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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

How Low Can Low Cost Go?

Wolfgang Kurth, advolar GmbH

slide2

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
slide3

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
the low cost business model
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
slide9

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

lcc mantras
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)

slide11

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?
lcc routes 2001
LCC Routes 2001

Caption:

Ryanair

easyjet

Volareweb

bmi Baby

Hapag-Lloyd Express

Germanwings

Sterling

Skyeurope

jet2

lcc routes 2002
LCC Routes 2002

Caption:

Ryanair

easyjet

Volareweb

bmi Baby

Hapag-Lloyd Express

Germanwings

Sterling

Skyeurope

jet2

lcc routes 2003
LCC Routes 2003

Caption:

Ryanair

easyjet

Volareweb

bmi Baby

Hapag-Lloyd Express

Germanwings

Sterling

Skyeurope

jet2

lcc routes 2004
LCC Routes 2004

Caption:

Ryanair

easyjet

Volareweb

bmi Baby

Hapag-Lloyd Express

Germanwings

Sterling

Skyeurope

jet2

lcc routes 2005
LCC Routes 2005

Caption:

Ryanair

easyjet

bmi Baby

Hapag-Lloyd Express

Germanwings

Sterling

Skyeurope

Jet2

etc, etc

slide19

Growth Rates And Market Shares

Europe: annual growth rate p.a. for LCCs, passenger

slide20

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?
market potential for european lccs

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

significant global growth potential
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

slide24

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

slide25

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

?

travel intensity with high lcc market share
Travel Intensity With High LCC Market Share

More trips because of cheaper travel

(at const. disposable income)!

yield per passenger vs price per seat
Yield Per Passenger vs Price Per Seat

Index

1994 Constant Dollars

current lcc det spec comparison
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

lccs get below the baseline
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

reducing turn around time
Reducing Turn Around Time

Boarding through Forward and Aft Entry Door

reducing turn around time32
Reducing Turn Around Time

Relocation of Forward Entry Door

outsourcing to the customer on board luggage
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

outsourcing to the customer check in
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

slide35

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?
low fares trigger demand
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

slide37

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

slide38

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

impact of lccs on fsas
Impact Of LCCs On FSAs

Southwest entry into the Sacramento-Portland Market

stage lenght is increasing in europe as well
Stage Lenght Is Increasing In Europe As Well

2000 2001 2002 2003 2004 2005

Source: Davy European Transport and Leisure, 15.2.2005

lccs develop different market strategies
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

migration of business models
Migration Of Business Models

Charter Airlines

Full Service Airlines

LCCs

migration of business models49
Migration Of Business Models

Full Service Airlines

?

CharterAirlines

Hybrids

Hybrids

LCCs

slide50

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
conclusion
Conclusion
  • Re-engineering of processes (not only doing the same at less cost)

Pass-on of cost savings to customer

Stimulate demand, increase LF

  • Efficient use of expensive recources ( e.g. A/C, labour)

Reduction of unit costs

Pass-on of cost savings to customer

Stimulate demand, increase LF

lcc business model within fsa
LCC Business Model Within FSA

Economy Class Business Class

Short/

Medium Haul

Long Haul

  • Push direct sales channels
  • Use promotional fares
  • Apply agressive marketing
  • Improve asset utilization
  • Improve labour productivity
  • Eliminate frills
  • Simplify fare structure
  • Improve passenger services
  • Fast Tracks at A/Ps
  • Personalized service
  • Post flight CRM

No change

  • Up-grade check in service
  • Modify Loyalty Program to

keep customer with A/L on

short/medium haul

lcc business model outside fsa
LCC Business Model Outside FSA

FSA LCC Subsidary Status

Delta

Re-integrated

United

???

British Airways

2002: sold Go

2006: start BA Connect

Deutsche Lufthansa

???

slide55

Migration and Segmentation

  • LCCs will continue to grow. Market share of 35% in 2010 seems not unrealistic.
  • LCCs in Europe will move into leisure destinations (sector length 2-3 f‘hrs) where traditional charter carriers have a significant „seat only“ business.
  • LCCs in Europe will increase frequency on leisure routes but will reduce the number of departure airports.
  • LCCs will adopt quality elements or product features from Full Service/Charter Airlines provided costs and complexity will not increase or they are providing another revenue stream (FFPs, IFE, seat reservation etc.)
  • LCCs will enter into arrangements with tour operators provided their business model will not be affected.