The Low-cost Idea

1. The Low-cost Idea The low-cost idea has to start in people´s mind! Low-cost means... ...not simply reducing the price, ...but primarily changing well-known processes. In doing so the simplicity of the new processes is most important.

2. Low-Cost Business Strategy Of Airlines: CEOs CEOs of LCCs don´t necessarily have an airline background David Neeleman CEO JetBlue Airliner: no Joachim Hunold Chariman of executive board Air Berlin Airliner: no Wolfgang Kurth CEO Hapag-Lloyd Express Airliner: yes Tim Claydon Senior Vice President JetBue Airliner: no Michael O´Leary CEO Ryanair Airliner: no Herbert D. Kelleher CEO Southwest Airliner: no Onno van den Brink CEO Transavia Airliner: no Jozef Varadi CEO Wizz Air Airliner: no Ray Webster CEO Easyjet Airliner: yes Christian Mandl CEO SkyEurope Airliner: no

3. Song´s Credo 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. We are magicians, musicians, acrobats and sprinters focused on a single goal: to give style, service and choice back to the people who fly. That´s why we „cast“ our stars - to make sure each and every one is attentive and gracious. Why we offer everyone 24 channels of real time, satellite TV and CD quality MP3 audio. Why we hand picked a socially-conscious chef - to prepare fresh meals and cater to diverse tastes. Why Kate Spade designed a collection for our stars, why we created exlusive programming for families, and offer cosmopolitans in the air. All in all, it´s why we offer more. And now it´s time to dig deeper. You see, we realize our difference doesn´t lie solely in the choices we offer, but also in how we offer them. ...

4. Song´s Credo Cont. This means paying attention to those subtle, all-important details that give someone or something a certain specialness. This means understanding that style isn´t just about the uniforms we wear, but in how we wear them. It means remembering not only to say please and thank you - but how old is your son and happy birthday. It means recognizing that some guests desire a sense of well-being and others - a sense of humor. It´s knowing that smiling is contagious, technology is empowerment, and that some people like their martini - ice cold - with olives - shaken, not stirred. It´s each and every day - in the lobby, the parking lot, on the web site and in the plane - demonstrating that we truly understand the frustrations our guests have with airline travel and exceeding their expectations with choices that are special and surprising. Here, lies the Song difference. Because in the end, as we all know, the proof is in the pudding. And if it needs to be low-fat, organic pudding - so be it. We are in tune with our guests. We are not an airline. We are Song.

5. LCCs Have A Competitive Edge Comparison of the cost structure of different airlines 14 Lufthansa Full Fare Airlines 12 10 easyJet 8 Virgin Express Charter Costs/ASK(€ cent) GO 6 Southwest Ryanair 4 Hapag-Lloyd Flug Low-Cost 2 0 300 550 800 1050 1300 1550 1800 2050 Sector lenght (in km) Source: Unternehmensberichte und -Websites, Analystenreports, AEA, Monitor Group Analyse

6. Comparison Of The Average Unit Costs For Intra-European Flights 25 20 15 10 5 0 Regional airlines SK Scheduled airlines AZ AF US LH BA KL AA Cents / ASM EasyJet UA AS IB Low costcarriers NW Charterairlines CO AirT TW AWA Ryanair ATA SWA DL Britannia 0 200 400 600 800 1.000 1.200 1.400 1.600 Average Route Length (Miles) ASM: Available Seats Miles Source: CASM Form 41, Air Transp. World June 2001 issue, Stage length data from the Airline Monitor Nov. 2001 issue; AirTran data Air Tran 10-Ks BAH Analysis

7. Unit Costs Of LCCs Are Only Half Of The Costs Of Traditional Airlines 14,0 • Primary and secundary airports 0.1 12.0 0.4 0.2 12,0 0.6 0.8 1.2 10,0 2.7 • Lower maintenance-, trainings costs • simplified change of flight personnel • Less staff (limited service, no transfers) 8,0 • Standardized classes • No Frills • Extras are subject to additional rates • No lounge • Etc. Costs/ASK(€ cent) • Direct channels • Bookings via travel agency are subject to addidtional rates 6.0 6,0 • Fast turnarounds, direct flights, no transfer • more seats per A/C 4,0 2,0 0,0 Aircraft operation LCCs Airport fees Frills Sales Staff Fleet Others Traditional airline Source: AEA, Analysten Reports, Artikel, Monitor Analyse

8. Low-Cost advantages • Higher utilisation • Lower ancillary costs, less complexity, additional income • Lower airport charges • Lower maintenance, spare parts and training costs, simpler swopping around of flight staff, higher capacity utilisation • Lower distribution costs, lower complexity • Lower complexity, higher capacity utilisation • Lower fixed personnel costs Differences Between Low-cost & Traditional Carriers Low-Cost Carrier Full Fare airlines Utilisation • Fast turnarounds (up to 25 min.) • Turnaround slowed down by use of major airports with large amount of traffic (approx. 45 min.) Frills • No Frills, extras paid for (e.g. catering, extra luggage) • Entertainment program, quick check in, lounges, paper tickets, business class, catering • Primary and secondary airports • International airports Airports Fleet • Standardised fleet (only one aircraft type), higher seating density (737-300: e.g. 146) • Various aircraft types, low seating density (737-300: e.g. 134) • Most tickets sold via travel agencies and by the airline itself • Direct channels, use of travel agencies only if extra costs minimal Retail Network • Direct flights, no transfers, short routes • Long haul and short haul routes with transfers Personnel • High variable-proportion of salary (up to 26 %), better capacity utilisation • High basic salaries (variable proportion up to 11 %), trade union affiliation

