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Low Cost Carriers Phantom or Phenomenon

Low Cost Carriers Phantom or Phenomenon. May 23, 2007 Kraków, Hotel Stary. Wolfgang Kurth. Advolar. The LCC Experience. Less “Standard” Customers. The Standard Customer:

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Low Cost Carriers Phantom or Phenomenon

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  1. Low Cost Carriers Phantom or Phenomenon May 23, 2007 Kraków, Hotel Stary Wolfgang Kurth Advolar

  2. The LCC Experience

  3. Less “Standard” Customers • The Standard Customer: • “John, 35 years, married, two kids, • white collar employee • suburban home, 1 Japanese SUV“ • - package tours (in Europe!), • - follows advertisements • - neighbor‘s life style provides guidance • - purchasing is based upon ratio • - status symbols are important • („my family, my home, my car!“)

  4. More “Mature” Customers • The Hybrid Customer: • in any sozio-demographic group • mobile • non conformistic • picky, critical • thrifty and lavishly • can‘t be defined by price segments • purchase is experience; at the same time decisions to purchase standard goods are based upon economical thinking • often a “lead customer“

  5. safety reliability good value for money transparency/fairness decent infrastructure competence/professional attitude flexibility Customer Expectations Expectations Ranking of Product Elements 1 Set of criteria: Aircraft (modern, looked after), tidiness, competent crew 2 Extremely low fares raise doubts with regards to reliability Source: Contest Census, 2002; Monitor Group Analyse

  6. European Airlines Unit Costs

  7. The Low-Cost Business Model The low-cost idea has to start in people´s mind! • Low-cost does not mean... • ... simply reducing the ticket price, • but primarily • changing traditional business processes, • using demand driven pricing, • applying aggressive marketing strategies

  8. LCC Mantra We are not an airline, we are a culture. A culture founded by optimists - and built by believers. We are not an airline. We are listeners, innovators and technology creators. We are not an airline. ... (Song‘s Credo) „When removing airlines from the bosom of national politics, what remains is a simple business!“ (Ray Webster)

  9. LCC Cost Structure • Primary and secondary airports • Simplified handling processes 14,0 0.1 12.0 0.4 0.2 12,0 0.6 0.8 1.2 10,0 2.7 • Lower costs for maintenance, spare parts and training • Lower Det. Spec. • Less personal (lower service level) • Minimum overheads • More outsourcing 8,0 • Single Class • No Frills • Extras at charge • No lounges • Re-usable boarding passes • Web check in • Etc. Costs/ASK(€ cent) • Direct sales channels • Travel Agencies only if no extra costs • No tour operators • No CRS 6.0 6,0 • Quick Turnarounds, • Point to point, no transfers • Higher seat capacity per A/C 4,0 2,0 0,0 Airport Charges Low-Cost Legacy Airline Operation Frills Distribution Personal Fleet Various Source: AEA Reports, Monitor Analysis

  10. Price Transparency? (Vodafone) 11

  11. Price Transparency! 12

  12. Information (Power) To The People! 13

  13. Why Buying Online? Ability to compare options myself Faster/saves time Offers lowest prices Offers wider selection of suppliers Easier/simpler to handle Offers more Frequent Flyer Miles Source: PhoCusWright Inc., Online Travel Shopping and Buying Behavior 14

  14. LCC Routes 2000

  15. Market Potential For European LCCs Prediction for the European Low Cost Market 2001E–2009F Market potential of the GermanLow Cost Segment 2001E–2009F Optimistic 30% Number of passengers of Ryanair & easyJet at basis of announced capacities Estimation formed by the use of US market share & travel frequency to the German population 19% PAX(m) PAX(m) 15% Pessimistic actual 1Low case: Number of no-frills journeys in Europe reach current UK / Ireland level (0.25 trips / capita) over 8 years 2 High case: Number of no-frills journeys in Europe reach the same level as currently in the U.S. (0.5 trips / capita) over 8 years Source: Analyst Reports, Monitor Analysis

