Assessing the Long Haul low cost business model Peter Morris Chief Economist Airneth

1. Assessing the Long Haul low cost business model Peter Morris Chief Economist Airneth Den Haag, April 2010

2. Key Question

3. Outline • How did ‘short haul low cost’ gain traction? • A look at the ‘Established Network model’ on long haul • Variety of long haul models • Case Study:Impact of new player on Long Haul – Oasis • Key cost concerns • Opportunities • Summary The golden rule is: There are no golden rules G.B. Shaw

4. The Aviation Industry has seen………….. • Regulation and liberalisation • Robust growth of 5%pa+ average • Economic and other shocks - and repeated recovery • Consolidation and rationalisation • New markets and changing business models- generally unforeseen An industry that both resists and accepts major change

5. Remember - One of the first ‘low cost long haul’ airlines is now an ‘incumbent’ And now adopting a strategy to defend its market - against other competitors, and any new ‘start-up’ threats

6. How did ‘short haul low cost’ gain traction?

7. Why did ‘low cost’ grow? • Deregulation • Convergence of previous business model on short haul with ‘comfortable’ competition • New entrants used: • New distribution outlets (internet) • Higher asset utilisation (fleet, staff) • Lower costs- airports, aircraft, distribution • Ancillary revenues (add ons, specific charges, partnerships) • Stimulate new traffic from lower fares • Simplicity! • Response of incumbents was inhibited by: • Legacy links, high costs, financial crisis, complexity

8. Why short haul? • Regional deregulation (US, Europe…) • Commodity product - with significant price elasticity • Utilisation improvement from 8 → 12h per day per aircraft • Artificial pricing barriers by airlines • Regional sales proposition acceptable and trusted • Many secondary destinations with poor service + alternate airports • Proven model (USA)

9. Why NOT long haul? • Regulatory restrictions • Price segmentation (3 class etc.) and business customers key • Higher entry costs (aircraft, set up, marketing etc.) • Connecting passengers • Long haul aircraft utilisation • Secondary airports of limited scope and availability for large jets • No market for ‘nowhere to nowhere’ routes • Incumbents able to price low at the margin to compete + connecting airlines • More difficult to attract new revenues, and many of the costs the same (e.g. aircraft, fuel)

10. Where does the cost advantage lie? In Europe for short haul services

11. Low cost differentials have been maintained

12. Low cost airlines gain more profitability from lower revenues

13. A look at the ‘Established Network model’ on long haul

14. Key strengths of network airline model • Network connections provide feed in to/ from hubs • Product differentiation (Class of service) allows coverage of wide willingness to pay, and charge ‘marginal fares’ for the last travellers • Established brand has value • Alliance relationships • Travel agency network, corporates important • Experience of international markets • Critical mass…….

15. Some weaknesses? • Class fare differentials have grown to unrealistic levels (6-10X for premium vs. economy) • Large players too big and inflexible to react swiftly (e.g. fleet refurbishment takes years) • The network ‘guarantees’ have a high cost • High growth markets create many new niches • ‘Personal service’ often just cosmetic, and unable to deal with detailed issues

16. Variety of new long haul models

17. Summary of the ‘low cost long haul’ entrants • Cover a widening spectrum • Most are relatively new, and many are targeting high growth markets (Asia, Middle East) • Some are parented by incumbents, and proving a useful market exploration tool as well (perhaps) as a warning to airline staff • Some are driven by the charter market seeking to diversify • Some have targeted ‘business class only’ markets (e.g. Maxjet, Eos, Silverjet) • Some have gone (e.g. Oasis, Maxjet, Eos, Silverjet)

18. Europe • Fleet: 168 A319’s and A320’s • Longest routes include London to Luxor, Sharm el Sheikh and Tel Aviv. • Fleet: 267 737-800’s • Long routes include UK and Scandinavia to the Canary Islands • Fleet: 35 737-800’s • Longest routes include Copenhagen and Oslo to Dubai, Scandinavia to the Canary Islands

19. Europe • Airberlin • Vueling Airlines • Jet2 • Iceland Express • Monarch Airlines • Smartwings • Thomson Airways • Transavia Airlines • TUIfly

20. North America • Fleet: 352 737-700’s • Routes: Transcontinental domestic services • Fleet: 118 A320’s • Routes: Transcontinental domestic services • Fleet: 135 737NG’s, 1 leased Boeing 757-200 • Routes: Canada to the Caribbean and the US (including Hawaii). Transcontinental domestic services.

