Air Scoop October 2008

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EDITORIAL

Highlights in this IssueInterview of Alex Cruz (CEO of clickair) p. 3

Economic Growth & Air Trafc Penetration p. 5

Oil: Ryanair Pays Twice p. 7

The World Low Cost Airlines Congress 2008 p. 9

Empty Plances & Fake Passengers p. 13

Air Scoop - October 2008 www.air-scoop.com

The Low Cost Carriers Analysis Newsletter

European LCCs: An Evolving Market

The international situation locked with market recession, nan-

cial crisis and oil prices increase has a deep impact on the Eu-

ropean low-cost carriers sector. Long time awaited by some,

the famous blood bath should come any time soon, leading to conso-

lidation and bankruptcies throughout Europe. These themes, amongmany others, were discussed in September during the annual World

Low Cost Airlines hold in London. Top executives and analysts of

the market were there to tackle main issues concerning the sector (p.

9). Oil prices increase was still the main issue, and hedging strategies

were at the heart of many talks. Some carriers have done some good

choice (Flybe for instance) while others seemed to have a miss their

oil analysis, like Ryanair (p. 7). Alex Cruz, CEO of clickair, explains

the strategy of its company in an exclusive interview (p. 3).

Another big issue currently is about getting more revenues, others

than by selling tickets. The way to generate more ancillary revenues

is a key question (p. 2). Still other means are still ongoing, especiallypublic subsidies, a hot topic in France and Belgium, according to some

analysts. To get more subsidies to balance the low prices of their tic-

kets, it seems that all means are good (p. 13). All areas in Europe are

touched, including Central and Eastern Europe, about which we made

an analysis of its economic growth and air trafc penetration (p. 5).

AIR SCOOP ANNOUNCEMENTS

A Glimpse of Headlines News!

Vueling September passenger trafc falls 20 pct

Passenger trafc at Spanish budget airline Vueling

fell 20.1 percent year-on-year to 500,977 passen-

gers in September, the company said on Friday.

Vuelings passenger load factor, which measures

the amount of available capacity lled on its i-

ghts, fell 8.5 percentage points to 70.3 percent of

capacity compared with 78.8 percent a year ear-lier.

Baltic airlines locked in legal battle

Rival airlines airBaltic and FlyLAL- Lithuanian

Airlines are prepared to take their dispute over

alleged unfair competition all the way to the Eu-

ropean Commission, the chairmen of both com-

panies told Deutsch Presse-Agentur dpa on Wed-

nesday. The spat began on September 30 when

media reports from Lithuania said local airline

FlyLAL had obtained a Lithuanian court orderfreezing airBaltics xed assets in Latvia, including

its headquarters at Riga airport.

Spanish airline Clickair to ground 7-8 planes

Spanish airline Iberias low-cost afliate Clickair

will ground seven or eight planes due to expected

weak demand during the winter season, a spokes-

man for the airline said on Thursday. Data from

(airports operator) Aena shows that Barcelonas El

Prat airport has seen a notable decline in trafc,

a Clickair spokesman said, noting that the carrier

will be operating 17 or 18 planes compared with

25 currently.

Passengers sueing Ryanair for cancelled ights

Ryanair is being sued by passengers whose ights

have been cancelled. A Dutch company has ins-

tructed lawyers in Dublin to start proceedings

against Ryanair. EUclaim, which specialises in

launching legal action against airlines, has offered

to handle compensation claims on behalf of 40

passengers, reports The Telegraph. The legal ac-

tion against Dublin-based Ryanair could lead toan avalanche of similar claims being made.

More on http://airscoop.blogspot.com

New Air Scoop Website: Fresh Air!

Air Scoop website got a new template. Check-it out online!

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BIRDS EYE VIEW


Ancillary revenue generation for airlines seems simple

enough a concept. After all, hotels, retailers and other in-

dustries routinely generate substantial percentages of re-

venue from outside of their core product offerings; why

couldnt airlines, with one of the more perishable core pro-

ducts in the market, also develop those auxiliary streams?

Low cost carriers were pioneers in the area of ancillary

revenue generation, taking advantage of this key aspect of

the airline business model years before their legacy coun-

terparts began to. LCCs were often more innovative when

it came to implementing ancillary revenue generation ini-

tiatives as well, creating opportunities for additional sales

instead of charging for existing services or increasing exis-

ting fees (though, of course, that was done as well).

