slowly becoming market leader in the routes we fly. Nowhere else in Europe is able to offer low fares through traditional distribution channels; no airline in the world has been able to skip the check-in process as we do with the Click&Fly product; the list goes on and it will not stop. We plan to continue to using innovation as a tool to increase our competitiveness. But most of all, we have a low cost operating structure; indeed, we are the lowest operating cost airline flying to main airports in Europe, and second to Ryanair overall. This is our main “hidden” weapon.

ly. Ultimately, there is a core difference between us: we have more than strict financial investors as shareholders, we have industrial partners. The deep expertise that our team brings to clickair, coupled with the regional market experience of our industrial shareholders creates a very powerful combination. Some analysts believe that clickair strategy and pressure on Madrid and Barcelona has accelerated Vueling’s fall. What is your point of view? We are unable to comment on this point at this time. What is the strategy of clickair to face Islanders’ invasion of Spain (Ryanair and easyJet)? easyJet and Ryanair have two fundamental differences: one is a higher cost operating carrier flying to main airports with a poor product and the other is a very low cost operator, such as ourselves, flying to secondary airports with not much concern for product. clickair is readying itself to withstand their pressure, financially and commercially – our high percentage of business passengers choose main airports, assigned seats, and major alliance frequent flier points every time. We plan to continue expanding these services without compromising our cost base.

How do you analyze Vueling’s current situation which has a net loss of €33.7m on the first semester? Could such situation happen to clickair ? We do not like making comments about our competitors. We can say, however, that there are a number of fundamental choices which we can see Vueling has had to make over the last two years. Faced with similar challenges, clickair has already made different decisions and is likely to deal with some of the same issues different-

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Air Scoop - October 2007

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

Ryanair’s Profit Projection Motivations Many analysts were concerned on June 5 when Ryanair, citing higher fuel costs and airport charges, projected sharply lower coming-year profit growth. Although Ryanair projected profit growth of a mere 5%, its recent results have far exceeded that figure, which poses the question: Why were Ryanair’s projections so far off, and were they deliberately off to give Ryanair a strategic advantage in the marketplace? While we will never know for sure, Ryanair has exploited its projection to further its lobbying, public relations, price-cutting, expansion, and value creation efforts. This has particularly hurt medium-size LCC competitors, including Jet2, Vueling, and SkyEurope, in the process. Ryanair’s lowered projections created a more positive environment for the company’s lobbying efforts. Ryanair has traditionally engaged in fights against regulatory and airport authorities and the company has been known to take drastic measures to prove a point because it feels that if it loses any battles against these authorities, it will have a weaker negotiating position when it fights against future restrictions and rate increases. A lowering of projections generated media sympathy, providing Ryanair with more negotiating power. But the lower predictions were also followed by some dramatic actions by Ryanair, perhaps partially intended to influence press coverage, which furthered the company’s lobbying and public relations efforts. Ryanair has been engaged in battles with BAA, Aer Rianta, the EU, as well as the UK Government. Ryanair’s most recent highly publicized fight was against BAA for doubling Stansted airport charges, resulting in Ryanair grounding seven Stanstedbased aircraft. Instead of continuing to fly aircraft with a slightly higher cost base (keep in mind that Ryanair still has by far the lowest costs of any European carrier) the airline simply grounded the planes, enabling the media to publicize the story and the apparent victimization, generating public sympathy for Ryanair and animosity towards BAA. But Ryanair may have exploited this situation to cleverly to turn media attention away from service issues. No media outlet wants to spend too much time and effort covering one company, and the battle with BAA provides the media a Ryanair story that is positive for the company and a good story for the media since it’s new, different, and engaging unlike many of the Ryanair traveler “horror stories” that are often covered instead. However, while the