  16. Potential For LCC Routes Potential new LCC lines each year in Europe History Forecast Source: Airbus Industries

  17. Significant Global Growth Potential 1) OAG 2004, non stop seats Intra European, no charter seats 2) Internet World Stats, 21.11.2005 3) WebSite101.com, 2004 4) Devinix.com, 2004 5) ICMA.com, 2004

  18. LCCs In Asia Source: LHT AG, FH Worms, 2004

  19. Number Of Airlines On The Rise

  20. 114 LCCs Worldwide (February 2007) Canada (4) Canjet HMY Airways Sunwing Westjet Europa (58) Aegean Airlines BMI Baby Iceland Express SmartWings Air Arann British European InterSky Snalskjutsen Air 2000 Budget Air Itali Airlines Snowflakes Air Baltic CentralWings Jet2 Sterling Air Berlin Clickair LTU Sun Express Air Finland Condor Meridiana Thomson Fly Air Scotland Corendo Monach Airlines TUIfly Air Service Plus EasyJet My Travel Lite Transavia Air Southwest Evolavia MyAir Virgin Express Alpi Eagles Excel Airways Nordic Airlink VLM Airlines Baboo Fare4U Norwegian Airshuttle Vueling Airlines Belle Air FlyMe Pegasus Airlines Windjet Blue1 GermanWings Ryanair WizzAir Blue Air Globespan Scanjet Blu-Express Helvetic Airways SkyEurope USA (9) Air Tran Allegiant Air ATA JetBlue Airways Midwest Express Southwest Airlines Spirit Airlines USA 3000 Airlines Ted Middle East, Asia, South Pacific(26) Adam Air Jetstar Asia Aero Pacific Jetstar Australia Air Arabia Kingfisher Airlines Air Asia Lion Air Air Blue Nok Air Air Deccan One-Two-Go Air India Express Paramount Airways Bangkok Air Skymark Airlines Cebu Pacific Air Skynet Asia Airways Freedom Air SpiceJet Go Air Tiger Airways IndiGo Valuair Jazeera Airways Virgin Blue Latin & South America (12) Aero California Mexico Alma de Mexico Aviasca de Mexico Avolar Mexico Azteca Mexico Bra Brazil Click Mexicana Gol Brazil Interjet Mexico Ocean Air Brazil Viva Aerobus Mexico Volaris Mexico Africa (5) 1 Time Atlas Blue Jet4You Kulula Mango