But now that legacies have embraced the ancillary revenue

phenomenon wholeheartedly, how can LCCs maintain

their competitive edge in this arena? If legacies have usur-

ped the ancillary advantage once possessed by LCCs, howwill they then differentiate themselves in a newly crowded

eld?

Low cost carriers can achieve this by focusing on three

areas of ancillary revenue development where they are

best positioned to compete with legacy carriers;

First, LCCs must continue to evolve toward an ecommerce

model at a faster rate than their legacy competitors.

Second, LCCs must continue to leverage the exibility oftheir business model to remain at the forefront of ancillary

revenue innovation, and continue to lead the industry to-

ward new products and services.

And last, but perhaps most importantly, LCCs can make

the next great leap forward in ancillary revenue generation

by reimagining one of the more successful legacy-initiated

concepts of the last three decades: the loyalty program.

By excelling in these three areas - ecommerce, innovation,

and loyalty - LCCs can beat back the legacy intrusion intothe ancillary revenue arena and maintain their competitive

edge.

Leading Edge Again

LCCs as a group were early to recognize the power of the

internet to facilitate ancillary revenue generation. Just look

at LCC pioneer Ryanair as it included the two most popular

ancillary offerings - hotel booking and car hire- when it rst

launched its website in 2000. Other low cost airlines soon

followed suit. Almost a decade one, the role of the indivi-

dual airline website has increased exponentially for LCCs,

becoming the engine of ancillary revenue growth and the

launching pad for nearly every new initiative implemented

by LCCs. As (increasingly) the only portal through which

the customer has contact with an airline before actually

boarding the airplane, the typical LCC website must focus

on both meeting passengers expectations and extracting as

much revenue from that encounter as possible. Fortuna-

tely, these are not mutually exclusive concepts, as the suc-

cess of enterprises like Amazon.com demonstrates. LCCs

will do well to incorporate some basic ecommerce tactics

into their overall web strategies, primarily the effective

tracking and management of customer data and the auto-matic presentation of additional high-adoption-potential

offerings. This technology is already available; it has just

needs to be taken up by the industry. And if the LCC sec-

tor can beat the legacies to the ecommerce model, it can

and will maintain its ancillary revenue edge.

The Ancillary Revenue Generation: A New Era

If it seems like legacy airlines have stumbled into the an-

cillary era, its probably because they have. While it ma-

kes logical sense in a time of record fuel prices to effec-

tively tax excess ight weight, thereby encouraging lessfuel usage while simultaneously generating revenue (i.e.,

the checked baggage fees now imposed by many legacy

lines), consumer and media backlash was strong against it.

American Airlines began offering passengers the ability to

choose their own seats, only to turn around a couple of

years later and charge them for the privilege. While both

of these examples had been implemented by LCCs long

before the legacies adopted them (Spirit Airlines began

charging a fee for the rst checked bag in 2007, nearly a

year before American become the rst legacy to do so),

the LCCs experienced far less consumer anger. In part,this is because many LCCs had the advantage of starting

without frills, whereas legacies had to ght a heritage of

bundled luxuries. And LCCs, with mostly point-to-point

and regional service and operating models that preclude

Ancillary Revenue Generation: Here and Now

By Rapahel Bejar

CEO, Airsavings SAemail: [email protected]


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BIRDS EYE VIEW


large advertising and marketing budgets, are often farther

outside the public eye than their legacy counterparts.

But LCCs have also consistently been more innovative

with their ancillary offerings, a trend that makes their no-frills baseline a lot more palatable to consumers. With

this, LCCs have created the perception of a customizable

ight experience, rather than a slow degradation of a fami-

liarly-packaged item. The myriad and inventive booking

path options (including single-use lounge passes, online

gaming, carbon offsets, and seat spacing upgrades) have

facilitated this perception, as have new in-cabin options

coming online (like in-ight internet service Gogo, which

is already in use by American and coming soon to Virgin

America). LCCs need to maintain their edge in new pro-

duct innovation if they are to compete with the majors forancillary revenue market share.

A New Take on a Tried-n-Tested Concept

Perhaps the newest take on an old standby is the substan-

tial revamping of tired frequent ier programs. Probably

the rst ancillary revenue, frequent ier programs began

in 1981 with Americans AAdvantage and Uniteds Mileage

Plus, and have been bright spots for legacy operations ever

since. However, issues with mile redemption and percei-

ved value have dogged the lucrative assets in recent years.