21. North America • Air Tran • Air Transat • Frontier • Spirit Airlines • Sunwing Airlines • USA 3000 Airlines • Virgin America

22. South America • Fleet: 94 737-700’s and -800s, 767’s • Longer routes within Brazil & to the Caribbean and neighbouring South American countries • Fleet: 24 A319’s, 2 A320’s • Routes: Mexico to US, including Guadalajara to Chicago

23. Middle East • Fleet: 21 A320’s, plus 40 more on order • Routes: Longest sectors to India, Kazakhstan, Nepal, Sri Lanka and Ukraine. • Subsidiaries in Morocco and Egypt. Will start subsidiary in Jordan. • Fleet: 15 737-800’s, 38 more on order • Routes: Longest sectors to India, Nepal, Russia and Sri Lanka from Dubai • Fleet: 21 737-800’s • Routes: Long and medium haul services from various destinations in India to the UAE, Oman, Malaysia and Singapore.

24. Asia/Pacific • Fleet: 2 A340-300’s, 9 A330-300’s. 22 more A330’s and 15 A350’s on order. • Routes: Kuala Lumpur to Australia, France, Iran and the United Kingdom. • Indonesia AirAsia and Thai AirAsia operate many routes within Asia, longer sectors include Bangkok to Delhi. • Fleet: 9 A330-200’s. 10 787-8s on order. • Routes: Australia to Japan, Vietnam, Indonesia, Malaysia and Hawaii. Singapore to China, Thailand and Vietnam. • Fleet: 5 777-300ERs, 8 more on Option. • Routes: Brisbane, Melbourne and Sydney to Los Angeles. Sydney to Abu Dhabi. • Fleet: 52 737-700/800’s. Will acquire 2 A330-200’s • Routes: Australia to Indonesia, Thailand, Papua New Guinea and the South Pacific Islands

25. Asia/Pacific • Tiger Airways • Jeju Air • Jin Air • Lion Air • Cebu Pacific Air

26. Ceased operations • Fleet: 3 767’s • Routes to Jakarta and Sydney + Charter & non scheduled flights to Japan and Vietnam • Fleet: 4 747-400’s • Routes from Hong Kong to London, Gatwick and Vancouver • Future to service more long-haul destinations including Sydney, Melbourne, San Francisco and Manchester • Fleet: 767’s, 737-800’s and 757s + 2 - 787s delivery in 2010/2011 • Routes operate like traditional charter carrier with seasonal routes and destinations • Fleet: 767-300ERs and 757s • Routes linking the US and Canada with the UK as well as Canada with Paris • Fleet: 737-800’s and -900ER’s, 757’s and 767’s • Routes: UK to North America, North Africa and Europe CEASED OPERATIONS

27. Case Study:Impact of new player on Long Haul - Oasis

28. Immediate journey at a premium on major carriers Booking in Feb 2008 for Feb 2008 Source: ASCEND review of company websites and best internet agents

29. Oasis desperate to attract premium revenue Booking in Feb 2008 for Feb 2008 Source: ASCEND review of company websites and best internet agents

30. More convergence for a future journey Booking in Feb 2008 for April 2008

31. HKG fares higher in April- Oasis going leaves only connections such as QA and TG Booking in Feb 2008 for April 2008

32. How did Oasis affect the market? • Probably added 20% to passenger traffic (100,000 passengers) with additional stimulation due to competition • Did not get traction in the premium market despite a good value product (timing, airports, flyer corporate loyalty) • Achieved good load factors in economy Fare changes Jan- June 2007 vs 2006 Sources, UKCAA, IATA

33. Key cost concerns

34. Step jump in fuel price has changed economics of the industry

35. Fuel costs rose significantly- some regions helped by hedging, others impacted by long sector distances or poor fleet efficiencyN. American labour costs fell dramatically Fuel costs and labourproved key cost issues Source: IATA

36. Opportunities

37. Global aviation trends by route area Source : Ascend analysis and OAG from BACK Aviation

38. Asia Pacific still clearly in the expansion stage…… Asia Pacific and Middle East half of potential world startups Source: ASCEND

39. Can Long Haul, Low Cost succeed? • It has more challenges than for LCC short haul • More competition • Ticket and travel product more complex • Fewer defensible ’new wave’ attributes • The ‘linked’ new entrants look set to succeed • lone participants have a challenge to reach critical mass • Fuel price (and taxes) are increasingly raising real cost of long haul trips, with no end in sight • Emirates could soon be offering the ultimate ‘long haul low cost’ with 750 seat A380’s

40. In Summary ‘The reasonable man accepts the world as he finds it. The unreasonable man tries to change the world to his point of view. Therefore all progress depends on the unreasonable man’ G.B.Shaw : Man and Superman ‘If the chariot ahead has overturned, let the chariot behind beware’ Jia-Yi , Han Dynasty

41. The information contained in our databases and used in this presentation has been assembled from many sources, and whilst the utmost care has been taken to ensure accuracy, the information is supplied on the understanding that no legal liability whatsoever shall attach to Ascend, the Airclaims Group Limited, its subsidiaries, their officers, or employees in respect of any error or omission that may have occurred. For further information: Email: peter.morris@ascendworldwide.com Thank you for your attention