  21. The Graveyard (74 „Bodies“) Europe Aeris Bankrupt 07Nov2003, Agent Air Never started, Air Bosnia Bankrupt, Air Andalucia Bankrupt 2005, Air Catalunya Bankrupt, Air Exel Bankrupt January 2005Air Freedom Bankrupt December2003, Air Holland Bankrupt 2004, Air Littoral Bankrupt 15Feb2004 , Air Luxor Bankrupt, Air Madrid Bankrupt 15Dec2006Air Polonia Bankrupt 05Dec2004, Air Wales Bankrupt 23Apr2006, Airlib Express Bankrupt 2003, Azzurra Air Bankrupt July2004BasiqAirChanged name in Transavia Dec2004, BerlinJet Bankrupt, Bexx Air Bankrupt Sep2004, BuzzAwaySold by KLM to Ryanair Dream Air Never realized their Dream, DuoBankrupt on 01May2004, DutchBird Bankrupt January 2005EastJetBankrupt End 2006, EU Jet Bankrupt 26Jul2005Europe Exel Aviation Group Bankrupt January 2005 Fairline Austria Bankrupt 09Jun2004 , Fly Eco Will probably never start, Fly West Website disappeared July 2005, Flying Finn Bankrupt 27Jan2004 Free Airways Never started, Fresh Aer BankruptGermania ExpressTaken over by FlyDba eff.27Mar2005, GetJet Poland Never started, Go Fly Sold by British Airways to EasyJet, Goodjet BankruptHellas Jet Bankrupt 10May2005 , Hop Never started, never a website! (2004), Jet Magic Bankrupt 28Jan2004, Jetgreen Bankrupt on Wed.12May2004 after 1 week flying!, JetsSkyNever started, probably a scam! (Jan2004)JetX Stopped scheduled flights March 2005Low Fare Jet BankruptMaersk Air Merged with Sterling on 13Sep2005Now Bankrupt May2004Silesian Air Never started, Skynet Airlines Bankrupt 26May2004 (booking engine too slow!), Spirit Of Balkan Never started, Swedline Express Bankrupt August 2006 V Bird Bankrupt 07Oct2004 VolareWeb Bankrupt 19Nov2004 White Eagle Sold entire 737 fleet Africa Civair Bankrupt 06Dec2004Flamingo Airlines BankruptAsia + South Pacific Air Nauru Bankrupt, Air One (India) Never started, Athena Air (Malaysia) Never started, AwairTaken over by Air Asia 2005BackpackersXpressNever startedCitilink Fake low-cost airline discontinued by Garuda Indonesia in 2006Diet Jet (Thailand) Never startedImpulse Airlines Bankrupt Origin Pacific Airways Bankrupt 10Aug2006 SkyAsia (Thailand) Never startedSmartjet Airways Never started, probably a scam! Transgulf Express (Gulf Area) Never started Canada Canada West Air Never startedetsGo Bankrupt 11Mar2005Tango Airlines Fake low-cost airline discontinued by Air Canada in 2004ZipFake low-cost airline discontinued by Air Canada in 2004U Air Bankrupt Early 2006USA America West Merged with US Airways Independence Air Bankrupt Early 2006, Interstate Jet Bankrupt 2005 Song Air Fake low-cost airline discontinued by Delta in 2006, Southeast Airlines Bankrupt 01Dec2004 TransMeridian Airlines Bankrupt 2006 Virgin USA Never started Source: http://www.etn.nl

  22. US LCC Aircraft Deliveries Source: Seabury Group, ACI Airline Restructuring Conference, Septt 0, 2004

  23. Customer Profile Age distribution

  24. Parking At LCC Airport

  25. Customer In Focus? "We don't fall all over ourselves if ... say my granny fell ill. What part of “no refund” don't you understand? You are not getting a refund so fuck off." Source: M. O’Leary, original sound track

  26. Customer Satisfaction

  27. Customer Segmentation FSA FSA/LCC high potential LCC market Source: Harris Interactive Airline Segmentation Study

  28. Different Market Strategies • Pure Low Cost Carriers • Year round traffic • Independent travelers • Balanced directional flows • Grow the market • Avoid charter markets (for the time being!) • Hybrid Models • Mix of business and leisure • “A la carte” services • Compete in some charter markets -Hot meals, -Lounges, -Paper tickets -Business passenger -Branding -Low Frequency -Branded meals -Main Airports -Frequency -Branding -Low-Fares -Frequency -Grass strips 29

  29. LCC Range of Product Elements

  30. LCC Operational Strategies To remain competitive LCCs incorporate FSA elements into their operational strategies • Expansion into and use of major/hub airports • - Southwest: PIT, PHL and DEN • - JetBlue : JFK, BOS • Increasing international service - Jetblue, Frontier, Air Tran, Spirit, America West, ATA • Code-share agreements and alliance membership - Southwest and ATA - US Airways / America West membership in Star Alliance • Increasing fleet complexity - Embraer 190 to jetBlue‘s A320 fleet - A319 to easyJet‘s B737 fleet Source: SH&E