Loyalty initiatives, particularly frequent ier programs,

should be linked to ancillary services, either by promotion

or by direct sale. This allows for the effective retention

of ancillary-purchasing customers to the booking plat-

form. It also serves as an outlet for miles, points or other

promotionals that have fallen on disfavor due to lack of

redeemability. In fact, frequent ier programs are ideal

ancillary opportunities, provided they are framed effecti-

vely to participants.66% of airlines believe frequent ier programs generate

signicant ancillary revenue, with 65% of that revenue, on

average, being derived from the sale of loyalty units (miles,

etc.) to 3rd party credit cards.

If LCCs can capitalize on this burgeoning phenomenon,

they can lay claim to the rst (and last) authentic legacy-

initiated ancillary.

With these three strategies rmly in mind, LCCs can

continue to compete effectively in a difcult operating

environment. Already in a good position from an expensestandpoint (low cost, after all, being their dening charac-

teristic), the sectors continued leadership in the area of

ancillary revenue generation should help LCCs to thrive,

even perhaps grab some market share from the lumbering

legacies.

http://www.ryanair.com/site/EN/about.php?page=A

bout&culture=GB&pos=HEAD

http://travel.latimes.com/articles/la-trw-spirit19jun18

http://www.nytimes.com/2008/05/22/business/22air.

html?ex=1369368000&en=418084a719dc1cd6&ei=5124&

partner=permalink&exprod=permalink

4 http://communication.howstuffworks.com/ff-pro-

grams.htm

Interview of Alex Cruz

(CEO of clickair)

What is the impact of oil prices increases on clickairsactivity?

Due to oil prices increases, clickair has the worst EBIT

results than planned for 2008. Having said, the end of

the year trends might ease the tension, as prices are going

down.

For every euro of increase, we have only been able to pass

on 40 cents in pricing.

How much does the fuel count in your total costs?

At the beginning of the year, fuel was 35% of our costs, and

it jumped to 43% during the summer.

What is your current hedging policy? What is the fuel

price where you break even?

Sorry, we consider this information condential at this

time.

Some other low-cost carriers announced they would re-

duce their expansion plans, cut jobs, ground some air-

crafts, y slower on some destinations What is your

strategy to limit the impact of fuel crisis on your busi-

ness?

To do so, we are reducing our eet to support a decrease

of 4 rotations (21 rotations during the summer, 17 rotations

during the winter). This capacity adjustment does affect

our eet size and accordingly crew jobs.

From a product perspective, there are few destination

cuts, but mostly we have adjusted frequencies.


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BIRDS EYE VIEW


Economic growth and air trafc penetration recent trends and future prospects

A comparison between Western Europe and Central Europe

A remarkably strong nexus has been observed between

the global growth of air trafc (measured as passengers

carried) and global economic growth. A study of the

consultant rm, Frontier Economics, prepared for the Eu-

ropean Low Fares Airline Association in 2006, contains

the following chart illustrating this correlation in the pe-

riod of 1985 to 2005:

One may not be too much surprised at this relationship

observed at the global level especially because the regio-

nal level may still demonstrate signicant variations. This

article intends to highlight such recent differences in airtrafc growth and economic progress between Central

Europe and Western Europe. The aim of the analysis is to

provide a follow-up on the editorial of the June issue of

Air-Scoop (The oil price shock and its effects on low-cost

business model) by identifying future growth opportuni-

ties for low-cost airlines on the one hand, and by drawing

attention to the limitations to market expansion on the

other hand.

If oil prices keep rising, then not only the cost of transport

increases but commodity prices as well. This may involve

that a relatively larger share of household income will bespent on commodities and less will be spent on leisure

expenses, like travelling. Obviously, rising prices may also

trigger ination which affects every single player in the

economy. In turn, a drop in economic growth might (but

not necessarily) happen. Nevertheless, under such condi-

tions an expected outcome will be that both the demand

and supply of air transport declines. If the decline is sharp

and constant due to a deep economic crisis, then, only

the most cost efcient and biggest players would be able

to keep up with the intensifying competition. However,

apart from taking cost-cutting, revenue-raising and ef-

ciency-enhancing measures (which were discussed in the

June editorial), another possibility is to enter into markets

less affected by the crisis or to such markets where a rise

in demand can still be expected. In this sense, a compa-

rison between Western and Central Europe may reveal

some interesting consequences.