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Air Scoop - October 2007

company’s public relations may have been boosted by this move, the company still isn’t winning the lobbying battles it wants to, and the company’s unilateral negotiation approach seems to be proving rather ineffective, so good press, while helpful, hasn’t done everything. The lower projections provided a logical explanation for Ryanair subsequently drastically cutting prices on most of its routes, including offers of 10 Euros each way including taxes and fees, as a way of stimulating lower load factors. This became a Ryanair-led price war. EasyJet was unable to match many of these fares, but trimmed fares where they could to maintain competitiveness. Air Berlin, with a higher cost structure than either Ryanair or easyJet, could not match Ryanair’s deals. (However, Air Berlin’s ongoing acquisitions will enable the company to offer fares much closer to Ryanair’s in the future.) The carriers who really suffered were those who were unable to cut fares without hemorrhaging cash. Vueling is a prime victim of Ryanair and easyJet’s expansion into Spain. Because the company has higher costs than either carrier, it lost money when it was forced to cut fares to compete with Ryanair and easyJet. Ryanair’s price cut strategy worked brilliantly to further destabilize Vueling, and as a result, that carrier is now reconsidering its business strategy. The lower projections also provided Ryanair with an understandable excuse to cut unprofitable routes and launch routes that compete more directly with easyJet, especially for the future. Ryanair will soon need to become more active and aggressive in higher-density city-pair markets if it hopes to meet passenger growth targets. As a result, Ryanair will continue to pressure carriers such as easyJet, Vueling, SkyEurope, and others who have high-density strategies. When Ryanair reshuffled routes this summer, the company positioned itself to compete more directly with easyJet, especially on routes to or from Spain and Italy. As Ryanair expands further there, it will compete more intensely with easyJet, which could alter easyJet’s strategy of targeting large, high-density markets as its primary growth strategy. As the industry leader, Ryanair sets the trend, so its poor projection hurt LCC stocks across the board. That provided Ryanair several opportunities. With its own share price lower, the company could buy back stock and likely increase the share price. Ryanair’s competitors, with their

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BIRD’S EYE VIEW shares down, had to be more careful about their expansion plans. But most importantly, it made some of Ryanair’s smaller competitors more susceptible to takeover, which might cause them to exit markets where they compete with Ryanair. Takeover rumors have been swirling concerning Vueling and SkyEurope, in part because of the immense pressure that Ryanair has put these carriers under, and a lower share price makes them more attractive to potential suitors. On June 5 Ryanair announced its annual results and a share buyback. Ryanair stock closed at 5,36 EUR the day before earnings were announced, while the stock headed lower in successive days and on June 26, Ryanair commenced the buyback, purchasing shares at a price of approximately 4,95 EUR. Ryanair was able to purchase its stock at a very attractive price, triggering a temporary increase in the share price. This in turn benefited Ryanair shareholders, including senior level executives. But this strategy hasn’t been too successful at creating lasting value for shareholders thus far, as Ryanair’s stock has since fallen to approximately post-earnings levels. Ryanair’s move affected the share prices of other compa-

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nies in the industry, causing pain for investors and concern for executives about future competitiveness. For example, while easyJet’s stock took a steep dive this summer, declining from 563 pence on June 4 to as low as 453 pence on July 30, it has since regained some of its lost value. EasyJet, Vueling, Jet2, and many other Ryanair competitors have all seen declines in share performance since the June 5 announcement, raising questions about whether these companies will be able to maintain competitiveness with Ryanair in the future as they lose market value. On most fronts, Ryanair’s strategy has been effective. The company exacerbated problems that its medium-size competitors have been facing, while enabling the company to better compete with its larger rivals. Unfortunately, this strategy hasn’t yielded all the potential benefits it could, as the company still is fighting BAA’s Stansted Airport charges, and Ryanair’s stock has had lackluster performance since the earnings announcement. But regardless of whether Ryanair’s earnings announcement was an intentional deception or a happy accident, the company has used it successfully to gain ground in a very competitive marketplace by driving down competitors’ yields and increasing competition on lucrative routes.

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Air Scoop - October 2007

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