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Low Cost Carriers Phantom or Phenomenon May 23, 2007 Kraków, Hotel Stary Wolfgang Kurth Advolar
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Low Cost Carriers Phantom or Phenomenon
May 23, 2007 Kraków, Hotel Stary
Wolfgang Kurth
Advolar
Top Consulting - 1/2
The LCC Experience
Top Consulting - 1/3
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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!“)
Top Consulting - 1/5
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“
Top Consulting - 1/6
Customer Expectations
• safety
• reliability
• good value for money
• transparency/fairness
• decent infrastructure
• competence/professional attitude
• flexibility
Expectations
Relevance Element
safety1
dependability essential
low fares2
primary airports (infra structure, connectivity)
flexible, competent staff
price transparency
important
point to point
change of bookings nice to have
catering
lounge
In-Flight Magazine unnecessary
paper tickets
Ranking of Product Elements
1 Set of criteria: Aircraft (modern, looked after), tidiness, competent crew2 Extremely low fares raise doubts with regards to reliability
Source: Contest Census, 2002; Monitor Group Analyse
Top Consulting - 1/7
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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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)
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0,0
2,0
4,0
6,0
8,0
10,0
12,0
14,0
Low-CostOperation Frills Distribution Personal Fleet Various
Legacy Airline
Costs/ASK(€ cent) 6.0
2.7
1.2
0.80.6
0.4 0.20.1 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
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Price Transparency? (Vodafone)
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Price Transparency!
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Information (Power) To The People!
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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
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LCC Routes 2000
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0
50
100
150
200
2001 2003F 2005F 2007F 2009F
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 GermanLow 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
510
16
32
83
21
42
0
25
50
75
100
Total Population
International
Domestic
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
Top Consulting - 1/17
0
50
100
150
200
250
300
350
400
1995 1997 1999 2001 2003 2005 2007 2009 2011 2013
Potential new LCC lines each year in Europe
History Forecast
Source: Airbus Industries
Potential For LCC Routes
Top Consulting - 1/18
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, 20044) 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)CanjetHMY AirwaysSunwingWestjet
USA (9)Air TranAllegiant AirATAJetBlue AirwaysMidwest ExpressSouthwest AirlinesSpirit AirlinesUSA 3000 AirlinesTed
Latin & South America (12)Aero California MexicoAlma de MexicoAviasca de MexicoAvolar MexicoAzteca MexicoBra BrazilClick MexicanaGol BrazilInterjet MexicoOcean Air BrazilViva Aerobus MexicoVolaris Mexico
Africa (5)1 TimeAtlas BlueJet4YouKululaMango
Middle East, Asia, South Pacific(26)Adam Air Jetstar AsiaAero Pacific Jetstar AustraliaAir Arabia Kingfisher AirlinesAir Asia Lion AirAir Blue Nok AirAir Deccan One-Two-GoAir India Express Paramount AirwaysBangkok Air Skymark AirlinesCebu Pacific Air Skynet Asia AirwaysFreedom Air SpiceJetGo Air Tiger AirwaysIndiGo ValuairJazeera Airways Virgin Blue
Europa (58)Aegean Airlines BMI Baby Iceland Express SmartWingsAir Arann British European InterSky SnalskjutsenAir 2000 Budget Air Itali Airlines SnowflakesAir Baltic CentralWings Jet2 SterlingAir Berlin Clickair LTU Sun ExpressAir Finland Condor Meridiana Thomson FlyAir Scotland Corendo Monach Airlines TUIflyAir Service Plus EasyJet My Travel Lite TransaviaAir Southwest Evolavia MyAir Virgin ExpressAlpi Eagles Excel Airways Nordic Airlink VLM AirlinesBaboo Fare4U Norwegian Airshuttle Vueling AirlinesBelle Air FlyMe Pegasus Airlines Windjet Blue1 GermanWings Ryanair WizzAirBlue Air Globespan ScanjetBlu-Express Helvetic Airways SkyEurope
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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 2005Air 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 July2004BasiqAir Changed name in Transavia Dec2004, BerlinJet Bankrupt, Bexx Air Bankrupt Sep2004, BuzzAway Sold by KLM to RyanairDream Air Never realized their Dream, Duo Bankrupt on 01May2004, DutchBird Bankrupt January 2005EastJet Bankrupt End 2006, EU Jet Bankrupt 26Jul2005Europe Exel Aviation Group Bankrupt January 2005Fairline 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 BankruptGermania Express Taken over by FlyDba eff.27Mar2005, GetJet Poland Never started, Go Fly Sold by British Airways to EasyJet, Goodjet BankruptHellas 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 2005Low Fare Jet BankruptMaersk Air Merged with Sterling on 13Sep2005Now Bankrupt May2004Silesian 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 06Dec2004Flamingo Airlines Bankrupt
Asia + South Pacific Air Nauru Bankrupt, Air One (India) Never started, Athena Air (Malaysia) Never started, Awair Taken over by Air Asia 2005BackpackersXpress Never startedCitilink Fake low-cost airline discontinued by Garuda Indonesia in 2006Diet Jet (Thailand) Never startedImpulse Airlines Bankrupt Origin Pacific Airways Bankrupt 10Aug2006 SkyAsia (Thailand) Never startedSmartjet Airways Never started, probably a scam! Transgulf Express (Gulf Area) Never started
Canada Canada West Air Never startedetsGo Bankrupt 11Mar2005Tango Airlines Fake low-cost airline discontinued by Air Canada in 2004Zip Fake low-cost airline discontinued by Air Canada in 2004U Air Bankrupt Early 2006
USAAmerica 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
Top Consulting - 1/23
US LCC Aircraft Deliveries
Source: Seabury Group, ACI Airline Restructuring Conference, Septt 0, 2004
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Customer ProfileAge distribution
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
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Customer Satisfaction
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Customer Segmentation
Source: Harris Interactive Airline Segmentation Study
FSA FSA/LCC high potential LCC market
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Service level
Cost
-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
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LCC Range of Product Elements
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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
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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
Brochures Travel
Agency Transport Incoming Transfer
Tourist Guide
Hotel Beach
Yesterday: Highly complex integrated product chainYesterday: 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•………..
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Mapping
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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
AirfareScheduleAirlineAirplane
Tourists Are Most Sensitive To Airfare
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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
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
Kilo
met
er
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2000 – 2005: Routes served in competion (white)Charter: - 50.6% (avg)Routes served by Charter only (yellow)-10.5% (avg)
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
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LCCs Eating Into Charter Markets
1748
69
118
232
2002 2003 2004 2005 2006
Ro
ute
s to
Sp
ain
Ryanair, easyJet, Volareweb, bmi Baby, Hapag-Lloyd Express, Germanwings, Sterling, SkyEurope, jet2
Ryanair, easyJet, Volareweb, bmi Baby, Hapag-Lloyd Express, Germanwings, Sterling, SkyEurope, jet2
Source: CH-Aviation
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Fragmented Value Chain
Brochures Travel
Agency Transport Incoming Transfer
Tourist Guide
Hotel Beach
Yesterday: Highly complex integrated product chainYesterday: Highly complex integrated product chain
Essential?no
Essential?no
Essential?no
Essential?no
Essential?no
Essential?yes
Essential?yes
Essential?yes
Today: „Fragmented“ product chainToday: „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
Top Consulting - 1/48
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
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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
Top Consulting - 1/50
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
Top Consulting - 1/51
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
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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!