The following calculations are based on recent Euros-

tat and Eurocontrol data. First, we chose the ve biggest

EU member states, which generate the bulk of Western

European air transport as well, France, Germany, Spain,

Italy and the United Kingdom. Then, from Central Eu-

rope we selected the so-called Visegrd countries, Poland,

the Czech Republic, Slovakia and Hungary. After calcula-

ting their average real GDP growth rates for the period of

2002-2007 and their air passenger growth rates (measuredas passengers carried) for the same period, a comparison

between these regional country groups is possible. Growth

rates were calculated in relation to the previous year, thus

the gures for each year represent the percentage change

in air trafc and GDP vis-a-vis the preceding year. The

next chart summarizes these ndings:

First of all, throughout the observed period, the avera-

ge real GDP growth rate of the selected Central Euro-

pean countries was signicantly higher than that of the

major Western European states. However, the difference

between the average GDP growth rates stayed more or

less constant through the entire period. When turning the

attention to the passenger growth rates, there is a remar-

kable difference between the Western European and the

Central European region.

While the Western European area demonstrated a pattern

quite similar to the global one, namely passenger growth

rates more or less followed the GDP growth rates; this


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BIRDS EYE VIEW


was not the case in Central Europe. A steep increase in air

trafc took place until 2007, which did not seem to corres-

pond to economic growth. At least, its volume was much

more dramatic than one would have expected it based on

the rate of economic growth. What is the reason for such

striking difference between Western Europe and Central

Europe?

One of the major underlying factors is the difference

between the levels of air trafc penetration. While the

Western European market had already undergone a consi-

derable liberalisation by 2002, which resulted in a major

expansion of the market due to the arrival of new players,

Central Europe was only at the initial stages of this process

at that time. There was a big gap therefore to ll, which

meant great market opportunities for air carriers in the re-

gion. Given the peculiarities of the Central European mar-

ket, low-cost carriers were mostly able to take advantageof liberalisation. Much of the growth of air trafc in Cen-

tral Europe was caused by the entry of low-cost players.

While the European market share of the low-cost segment

(measured as total ight movements) was below 4 % in

January 2002, by January 2005 it rose to 13,6 % and excee-

ded 18 % by 2007. To this sudden increase, as the above

gures demonstrate, a major (but not exclusive) contribu-

tion came from Central Europe. Has this market already

reached the point of saturation, or, in other words, has air

trafc penetration reached levels comparable to that of

Western Europe? In order to assess this, a potential measu-re can be the number of passengers (both international and

national) carried per country inhabitants. The relevant -

gures are displayed in the following chart:

Again, there is a striking difference between Western Eu-

rope and Central Europe. In spite of the comparatively

lower air trafc growth rate in the given period, the rise

in the number of passengers carried per inhabitant in the

selected ve major Western European countries was quite

similar to the Central European trend. Nevertheless, the

gap between the two regions decreased signicantly: while

in 2001 approximately 5 times more passengers per in-

habitant were carried in Western Europe than in Central

Europe, by 2006 this gap shrank to 3.5. However, the gap

is still enormous, which may suggest that future growth

opportunities are still to be utilized in Central Europe.

One may argue that the comparison between large Wes-

tern European countries and small (except for Poland)

Central Europeans is not appropriate. In order to mitigate

such claims, we selected two Western European countries

(Belgium and Portugal) of which population size (approxi-

mately 10 million inhabitants) is comparable to two Cen-

tral European states, Hungary and the Czech Republic.

The above observed difference does not disappear when

comparing these four countries to each other. Air trafc

penetration still remains signicantly lower in Central Eu-

rope than in Western Europe:

In sum, the Central European market seems to offer more

opportunities for expansion for air carriers, especially for

LCCs. However, there are considerable limitations as well.

First, the density of international airports is lower in the

region (capacity limit) than in Western Europe and, ove-

rall, the existing airport infrastructure is also of a lower

standard, a lot of investment is still required to improve it.

This poses a certain limit to quick market growth.

Second, while air trafc between Western European city

pairs is intensive, connections between Central and Eas-tern European destinations are much less dense and are

still vastly dominated by traditional carriers. The reason

for this is the low air trafc penetration on the one hand

and the low demand for service between these East-East

city pairs on the other hand. There are exceptions, like

Wizzair that has recently began to serve routes between

major Ukrainian cities, but the dominant trend is that low-

cost carriers primarily chose to serve West-East destina-

tions. Third, even though there may be a potentially high

demand for low-cost air carriers, this is also a disadvantage

at the same time. People in this region spend signicantly

less from their disposable income on leisure activities and

travel than in Western Europe. This implies that custo-

mers may be more price sensitive, therefore more likely

to choose the low-cost carriers but at the same time a re-

latively little increase in fare prices may lead to a sharp


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BIRDS EYE VIEW


Oil: Ryanair Pays Twice

Fuel forms a major part of total costs for budget carriers.