9. Business processes Staff • Lean-management • Fast decision making • Less staff (e.g. no service) • Flexibility and motivation of staff Sales • Direct sales channels • Processes such as „information“, „booking“, „seat-reservation“ and „payment“ are relocated to the client • Bookings via Call-Center or travel agency are subject to additional charges • No paper tickets • Pricing-strategies • Aggressive marketing Network planning • Point-to-point traffic • High frequencies • usually short distance flights (max. 1.500 km) Distribution, Staff And Network Planning

10. Low-cost Business Strategy Of Airlines: Sales Sales channels as per bookings in % in 2004 Sales channels as per revenue in % 2004 3 3 2 2 1 1 1 including 74% Internet, 5% flyloco/LTUR, 13% Skyagent 2 including 3% CC, 1% Agencies via CC 3 e.g. group-, press- and member of staff bookings 1 including 79% Internet, 4% flyloco/LTUR, 9% Skyagent 2 including 2% CC, 2% Agencies via CC 3 e.g. group-, press- and member of staff bookings

11. Low-cost Business Strategy Of Airlines: Sales Cont. Sales via internet is essential • Website performance per month • Page visits: 2,0 m • Page impressions: 14,8 m • Newsletter subscription: >560.000 • Conversion rate: 16 % (August 04) • Cooperation with Flyloco.de offers: • Dynamic packaging. • Hotel data base • With about 2400 hotels • Average prices from € 85 to € 130 per double room • 40 % of these hotels in 3-stars segment

12. Low-cost Business Strategy Of Airlines: Sales Cont. Targeted promotion generates demand • HLX „Rock Buttom Site“ • Clearly laid out overview of the cheapest flights • „Happy HLX Hours“ • Regular promotion at especially favourable conditions (Tuesday- Wednesday) • Partner HLF and others • Distribution synergies due to „piggy backing“ on partners´ natioal website

13. Low-cost Business Strategy Of Airlines:Sales Cont. Course of the day: 8:00 to 24:00, high utilisation also beyondthe “travel agency time”

14. Low-cost Business Strategy Of Airlines: No Frills No Frills • No meals, drinks and snacks for free, therefore reduction of costs for the catering itself but also for cleaning and loading • No frequent-flyer programs • Excess baggage, sports equipment etc. is subject to additional rates • No cancellation • Changes of booking are charged • Free-seating / seat reservations are changed • No lounges

15. Lufthansa breakfast HLX breakfast Quelle: Die Welt, 08.10.2004 Airlines Meals

16. Low-cost Business Strategy Of Airlines: A/C and Fleet Aircraft / Fleet • Homogeneous fleet, therefore low costs for maintenance, cockpit training and „stand by“ crews • Higher number of seats, therefore higher capacity and higher utilisation of the aircraft • In future functions will be paid instead of the hardware, e.g. functions such as CAT IIIA, MTOW and thrust are paid according to the actual utilisation instead of being an integral part of the purchase

17. Low-cost Business Strategy Of Airlines: Airports Airports • Utilisation of secondary airports, thererfore lower airport fees, lower traffic and congestion, fewer delays • Basing of the fleet at several airports, aircraft return to their base at the end of the day, no hotel expenses for the crew, crew rostering is more efficient

18. Low-cost Business Strategy Of Airlines: A/C Basing • LCCs spread their bases across Europe • National / flag carrier usually have one or two national bases only

19. Low-cost Business Strategy Of Airlines: A/C Basing • LCCs spread their bases across Europe • National / flag carrier usually have one or two national bases only

20. Low-cost Business Strategy Of Airlines: A/C Basing • LCCs spread their bases across Europe • National / flag carrier usually have one or two national bases only

21. Low-cost Business Strategy Of Airlines: Flight Operation Flight operation • Higher productivity due to faster turnarounds (20 to 25 min. in comparison to 45 min and more from flag carriers) due to: • Less traffic and less delays at secondary airports • No waiting time due to transfer-passengers and baggage • Simple boarding and loading processes • Time-saving fueling processes • No cargo • Cleaning by cabin crew • Catering for four legs • „Outsourcing“ of catering and bordshop, airline only provides staff and sales area

22. Low-cost Business Strategy Of Airlines: Staff Source:http://www.verdi.de/verkehr/luftverkehr/sonstiges/zeitung_check-in

23. Low-cost Business Strategy Of Airlines: Staff Cont. * * pilots are charged an application fee of £ 50 Source: http://www.ryan-be-fair.org/pdfs/compare.pdf

24. Low-cost Business Strategy Of Airlines: Maintenance Maintenance • New service concepts for LCCs • Suppliers should „provision“ according to the data they have collected during hundreds of checks (e.g. knowledge of most frequent material repair) • LCCs want „air time“, suppliers want ground time, there´s a conflict of interest, less incentive for suppliers to „improve“ themselves • Development of „equalised“ maintenance concepts, shorter ground time and higher availability of the aircraft • For LCCs there is little incentive to take on board anything other than line maintenance work. What LCCs really do well is flying passengers from point A to point B, develop product and markets, manage yield and revenue • Cost reductions will have to come from smarter maintenance planning. Doing the right work at the right time and not over-maintaining Source: „Service Challenge“, Airline Business, October 2004

25. Remarks • LCCs flexibly adjust their prices to the respective demand • Prices rise towards departure time • the higher the demand the higher the price • Pricing of flag carriers is usually more inflexible • Price curves proceed flater, however they rise as well • Price structures of Charter-Airlines are contrary to those of LCCs • Prices decline towards departure time Low-cost Business Strategy Of Airlines: Pricing Price development of different airlines1,2 Index Days prior to departure 1 Research 5.3.2003-11.3.2003, indicated floating average, (basis: one-way incl. taxes and fees 2 Ryanair: Frankfurt-Glasgow, Lufthansa: Munich-London, Aerolloyd: Düsseldorf-Malaga Source: Monitor Group, 2003