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How Low Can Low Cost Go?

How Low Can Low Cost Go? . Wolfgang Kurth, advolar GmbH. Content . Why is the low-costs model different? How much of the market is low-costs? Can low-costs keep growing? Is there any hope for full-service carriers? Conclusion. Content . Why is the low-costs model different?.

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How Low Can Low Cost Go?

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  1. How Low Can Low Cost Go? Wolfgang Kurth, advolar GmbH

  2. Content • Why is the low-costs model different? • How much of the market is low-costs? • Can low-costs keep growing? • Is there any hope for full-service carriers? • Conclusion

  3. Content • Why is the low-costs model different? • Why is the low-costs model different? • How much of the market is low-costs? • Can low-costs keep growing? • Is there any hope for full-service carriers? • Conclusion

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

  5. Business Models

  6. Difference Between LCC and FSA

  7. European Airlines Unit Costs

  8. Labor Efficiency

  9. CEOs Don´t Necessarily Have An Airline Background David Neeleman CEO JetBlue Airliner: yes Almar Örn Hilmarsson CEO Sterling Airways Airliner: no Joachim Hunold Chariman of Executive Board Air Berlin Airliner: no Dr. Joachim Klein CEO Germanwings Airliner: no Michael O´Leary CEO Ryanair Airliner: no Herbert D. Kelleher ex CEO Southwest Airliner: no Christian Mandl CEO SkyEurope Airliner: no Onno van den Brink CEO Transavia Airliner: no Ray Webster CEO Easyjet Airliner: yes Jozef Varadi CEO Wizz Air Airliner: yes

  10. LCC Mantras 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)

  11. Content • Why is the low-costs model different? • How much of the market is low-costs? • Can low-costs keep growing? • Is there any hope for full-service carriers? • Conclusion • How much of the market is low-costs?

  12. LCC Routes 2001 Caption: Ryanair easyjet Volareweb bmi Baby Hapag-Lloyd Express Germanwings Sterling Skyeurope jet2

  13. LCC Routes 2002 Caption: Ryanair easyjet Volareweb bmi Baby Hapag-Lloyd Express Germanwings Sterling Skyeurope jet2

  14. LCC Routes 2003 Caption: Ryanair easyjet Volareweb bmi Baby Hapag-Lloyd Express Germanwings Sterling Skyeurope jet2

  15. LCC Routes 2004 Caption: Ryanair easyjet Volareweb bmi Baby Hapag-Lloyd Express Germanwings Sterling Skyeurope jet2

  16. LCC Routes 2005 Caption: Ryanair easyjet bmi Baby Hapag-Lloyd Express Germanwings Sterling Skyeurope Jet2 etc, etc

  17. LCC Market Shares By Country 18.9% (2005)

  18. Market Share Of European LCCs

  19. Growth Rates And Market Shares Europe: annual growth rate p.a. for LCCs, passenger

  20. Content • Why is the low-costs model different? • How much of the market is low-costs? • Can low-costs keep growing? • Is there any hope for full-service carriers? • Conclusion • Can low-costs keep growing?

  21. Optimistic 30% Number of passengers of Ryanair & easyJet at basis of announced capacities 19% 15% Pessimistic Market potential for European LCCs Prediction for the European Low Cost Market 2001E–2009F Market potential of the GermanLow Cost Segment 2001E–2009F Estimation formed by the use of US market share & travel frequency to the German population PAX(m) PAX(m) 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

  22. European Growth Potential

  23. Significant Global Growth Potential 2) 3) 1) 4) 1) 2) 1) 2) 1) 5) 2) 2) 5) 5) 2) 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

  24. BEGINNING STAGE TRANSITION RAPID GROWTH STAGE TRANSITION MATURE STAGE VOLUME/GDP U.S. and Europe GDP Latin America Middle East Asia Volume Africa TIME Business Environment

  25. BEGINNING STAGE TRANSITION RAPID GROWTH STAGE TRANSITION MATURE STAGE VOLUME/GDP U.S. and Europe GDP Latin America Middle East Asia Volume Africa TIME Business Environment ?

  26. Travel Intensity Without Significant LCC Market Share

  27. Travel Intensity With High LCC Market Share More trips because of cheaper travel (at const. disposable income)!

  28. Yield Per Passenger vs Price Per Seat Index 1994 Constant Dollars

  29. Current LCC Det. Spec. Comparison Note: $ 1.0 mio in a/c aquisition price ~ $ 8.0 – 12.0 k/month in lease rate or >160.000 free flights/month on Ryanair!* * based on 80 a/c

  30. LCCs Get Below The Baseline Leaner Specs - reduce the a/c aquisition price - reduce the inventory costs - reduce the weight => the fuel burn - reduce the maintenance costs but may affect the residual value! Window shades: app.10 kg* Seat actuator: app.45 kg* Gasper fans: app. 30 kg* TTL.: 85 kg = app. 11.000 ltr. fuel p. a/c and year * * B737-700, 4000 b‘hrs/year

  31. Reducing Turn Around Time Boarding through Forward and Aft Entry Door

  32. Reducing Turn Around Time Relocation of Forward Entry Door

  33. Outsourcing To The Customer: On Board Luggage „Super Size“ Overhead Compartments: - More cabin luggage reduces costs related to baggage loading processees (check-in, loading and off-loading etc.) - No baggage related airport charges - Passenger convienence - reduced lost baggage rate

  34. Outsourcing To The Customer: Check-In Yesterday: Check-In counters - Long lines • Passenger inconvenience • Expensive Check-In counters • Labour intensiv (cost, quality) Today: Check-In kiosks • - Shorter lines • - No Check-In counters => lower costs • - No Check-In staff => lower costs • but • - Investment in hard-/software • - Maintenance Tomorrow: Online Check-In - No lines - No counters => lower costs - No check-in staff => lower costs - No hardware => lower costs - No maintenance => lower costs

  35. Content • Why is the low-costs model different? • How much of the market is low-costs? • Can low-costs keep growing? • Is there any hope for full-service carriers? • Conclusion • Is there any hope for full-service airlines?

  36. Low Fares Trigger Demand 50% For what reason would you fly more often? 40% 41% 30% 20% 17% 10% 11% 11% 8% 8% 6% 0% upgrades schedule safety low fares more safety others ground FFP´s board Source: IATA Online Survey 2003

  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. Airfares are Less Important on Longer Flights But flight length is a key factor in determining what is important to tourists Portion of travellers naming factor as "most important" 11% 16% 2% 18% Airfare 19% Schedule Airline Airplane 52% 19% 63% Flights of less than 2 hours Flights of more than 5 hours Source: Boeing-sponsored traveller survey

  39. Impact Of LCCs On FSAs Southwest entry into the Sacramento-Portland Market

  40. In The US Stage Length Is Increasing

  41. Stage Lenght Is Increasing In Europe As Well 2000 2001 2002 2003 2004 2005 Source: Davy European Transport and Leisure, 15.2.2005

  42. LCCs Develop 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

  43. Trends In The Airline Industry

  44. Trends In The Airline Industry

  45. Trends In The Airline Industry

  46. Trends In The Airline Industry

  47. Trends In The Airline Industry

  48. Migration Of Business Models Charter Airlines Full Service Airlines LCCs

  49. Migration Of Business Models Full Service Airlines ? CharterAirlines Hybrids Hybrids LCCs

  50. Content • Why is the low-costs model different? • How much of the market is low-costs? • Can low-costs keep growing? • Is there any hope for full-service carriers? • Conclusion • Conclusion

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