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


The LCC Experience: The LCC Experience


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: Customer Expectations safety reliability good value for money transparency/fairness decent infrastructure competence/professional attitude flexibility 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


European Airlines Unit Costs : European Airlines Unit Costs


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: 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) LCC Mantra „When removing airlines from the bosom of national politics, what remains is a simple business!“ (Ray Webster)


Slide10: 0,0 2,0 4,0 6,0 8,0 10,0 12,0 14,0 Low-Cost Operation Frills Distribution Personal Fleet Various Legacy Airline Costs/ASK (€ cent) 6.0 2.7 1.2 0.8 0.6 0.4 0.2 0.1 12.0 Quick Turnarounds, Point to point, no transfers Higher seat capacity per A/C Primary and secondary airports Simplified handling processes Single Class No Frills Extras at charge No lounges Re-usable boarding passes Web check in Etc. Direct sales channels Travel Agencies only if no extra costs No tour operators No CRS Less personal (lower service level) Minimum overheads More outsourcing Lower costs for maintenance, spare parts and training Lower Det. Spec. Source: AEA Reports, Monitor Analysis LCC Cost Structure Airport Charges


Price Transparency? (Vodafone): 11 Price Transparency? (Vodafone)


Price Transparency!: 12 Price Transparency!


Information (Power) To The People!: 13 Information (Power) To The People!


Why Buying Online?: 14 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


LCC Routes 2000: LCC Routes 2000


Market Potential For European LCCs: Pessimistic Optimistic Number of passengers of Ryanair & easyJet at basis of announced capacities 19% 15% 30% Prediction for the European Low Cost Market 2001E–2009F Market potential of the German Low Cost Segment 2001E–2009F 1 Low 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 Estimation formed by the use of US market share & travel frequency to the German population PAX (m) PAX (m) Market Potential For European LCCs actual


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


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


Number Of Airlines On The Rise: Number Of Airlines On The Rise


114 LCCs Worldwide (February 2007): 114 LCCs Worldwide (February 2007) Canada (4) Canjet HMY Airways Sunwing Westjet USA (9) Air Tran Allegiant Air ATA JetBlue Airways Midwest Express Southwest Airlines Spirit Airlines USA 3000 Airlines Ted 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 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 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


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 2005 Air Freedom Bankrupt December2003, Air Holland Bankrupt 2004, Air Littoral Bankrupt 15Feb2004 , Air Luxor Bankrupt, Air Madrid Bankrupt 15Dec2006 Air Polonia Bankrupt 05Dec2004, Air Wales Bankrupt 23Apr2006, Airlib Express Bankrupt 2003, Azzurra Air Bankrupt July2004 BasiqAir Changed name in Transavia Dec2004, BerlinJet Bankrupt, Bexx Air Bankrupt Sep2004, BuzzAway Sold by KLM to Ryanair Dream Air Never realized their Dream, Duo Bankrupt on 01May2004, DutchBird Bankrupt January 2005 EastJet Bankrupt End 2006, EU Jet Bankrupt 26Jul2005 Europe 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 Bankrupt Germania Express Taken over by FlyDba eff.27Mar2005, GetJet Poland Never started, Go Fly Sold by British Airways to EasyJet, Goodjet Bankrupt Hellas Jet Bankrupt 10May2005 , Hop Never started, never a website! (2004), Jet Magic Bankrupt 28Jan2004, Jetgreen Bankrupt on Wed.12May2004 after 1 week flying!, JetsSky Never started, probably a scam! (Jan2004) JetX Stopped scheduled flights March 2005 Low Fare Jet Bankrupt Maersk Air Merged with Sterling on 13Sep2005 Now Bankrupt May2004 Silesian 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 06Dec2004 Flamingo Airlines Bankrupt Asia + South Pacific Air Nauru Bankrupt, Air One (India) Never started, Athena Air (Malaysia) Never started, Awair Taken over by Air Asia 2005 BackpackersXpress Never started Citilink Fake low-cost airline discontinued by Garuda Indonesia in 2006 Diet Jet (Thailand) Never started Impulse Airlines Bankrupt Origin Pacific Airways Bankrupt 10Aug2006 SkyAsia (Thailand) Never started Smartjet Airways Never started, probably a scam! Transgulf Express (Gulf Area) Never started Canada Canada West Air Never started etsGo Bankrupt 11Mar2005 Tango Airlines Fake low-cost airline discontinued by Air Canada in 2004 Zip Fake low-cost airline discontinued by Air Canada in 2004 U Air Bankrupt Early 2006 USA 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


Parking At LCC Airport: Parking At LCC Airport


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 Satisfaction: Customer Satisfaction


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


Different Market Strategies: 29 -Low-Fares -Frequency -Grass strips -Main Airports -Frequency -Branding -Business passenger -Branding -Low Frequency -Branded meals -Hot meals, -Lounges, -Paper tickets 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 Different Market Strategies


LCC Range of Product Elements: LCC Range of Product Elements


LCC Operational Strategies: LCC 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 To remain competitive LCCs incorporate FSA elements into their operational strategies Source: SH&E


Connecting LCC Passengers: Connecting LCC Passengers


Network Overlaps: Network Overlaps Source: McKinsey


Side Step: EU – USA Open Skies Agreement: 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!!


Slide35: For sun seekers nothing has changed…. …we still like going on vacation!


A Package Tour: A Package Tour Brochures Travel Agency Transport Incoming Transfer Tourist Guide Hotel Beach Yesterday: Highly complex integrated product chain Essential? no Essential? no Essential? no Essential? no Essential? no Essential? yes Essential? yes 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 ………..


Mapping: Mapping


Slide38: Business travellers are more sensitive to airline and schedule Portion of travellers naming factor as "most important" Source: Boeing-sponsored traveller survey 57% 19% 17% 7% Tourists 30% 36% 25% 10% Business travellers Airfare Schedule Airline Airplane Tourists Are Most Sensitive To Airfare


Protect Your Fare: Protect Your Fare


Protect Your Fare: Protect Your Fare


Websites Used For Holiday Bookings: Websites Used For Holiday Bookings Source: Mintel


Distribution & Product Trends: Distribution & Product Trends


Slide43: In The US Stage Length Is Increasing


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


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


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


Fragmented Value Chain: Fragmented Value Chain Brochures Travel Agency Transport Incoming Transfer Tourist Guide Hotel Beach Yesterday: Highly complex integrated product chain Essential? no Essential? no Essential? no Essential? no Essential? no Essential? yes Essential? yes 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


Conclusion: 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


Conclusion: 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


Conclusion: 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


Airline Segmentation: Airline Segmentation Source: AEA


Size Is No Guarantee For Survival: Size Is No Guarantee For Survival


Conclusion: …no phantom, no phenomenon -: Conclusion: …no phantom, no phenomenon - Reality!


Slide55: Thank you for your attention!