In the current situation when it is difcult to predict oil

market movements, the real value of hedging is hard to es-

timate. The decision to hedge depends on perceived risk.

That is, if crude oil prices fall below the locked price,

hedging will appear to be a waste of money only. In other

words, a carrier should be sure that the amount of money

spent on hedge contracts wont exceed the actual savings

from hedging. Otherwise, it might be better for carriers tospend this money on maintenance and expansion needs.

Obviously, there cannot be a unique rule for all carries as

each of them has its own way of making money and its

own hedging strategies. However, the recent cases have

shown that hedging strategies might differ completely

from carrier to carrier, and that there are some real hed-

ging losers.

Seems like Ryanair has fallen under some strange kind of

a fuel spell. Having refused to hedge for the year at lower

rates, Ryanair reported a rst-quarter loss. In the rst -

nancial quarter ended June, 30 the carriers prot fell by

85% if to compare with the year 2007 to 21 million. At

the same time, the carriers fuel costs increased 93% to

367 million which makes up about 50% of the overall

operational costs. Though Michael OLeary said earlier he

would not hedge fuel until prices dipped below $100 per

barrel, Ryanair hedged 90% of its September fuel at $129

a barrel. Looking backward over earlier mistakes, Ryanair

even hedged 80% of fuel for the next three months till

December, 31 at $124 per barrel. With the prices going

down, this might be a loss-making decision. Interestingly,

Michael OLeary admitted his mistake in not having bou-ght fuel hedging contracts when prices were below $100

per barrel. Here emerges a question as to why the Irish

carrier refuses to look backward over earlier mistakes.

Exactly two years ago, September 2006, Ryanair hedged

a considerable amount of its fuel at a level much higher

than falling market prices. On the other hand, a strong

belief that prices would go down had already got Ryanair

into trouble several years ago when the carrier remained

unhedged against rising prices. Does this make hedging a

matter of a lucky guess only?

This time Ryanair has not hedged fuel for the period

between January and March 2009 hoping that fuel priceswill continue to go down so that the carrier would be able

to gain prots starting January 2009. Savings made during

the fourth quarter might come in very handy as analysts

predict low yields this winter because of the global eco-

nomic recession. Ryanair reported to follow its same old

strategy and to launch large sales at reduced fares to sti-

mulate passenger demand. According to preliminary fo-

recasts, Ryanair is planning to carry more than 65 million

passengers in the year ending March, 31.

Michael OLeary commented on other airlines as well,

predicting more bankruptcies in the industry because of

high oil prices. Speaking of Ryanairs future, OLeary was

more optimistic if to compare to his July forecast and pro-

mised to break even if oil stays at $100 a barrel. Amongst

potential bankrupts OLeary mentioned SkyEurope, Flybe

and Jet2. However, both Flybe and Jet2 rejected the claim

stressing that they had hedged most of their fuel require-

ment at attractive rates. Unlike Ryanair, Flybe is sure to

be able to break even if oil reaches $170 a barrel. This fact

shows that aggressive hedging strategy comes to be more

benecial for an airlines prot than aggressive expansion.

decline in demand. As a consequence, the oil price shock

may have a greater impact on the Central and Eastern

European air trafc demand than on the Western Euro-

pean one.

From this perspective, the conclusion is twofold: on the

one hand, Central and Eastern Europe may indeed offerfurther market opportunities for air carriers, primarily

for LCCs. On the other hand, these opportunities can

only be realised under favourable external and internal

conditions: both stable economic growth and modest le-

vel of oil prices are crucial. The rst condition ensures a

continuously rising demand for air travel, while the se-

cond condition inuences both the supply (LCCs busi-

ness model) and demand side. However, at the moment

only the economic growth is there which, given that the-

se countries are open economies, is endangered by exter-

nal shocks such as the ongoing sub-prime crisis. In other

words, these economies are more vulnerable than Wes-

tern Europeans, thus the risk associated with pursuing

economic activity in the Central and Eastern Europeanregion is higher. Those air carriers operating in this area

that are unable to incur such risks will be driven out of

the market or will be acquired by more powerful actors.

These factors all seem to suggest that in the coming years

the long-awaited consolidation of the air transport mar-

ket will take place in Central and Eastern Europe, too.



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BIRDS EYE VIEW


23 - 24 September 2008, QEIICC, London

This year again, the World Low Cost Airlines Congress turned to be the biggest event of the market in terms of number

of attendees. According to Karen Forster (Managing Director, Terrapinn), more than 500 aviation professionals attended

the event, and 300 the Budgies World Low Cost Airline Awards.