  31. Connecting LCC Passengers

  32. Network Overlaps Source: McKinsey

  33. Liberalization of the airline industry in Europe in the 90ties has removed the protective care package from the National Carriers. Competition is on in Europe! The EU-USA Open Skies Agreement is liberalizing the highly lucrative transatlantic market. EU airlines can fly from any European airport to any airport in the US. In turn it opens European airports to US airlines. The market is expected to grow by > 25 mio passengers within 5 years. Conclusion: No longer national markets will belong exclusively to National Carriers!! Side Step: EU – USA Open Skies Agreement

  34. For sun seekers nothing has changed…. …we still like going on vacation!

  35. A Package Tour Yesterday: Highly complex integrated product chain Brochures Travel Agency Transport Incoming Transfer Tourist Guide Hotel Beach Essential? no Essential? no Essential? yes Essential? no Essential? no Essential? yes Essential? no Essential? yes • Tour Operator Added Value: • gathers information, presents destination and resort • selects hotel and guarantees quality • minimizes foreign exchange risks • guarantees prices • arranges for transfer from destination airport to hotel and vv • local assistance minimizes cultural and language problems • one focal point for problems along the product chain • provides security • manages complaints • protects customers during crisis • ………..

  36. Mapping

  37. Tourists Are Most Sensitive To Airfare Business travellers are more sensitive to airline and schedule Portion of travellers naming factor as "most important" 17% 25% 10% 7% 19% Airfare Schedule Airline 30% Airplane 36% 57% Tourists Business travellers Source: Boeing-sponsored traveller survey

  38. Protect Your Fare

  39. Protect Your Fare

  40. Websites Used For Holiday Bookings Source: Mintel

  41. Distribution & Product Trends

  42. In The US Stage Length Is Increasing

  43. Stage Length Is Increasing In Europe As Well Avg. Stage Length Ryanair Kilometer 2000 2001 2002 2003 2004 2005 2000 2001 2002 2003 2004 2005 2006 Source: Davy European Transport and Leisure, 15.2.2005, wwww.ryanair.com

  44. Impact Of LCC Entry On Charter Routes > 4 f‘hrs LON < 3 f‘hrs 2000 – 2005: Routes served in competion (white) Charter: - 50.6% (avg) Routes served by Charter only (yellow) -10.5% (avg)

  45. LCCs Eating Into Charter Markets Ryanair, easyJet, Volareweb, bmi Baby, Hapag-Lloyd Express, Germanwings, Sterling, SkyEurope, jet2 232 118 Routes to Spain 69 48 17 2002 2003 2004 2005 2006 Source: CH-Aviation

  46. Fragmented Value Chain Yesterday: Highly complex integrated product chain Brochures Travel Agency Transport Incoming Transfer Tourist Guide Hotel Beach Essential? no Essential? no Essential? yes Essential? no Essential? no Essential? yes Essential? no Essential? yes Today: „Fragmented“ product chain T/O required? no T/O required? no T/O required? ??? T/O required? no T/O required? ??? T/O required? no

  47. The market will …. … continue to appreciate „Value for Money“ products. … see an increase in travel opportunities, i.e. more destinations from more origines … be affected by increasing costs which will hit the leisure segment … offer plenty of supply and price sensitive demand The consumer will …. … take advantage of oversupply and unlimited information available to him … be hard to predict, no easy segmentation Conclusion

  48. LCCs will …. … continue to grow. Market share of 35-40% in Europe by 2010 seems realistic. … move into leisure destinations where traditional charter carriers have a significant „seat only“ volume. … increase frequency on leisure routes but will reduce the number of departure airports. … enter into arrangements with tour operators provided their business model will not be affected. … adopt quality elements or product features from full fare airlines provided costs and complexity remains untouched or they are providing another revenue stream (seat reservation, IFE). … move into „business destinations“ which today have only indirect connections. … negotiate corporate fares. Conclusion

  49. FASs will …. … cut costs, adopt elements of the LCC business model. … simplify tarifs and travel rules. … focus on on-line distribution. … improve long haul product … apply agressive price strategies to fight LCCs … loose on indirect routes < 2 f‘hrs Charter Airlines will… … disappear Conclusion

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