Wolfgang Kurth, advolar GmbH
How Low Can Low Cost Go?
February 06
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
February 06
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
February 06
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
February 06
Business Models
February 06
Difference Between LCC and FSA
February 06
European Airlines Unit Costs
February 06
Labor Efficiency
February 06
CEOs Don´t Necessarily Have An Airline Background
Joachim Hunold
Chariman of
Executive Board
Air Berlin
Airliner: no
Dr. Joachim Klein
CEO Germanwings
Airliner: no
Almar Örn Hilmarsson
CEO Sterling Airways
Airliner: no
February 06
David Neeleman
CEO JetBlue
Airliner: yes
Michael O´Leary
CEO Ryanair
Airliner: no
Herbert D. Kelleher
ex CEO Southwest
Airliner: no
Onno van den Brink
CEO Transavia
Airliner: no
Ray Webster
CEO Easyjet
Airliner: yes
Jozef Varadi
CEO Wizz Air
Airliner: yes
Christian Mandl
CEO SkyEurope
Airliner: no
LCC Mantras
February 06
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)
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
February 06
LCC Routes 2001
February 06
Caption:
Ryanair
easyjet
Volareweb
bmi Baby
Hapag-Lloyd Express
Germanwings
Sterling
Skyeurope
jet2
LCC Routes 2002
February 06
Caption:
Ryanair
easyjet
Volareweb
bmi Baby
Hapag-Lloyd Express
Germanwings
Sterling
Skyeurope
jet2
LCC Routes 2003
February 06
Caption:
Ryanair
easyjet
Volareweb
bmi Baby
Hapag-Lloyd Express
Germanwings
Sterling
Skyeurope
jet2
LCC Routes 2004
February 06
Caption:
Ryanair
easyjet
Volareweb
bmi Baby
Hapag-Lloyd Express
Germanwings
Sterling
Skyeurope
jet2
LCC Routes 2005
February 06
Caption:
Ryanair
easyjet
bmi Baby
Hapag-Lloyd
Express
Germanwings
Sterling
Skyeurope
Jet2
etc, etc
LCC Market Shares By Country
February 06
18.9% (2005)
Market Share Of European LCCs
February 06
Growth Rates And Market Shares
Europe: annual growth rate p.a. for LCCs, passenger
February 06
Content
 Why is the low-costs model different?
 How much of the market is low-costs?
 Can
Can low-costs
low-costs keep
keep growing?
growing?
 Is there any hope for full-service carriers?
 Conclusion
February 06
Market potential for European LCCs
200
Prediction for the European Low
Cost Market 2001E–2009F
Optimistic
100
February 06
Market potential of the German
Low Cost Segment 2001E–2009F
International
30%
Domestic
83
150
Number of passengers of
Ryanair & easyJet at basis of
announced capacities
75
Estimation formed by the use of
US market share & travel
frequency to the German
population
19%
PAX
(m)
100
15%
PAX
(m)
50
42
50
25
21
32
Pessimistic
16
0
2001
actual
1
2
2003F
2005F
2007F
2009F
5
0
Total Population
Low case: Number of no-frills journeys in Europe reach current UK / Ireland level (0.25 trips / capita) over 8 years
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
10
European Growth Potential
February 06
Significant Global Growth Potential
1)
February 06
2)
3)
4)
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
1)
2)
1)
2)
1)
2)
5)
2)
5)
2)
5)
VOLUME/GDP
Business Environment
BEGINNING TRANSITION
STAGE
February 06
RAPID GROWTH
STAGE
TRANSITION MATURE
STAGE
U.S. and
Europe
GDP
Latin America
Middle East
Asia
Volume
Africa
TIME
VOLUME/GDP
Business Environment
BEGINNING TRANSITION
STAGE
February 06
RAPID GROWTH
STAGE
TRANSITION MATURE
STAGE
U.S. and
Europe
GDP
Latin America
?
Middle East
Asia
Volume
Africa
TIME
Travel Intensity Without Significant LCC Market Share
February 06
Travel Intensity With High LCC Market Share
More trips because of cheaper travel
(at const. disposable income)!
February 06
Yield Per Passenger vs Price Per Seat
Index
1,8
Airplane Price per Seat
Yield per Pax Mile
1,6
1,4
1,2
1
0,8
0,6
0,4
1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004
1994 Constant Dollars
February 06
Current LCC Det. Spec. Comparison
February 06
Region:
Operator:
Aircraft:
Europe
Airline A
-800
Europe
Airline B
-700
Asia/Pacific
Airline C
-800
N America
Airline D
-700
Europe
Airline E
-700
MTOW
Thrust
Features
–
–


