Low Cost Carriers
Phantom or Phenomenon
Wolfgang Kurth
Advolar
May 23, 2007
Kraków, Hotel Stary
The LCC Experience
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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!“)
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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“
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Customer Expectations
Expectations
• safety
Ranking of Product Elements
Relevance
Element
safety1
• reliability
essential
dependability
low fares2
• good value for money
• transparency/fairness
primary airports (infra
structure, connectivity)
important
price transparency
point to point
• decent infrastructure
nice to have
• competence/professional attitude
change of bookings
catering
lounge
unnecessary
• flexibility
flexible, competent staff
In-Flight Magazine
paper tickets
1 Set
2
of criteria: Aircraft (modern, looked after), tidiness, competent crew
Extremely low fares raise doubts with regards to reliability
Source: Contest Census, 2002; Monitor Group Analyse
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European Airlines Unit Costs
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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
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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)
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LCC Cost Structure
• Primary and
secondary airports
• Simplified handling
processes
14,0
0.4
12,0
0.1
0.2
12.0
0.6
0.8
1.2
10,0
2.7
8,0
Costs/ASK
(€ cent)
•
•
•
•
•
6.0
6,0
• Quick
Turnarounds,
• Point to point, no
transfers
• Higher seat
capacity per A/C
4,0
2,0
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.
0,0
Low-Cost
Airport Charges
Operation
Frills
Distribution
Personal
Fleet
Various
Legacy Airline
Source: AEA Reports, Monitor Analysis
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Price Transparency? (Vodafone)
11
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Price Transparency!
12
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Information (Power) To The People!
13
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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
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LCC Routes 2000
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Market Potential For European LCCs
Prediction for the European Low
Cost Market 2001E–2009F
Market potential of the German
Low Cost Segment 2001E–2009F
200
100
Optimistic
150
30%
International
Domestic
83
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 100
(m)
15%
PAX
(m)
50
42
50
25
21
32
Pessimistic
16
0
2001
actual
1
2
2003F
2005F
2007F
2009F
5
0
10
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
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Potential For LCC Routes
Potential new LCC lines each year in Europe
400
History
Forecast
350
300
250
200
150
100
50
0
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
Source: Airbus Industries
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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
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LCCs In Asia
Source: LHT AG, FH Worms, 2004
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Number Of Airlines On The Rise
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114 LCCs Worldwide (February 2007)
Canada (4)
Europa (58)
Canjet
HMY Airways
Sunwing
Westjet
Aegean Airlines
Air Arann
Air 2000
Air Baltic
Air Berlin
Air Finland
Air Scotland
Air Service Plus
Air Southwest
Alpi Eagles
Baboo
Belle Air
Blue1
Blue Air
Blu-Express
USA (9)
Air Tran
Allegiant Air
ATA
JetBlue Airways
Midwest Express
Southwest Airlines
Spirit Airlines
USA 3000 Airlines
Ted
BMI Baby
British European
Budget Air
CentralWings
Clickair
Condor
Corendo
EasyJet
Evolavia
Excel Airways
Fare4U
FlyMe
GermanWings
Globespan
Helvetic Airways
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
Iceland Express
SmartWings
InterSky
Snalskjutsen
Itali Airlines
Snowflakes
Jet2
Sterling
LTU
Sun Express
Meridiana
Thomson Fly
Monach Airlines
TUIfly
My Travel Lite
Transavia
MyAir
Virgin Express
Nordic Airlink
VLM Airlines
Norwegian Airshuttle Vueling Airlines
Pegasus Airlines
Windjet
Ryanair
WizzAir
Scanjet
SkyEurope
Middle East, Asia, South Pacific(26)
Adam Air
Aero Pacific
Air Arabia
Air Asia
Air Blue
Air Deccan
Air India Express
Bangkok Air
Cebu Pacific Air
Freedom Air
Go Air
IndiGo
Jazeera Airways
Jetstar Asia
Jetstar Australia
Kingfisher Airlines
Lion Air
Nok Air
One-Two-Go
Paramount Airways
Skymark Airlines
Skynet Asia Airways
SpiceJet
Tiger Airways
Valuair
Virgin Blue
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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
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US LCC Aircraft Deliveries
Source: Seabury Group, ACI Airline Restructuring Conference, Septt 0, 2004
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Customer Profile
Age distribution
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Parking At LCC Airport
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
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Customer Segmentation
FSA
FSA/LCC
high potential LCC market
Source: Harris Interactive Airline Segmentation Study
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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!)
-Business passenger
-Branding
-Low Frequency
-Branded meals
Cost

Hybrid Models
-Hot meals,
-Lounges,
-Paper tickets
-Main Airports
-Frequency
-Branding
-Low-Fares
-Frequency
-Grass strips
• Mix of business and leisure
• “A la carte” services
• Compete in some charter
markets
Service level
29
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LCC Range of Product Elements
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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
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Connecting LCC Passengers
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Network Overlaps
Source: McKinsey
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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!!
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For sun seekers nothing has
changed….
…we still like going on vacation!
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A Package Tour
Yesterday: Highly complex integrated product chain
Brochures
Essential?
no
Travel
Agency
Essential?
no
Transport
Incoming
Transfer
Essential?
yes
Essential?
no
Essential?
no
Tourist
Guide
Essential?
no
Hotel
Essential?
yes
Beach
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
•………..
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Mapping
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Tourists Are Most Sensitive To Airfare
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
Business travellers
Source: Boeing-sponsored traveller survey
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Protect Your Fare
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Protect Your Fare
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Websites Used For Holiday Bookings
Source: Mintel
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Distribution & Product Trends
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In The US Stage Length Is Increasing
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Stage Length Is Increasing In Europe As Well
Kilometer
Avg. Stage Length Ryanair
2000
2000
2001
2001
2002
2002
2003
2003
2004
2004
2005
2005
2006
Source: Davy European Transport and Leisure, 15.2.2005, wwww.ryanair.com
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Impact Of LCC Entry On Charter Routes
> 4 f‘hrs
< 3 f‘hrs
LON
2000 – 2005:
Routes served in competion (white)
Charter: - 50.6% (avg)
Routes served by Charter only (yellow)
-10.5% (avg)
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LCCs Eating Into Charter Markets
Routes to Spain
Ryanair, easyJet, Volareweb, bmi Baby,
Hapag-Lloyd Express, Germanwings,
Sterling, SkyEurope, jet2
232
118
69
48
17
2002
2003
2004
2005
2006
Source: CH-Aviation
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Fragmented Value Chain
Yesterday: Highly complex integrated product chain
Brochures
Essential?
no
Travel
Agency
Essential?
no
Transport
Incoming
Transfer
Essential?
yes
Essential?
no
Essential?
no
Tourist
Guide
Hotel
Essential?
no
Essential?
yes
Beach
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
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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
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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.
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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
•
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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
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Airline Segmentation
Source: AEA
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Size Is No Guarantee For Survival
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Conclusion: …no phantom, no phenomenon -
Reality!
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Thank you for your attention!
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