The event covered many current issues facing the low-cost carriers industry: fuel crisis, overcapacities, environment

For Patrick Murphy, former Chairman of Ryanair, the upfront of the problem is the price of fuel, and furthermore, consu-

mers capacities to pay have decreased. Facing oil prices, each LCC has its own hedging strategy. easyJet for instance have50% hedged, and know that above 130$ per barrel, they wont make any prots, said Hal Calamvokis, Strategic Planning

Manager at easyJet, which explains why its not well hedged.

The World Low Cost Airlines Congress 2008

Another current issue is the merger of the two Spanish LCCs, Vueling and clickair. The merger is on

track, but not on specic time. There will be challenges for the merger, but good values should come

out of both companies, said Alex Cruz, CEO of clickair.

For Mike Rutter, CCO of Flybe, focused on 4 key areas:

1. You need to be the leader in what you do

2. You need a more balanced passengers portfolio

3. You need to have a high frequency4. You need to focus on the cost base

Something has changed in Europe and in the UK, last weeks. Customers trusted things they dont

believe real any longer. They will need to believe in true values from now on.



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Daniel Skjeldam, CCO of Norwegian Air Shuttle, said they had to work restructuring their network

due to fuel price. Norwegian is a LCC as it comes to costs (SAS has twice their costs), but it is a lot

focused on the business market, with high frequency, frequent traveler program

We do believe that leisure market has a problem. Leisure passengers will choose to go by bus, or

stay in their sofa, instead of taking a plane, he declared. We believe there will be casualties betweenLCCs if they dont have a strong local market. Norwegian has invested a lot into technologies, in

order to avoid waiting in long lines for instance.

Discussions also turned around the evolving business models of LCCs. Thomas Winkelman,

CEO of Germanwings, pointed out 5 key points:

1. I believe customers dont care about the denition of the carriers (LCCs, hybrid, charter,

point-to-point, new generation). They look for quality and price. There are business models

ying from nowhere to nowhere for nothing, especially if these routes are paid by local sub-

sidies.

2. Quality decides. SouthWest is my model as a high quality model. In the US, cheap quality

carriers have simply disappeared.3. We dont have enough competition between carriers yet.

4. Not enough competition at airports and air trafc control.

5. Size does matter, but carriers need ideas to generate revenue and value.

TUI is said to be in talks with Air Berlin about a possible merger between the german carrier and TUIFly, a subsidiary of

TUI. This scenario could occur if current discussion between TUIFly and Germanwings and Condor should fail. TUI could

acquire shares in Air Berlin if a merger happened. Coming mergers in the German market will have an important impact,

as the new entity would become one of Germanys largest airlines, active in low-cost and chartered ights.

Another issue discussed during the congress was the shortage of pilots. A prime problem Flybe has is the sourcing of pilots

of the right caliber to operate with us and hopefully stay with the airline. I think you could say that this is probably oneof our biggest challenges said Brian Watts from Flybe. Some LCCs are now performing their own pilot training to face

this pilot shortage.

A new wave of consolidation could soon be made in the European LCC market. However, easyJet should not be involved

in any further mergers, according to managements statement to investors.

Ryanairs management told its investors to expect a breakeven result for its scal year (end in March 2009). Michael

OLeary believes more airlines will fail in the coming weeks and months, leading to a further decline in worldwide jet

fuel prices. SkyEurope could be one of those. Still in deep losses, SkyEurope received a 14 million dollars loan from York

Capital, its largest shareholder, and seeks 30 million dollars more.

Hallways Buzz in London

Ryanair doesnt always win. They made a weak hedging policy forecast.

Is easyJet no longer concerned by environment? Nothing about it in their last statement to investors.

Air Berlin hedged well, but still faces uncertainties with their balance sheet.

Flybe has a good hedging. Its getting out while the going is good.

Norwegian is on SAS back, after rumors of takeovers. Lufthansa?

Vueling still in great nancial difculties. Could the merger with clickair mean something?

SkyEurope: doomed?; Zoom, XL SkyEurope?



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IATA had forecast an average price of 131.50 dollars a barrel for 2008. This price has been exceeded for most of the early

summer, but still at this price, fuel would cost 74 billion dollars in 2008, around 14% of airlines revenues. So the industry

would have to increase ticket prices by an average of 32 dollars per passenger for the fuel increase.

Ancillary Revenues as a Share of Total Revenues

The next World Low Cost Airlines Congress 2009 will be hold in Barcelona, the 29th and 30th of September.