–





–


–

2002$
$
500,000
$
1,500,000
$
3,000,000
$
500,000 $
1,500,000
Note: Total Features are rounded to the nearest $500,000
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
February 06
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!
Seat actuator: app.45 kg*
Window shades: app.10 kg*
Gasper fans: app. 30 kg*
* B737-700, 4000 b‘hrs/year
TTL.: 85 kg = app. 11.000 ltr. fuel p. a/c and year *
Reducing Turn Around Time
Boarding through Forward and Aft Entry Door
February 06
Reducing Turn Around Time
Relocation of Forward Entry Door
February 06
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
February 06
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
February 06
Content
 Why is the low-costs model different?
 How much of the market is low-costs?
 Can low-costs keep growing?
Is there
there any
any hope
hope for
for full-service
full-service carriers?
airlines?
 Is
 Conclusion
February 06
Low Fares Trigger Demand
February 06
50%
For what reason would you fly more often?
40%
41%
30%
20%
17%
10%
11%
11%
safety
board
others
8%
8%
6%
0%
upgrades
schedule
safety
ground
Source: IATA Online Survey 2003
low fares
more
FFP´s
Tourists Are Most Sensitive To Airfare
February 06
Business travellers are more sensitive to airline and schedule
Portion of travellers naming factor as "most important"
17%
10%
7%
25%
19%
Airfare
Schedule
Airline
Airplane
30%
36%
57%
Tourists
Source: Boeing-sponsored traveller survey
Business travellers
Airfares are Less Important on Longer Flights
February 06
But flight length is a key factor
in determining what is important to tourists
Portion of travellers naming factor as "most important"
2%
11%
16%
18%
19%
52%
19%
63%
Flights of less than 2 hours
Source: Boeing-sponsored traveller survey
Flights of more than 5 hours
Airfare
Schedule
Airline
Airplane
Impact Of LCCs On FSAs
Southwest entry into the Sacramento-Portland Market
February 06
In The US Stage Length Is Increasing
February 06
Stage Lenght Is Increasing In Europe As Well
2000
2001
Source: Davy European Transport and Leisure, 15.2.2005
2002
2003
2004
2005
February 06
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!)
Cost
 Hybrid Models
• Mix of business and leisure
• “A la carte” services
• Compete in some charter
markets
-Hot meals,
-Business passenger -Lounges,
-Branding
-Paper tickets
-Low Frequency
-Branded meals
-Main Airports
-Frequency
-Branding
-Low-Fares
-Frequency
-Grass strips
Service level
February 06
Trends In The Airline Industry
February 06
Trends In The Airline Industry
February 06
Trends In The Airline Industry
February 06
Trends In The Airline Industry
February 06
Trends In The Airline Industry
February 06
Migration Of Business Models
Charter Airlines
February 06
Full Service Airlines
LCCs
Migration Of Business Models
?
February 06
Full Service Airlines
Charter Airlines
Hybrids
Hybrids
LCCs
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
February 06
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
February 06
Different Strategies Of LCCs And FSAs
February 06
LCC Business Model Within FSA
Economy 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
No change
February 06
Business Class
 Improve passenger services
 Fast Tracks at A/Ps
 Personalized service
 Post flight CRM
 Up-grade check in service
 Modify Loyalty Program to
keep customer with A/L on
short/medium haul
LCC Business Model Outside FSA
FSA
LCC Subsidary
February 06
Status
Delta
Re-integrated
United
???
British Airways
Deutsche Lufthansa
2002: sold Go
2006: start BA Connect
???
Migration and Segmentation
February 06
 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.
February 06
Thank you for your attention!