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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

Low Cost Carriers Phantom or Phenomenon

May 23, 2007 Kraków, Hotel Stary

Wolfgang Kurth

Advolar

less standard customers
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!“)
more mature customers
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“
customer expectations
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

the low cost business model
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
lcc mantra
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)

slide10

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

why buying online
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

market potential for european lccs
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

potential for lcc routes
Potential For LCC Routes

Potential new LCC lines each year in Europe

History

Forecast

Source: Airbus Industries

significant global growth potential
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

lccs in asia
LCCs In Asia

Source: LHT AG, FH Worms, 2004

114 lccs worldwide february 2007
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

the graveyard 74 bodies
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

us lcc aircraft deliveries
US LCC Aircraft Deliveries

Source: Seabury Group, ACI Airline Restructuring Conference, Septt 0, 2004

customer profile
Customer Profile

Age distribution

slide26

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

customer segmentation
Customer Segmentation

FSA FSA/LCC high potential LCC market

Source: Harris Interactive Airline Segmentation Study

different market strategies
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

lcc operational strategies
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

network overlaps
Network Overlaps

Source: McKinsey

side step eu usa open skies agreement
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
slide35

For sun seekers nothing has changed….

…we still like going on vacation!

a package tour
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
  • ………..
slide38

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

stage length is increasing in europe as well
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

impact of lcc entry on charter routes
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)

lccs eating into charter markets
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

fragmented value chain
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

conclusion
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
conclusion49
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
conclusion50
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
conclusion51
Co-operations will ….

… take place between selected LCCs (Cross Marketing).

… start between international (non-Alliance) long haul carriers

and LCCs.

Merges will …

… take place between mid size LCCs and smaller LCCs to grow

quickly into international markets.

Re-integration will …

… affect most „Sponsored LCCs“ (LCC subsidaries of FSAs)

Fatalities will…

… reduce the flock of European LCCs to 3 -4 strong Pan European

LCCs and about 10 -12 national/niche LCCs

Conclusion