For more information on the World Low Cost Airlines 2009, visit www.terrapinn.com/2009/wlac/.

Chris Tarry, from CTAIRA, declared: I dont buy the argument that low-cost carriers will necessa-

rily benet from other accriers. They still have to survive. They have a high break-even factor andlow cash. We will see deferrals and cancellations of new aircraft orders. The industry is still two years

away from the peak in deliveries of existing orders. They are too many planes in the backlog. He

also noticed that lease rates were falling, which is a marker of the industrys current issues.

Talking about Vueling/clickair current merger project, he said Putting two weak businesses to-

gether doesnt result in the emergence of a strong one.

The holy graal is now to identify ancillary reve-

nues as key to LCCs protability, as their share

ranged from 2% to almost 30%.

The Budgies awards have been created to honorand generate public recognition of the efforts,

accomplishments, and positive contributions of

companies and individuals in the low cost air-

line industry.

Best Newcomer:

WINNER: AirAsia X.

Best Passenger Experience:

WINNER: Virgin Blue

Best Website:

WINNER: Germanwings

Special Merit for Commitment

to the Environment

WINNER: Flybe

Best Low Cost Airline - Americas:

WINNER: Southwest Airlines

Best Low Cost Airline - Europe:

WINNER: EasyJet

Best Low Cost Airline Award:

WINNER: Southwest Airlines

Lifetime Achievement Award:

WINNER: Herb Kelleher,

Founder and Executive Chairman,

Southwest Airlines



DOWN TO EARTH

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BIRDS EYE VIEW

Air Scoop - October 2008 www.air-scoop.com3

As fuel prices rise, LCCs have an even greater incentive

to y fuller planes with passengers paying higher fares.

Ryanair and easyJet operate with the highest load factors

in the industry (near 90% over the summer), and are in-

creasing yields through higher ticket prices and higher an-

cillary charges. However, some smaller LCCs have chosento y emptier planes with passengers using free tickets.

Earlier this year, Flybe was implicated in a scandal when

the carrier hired actors to achieve a threshold passenger

count on a route, thereby receiving a subsidy from the

airport. Some carriers are even operating empty ights.

With all the problems LCCs face, why do some compa-

nies engage in these behaviors? Two words: airport sub-

sidies.

Arguably, part of the problem lies with the airlines them-

selves. The airline business has low margins, and airlinesare desperate for competitive advantage and additional

revenue. In order to survive, carriers want to extract

the best possible deals from airports, leading to higher-

than-necessary subsidies. However, airports are mostly

to blame. Many airports, and the local governments that

support them, need LCCs to improve passenger levels

and generate tourism. Subsidies are often needed because

the barriers to receive airline service, in this era of higher

costs, are increasing. However, oftentimes subsidies are

handed out without sufcient assessment of a routes via-

bility. Therefore, airports sometimes dole out large cashamounts for relatively few passengers, especially on routes

not specically focused on generating tourist trafc. Mo-

reover, airports all too frequently cross the line between

legal and illegal aid, privately negotiating with one carrier,

while refusing to offer comparable aid to other carriers.

This is not to suggest that all LCCs are created equal in

terms of their attitudes towards receiving subsidies. Rya-

nair has been more successful than others in using sub-

sidies to successfully launch new routes from small air-

ports. Often, these facilities lack international service, and

Ryanair is a boon for the small communities that receive

an inux of valuable tourist dollars. In most situations,

Ryanair will typically launch ights to London, and then if

those are successful, to other bases. Many of these routes

have become commercially successful for Ryanair and the

airports, enabling airports to withdraw subsidies over a

period of time.

But, there have been occasions when Ryanair has opened a

new destination, only to nd that its expansion prospectsare limited, as few of its other bases outside of London

can support its services. Ryanair has withdrawn ights on

many routes because of low demand, or because of an

unexpected increase in the airports costs. This strategy,

while somewhat ruthless, has helped the airline minimize

losses on new routes. Often, the most successful airlines

are those that know when to cut their losses early, and

Ryanair has learned this lesson well.

Flybe, on the other hand, has tended to use subsidies from

airports not to necessarily foster creation of a long-term,sustainable route, but rather to improve the bottom line.

Subsidies are more effective in markets with large po-

tential for trafc increases, such as tourist markets that

have not yet been exploited. Markets that have a higher

proportion of business trafc generally see slower gains in

trafc. Moreover, airports that need to offer subsidies ty-

pically lack signicant demand from business travelers be-

cause theyre typically distant from major trade centers.

Airports can be seen as subsidizing airlines in two ways,

through direct subsidies and inefcient slot appropriation.By offering cash to carriers that add new routes or meet

specic passenger count totals, airports can spur the crea-

tion of new services. Through poorly managed subsidy

programs, airports can end up in a very undesirable situa-

tion, having to pay a subsidy to a carrier that did not y

passengers beneting the airport in any way, such as what

Flybe did in Norwich. Norwich, like any airport, should

consider using subsidies, but should work closely with

carriers to develop targets that are meaningful and realis-

tic, on routes that will actually produce tangible gains in

passenger totals. This means airports must carefully select

routes to subsidize.

Simply because a carrier is able to or interested in serving

a route does not mean that it is the best use of airport dol-

LCC Contrast: The trend is fuller ights, so why are some carriers ying empty planes or

using fake passengers?

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lars. If a facility is looking for signicant passenger gains,

targeting subsidies at carriers like Flybe, which operate

smaller planes shorter distances, on routes own mostly

by business travelers, may be less attractive than working

with Ryanair or easyJet to bring in more passengers from

greater distances to tourist markets.

Unfortunately for airports, given the high xed costs of

the airline business, LCCs will need subsidies to take the

risks associated with a new route. Until the EU more

stringently regulates this practice, subsidies will continue

to exist. However, more careful and conservative route

analysis, along with consultation with airlines about ways

to increase passenger totals, will help airports ensure their

investments.

Moreover, airports can articially limit passenger counts

through antiquated slot arrangements that limit compe-

tition. While this is a non-issue at most facilities, larger

airports like Heathrow are grappling with carriers such as

BMI, which intends to y empty planes this winter in or-

der to maintain slots. The slot restrictions, which require

airlines at Heathrow to use the slots at least 80% of the

time in order to keep them, are inhibiting the ability of

new carriers who want to y into Heathrow (with paying

passengers) and introduce competition into the market.

Since the introduction of Open Skies, Heathrow has be-come enormously popular for foreign carriers. Few low-

cost carriers have been able to obtain slots there, because

of high price and scarce availability. Many foreign carriers

are willing to pay much more for a slot than LCCs are,

since intercontinental ights can generate more revenue

with larger planes and longer sector lengths. Regulation

will be needed to ensure that slots are distributed more

equitably, to carriers who y paying passengers. Govern-

ments need to work with airlines and airports to ensure

that the standards for keeping a slot are very high. Not

only should airlines be required to use a slot at least 90-95% of the time, but also, there should be a combination

of regulations ensuring high load factors, as well as mini-

mum plane size.

My suggestion would be for airlines that fail to achieve

an average 70% load factor on a given ight over a three-

month period would lose the slot for that ight. Airlines

would be required to use aircraft with a minimum of 100

seats. This would force airlines to ll larger planes, more

efciently using the valuable runway space at Heathrow

and airports like it. Moreover, to ensure such a high load

factor, airlines might be forced to discount some seats,

beneting passengers and encouraging competition.

However, these regulations would need to be implemen-

ted in careful consultation with airlines. A 70% load fac-

tor on early-morning ights sometimes is not feasible, and

some carriers should be allowed exemptions on certain

ights, but a target like this would ensure efcient move-

ment of passengers using the least number of aircraft du-

ring the vast majority of operating hours. This regulation

alone does not mean that many more LCCs will be able

to operate from Heathrow, but it will make fares more

competitive and ensure greater efciency.

Most LCCs are guilty of taking excessive subsidies from

airports desperate to see new services. During this timeof duress for carriers, airlines are under pressure to seek a

competitive advantage in any way possible. This does not

absolve carriers of their shortcomings, but it will require

increased vigilance from governments and airports to en-

sure airlines dont exploit public bodies. Airports need to

do a better job of holding LCCs accountable for their in-

vestments, ensuring that routes are well chosen and are

bringing in the desired passengers. Moreover, airports also

need to work with governments and airlines to update

outdated regulations addressing slot allocation, improving

facility utilization and encouraging added competition tocrowded airports like Heathrow.

Remarks, questions Join Sam by email (samsellers@

gmail.com) or on his website to comment this article

http://www.airlinebulletin.com.

Sam Sellers provides analysis and commentary on the

airline industry at his website, www.airlinebulletin.com,

and is the author ofTake Control of Booking a Cheap

Airline Ticket, an ebook for travelers in the United States

who are interested in purchasing cheap airline tickets.

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