You are on page 1of 22

Highlights in this Issue

Vueling: Competition Cannot but Bites p. 5


SWOT Analysis of easyJet p. 6
Fifty LCCs in Europe, and a « Bloodbath » Expected p. 13
Rough Times: Duty Rises – Shares fall p. 15
The Analysis of the Romanian LCC Market p. 16
The Low Cost Carriers Analysis Newsletter
Air Scoop ANNOUNCEMENTS
EDITORIAL 2007 Ancillary Revenue Airline
Conference (ARAC 2007)

T
he main issue discussed at the Low Cost Air Transport Sum-
mit 2007 was with no doubt the impact of environmental
issues on Low-Cost Carriers activities (p. 17). Indeed, a way November 14 and 15 in Frankfurt
to limit global warming is to tax tickets which would directly rise
their prices (p. 11) and have therefore negative consequences on Learn to boost your non-ticket revenues by
the growth of LCCs. Each speaker, one after the other, had at least attending the only conference dedicated to
a word on it, and easyJet even hold a press conference to present this topic. Ancillary Revenue Airline Confer-
its future Eco-Jet. With its own business model, easyJet has some ence - - ARAC 2007 - - will take place 14/15
assets to manage the slowdown of activity in the European LCC November 2007 in Frankfurt. The two-day
sector, that’s why Air Scoop has realized a SWOT of the carrier (p. agenda offers more than 25 speakers, inclu-
6) in order to present its strengths and weakness. ding senior airline executives and top indus-
One signal of the slowdown of the market is the current wave of try vendors working in the field. Confirmed
consolidations occurring through Europe. Air Scoop had the oppor- speakers include:
tunity to interview Maunu Von Lueders and Daniel Skjelman (p.
2) about the recent acquisition of FlyNordic by Norwegian. Face to Air Canada - Sandra Lindala, Senior Direc-
these mergers and acquisitions, our team has analyzed the effective- tor New Revenue Opportunities
ness of LCCs mergers (p. 21) and their limits. Amadeus - Alberto Pozo, Managing Director
Another sign of the slowdown of LCCs is definitely the global fall of - Travel Services & Leisure
LCCs shares (p. 14). Ryanair, easyJet, Air Berlin, Vueling… their Flybe - Militsa Pribetich-Gill, Ancillary Re-
shares all has followed the same falling trend these weeks. In this venue Manager
tensed context, many analysts predict a “bloodbath” among LCCs Lufthansa Systems - Roland Moor, Future
soon (p. 13). The market has reach its limits in terms of activity Airline Core Environment
and the slowdown will lead to few strong carriers and the death of Eurostar - Luke Kingsnorth, eCommerce
others. Manager
As usual, in each issue, Air Scoop makes a focus on a Central/Eas- SkyEurope Airlines - Karim Makhlouf, Chief
tern Europe market. After Hungary, the Czech Republic and Slova- Commercial Officer
kia, we have analyzed the Romanian LCCs market (p. 16). Bulgaria US Airways - John Reistrup, Director of
and Poland will be our next markets… Marketing Programs & Customer Loyalty
Visa - Kirk Stuart, Vice President Co-Bran-
ding
Vueling Airlines - Arturo de Perthuis, An-
Air Scoop - In the Air cillary Revenue Manager

Visit the ARAC 2007 web site to view the


agenda and register: www.airlineinformation.
org and click on the Conferences tab.
Vueling: flying «Clickair unsafe
with Band-aid! to fly»
The discounted early bird rate of $479 (for
airline and transport providers) expires on 15
June. Air Scoop subscribers qualify for this
low rate. Simply enter «Airscoop» as the
promotional code when you register for the
conference.

Air Scoop - July 2007 www.air-scoop.com


BIRD’S EYE VIEW
Interview of Maunu von Lueders
‘‘NORDIC CONSOLIDATION’’
(CEO of FlyNordic)
Maunu von Lueders
What is the difference since Norwegian has acquired Fly- (CEO of FlyNordic)
Nordic?
First of all, our previous owner is a traditional airline and
a member of a global alliance. We were a strategic tool for
them, but now for Norwegian, we are a tool for expansion
and to broaden their scope. Because FlyNordic and Norwe- How do you see your expansion in Scandinavian coun-
gian are very similar in the way they function and in their tries? Outside Scandinavia?
business model, there are a lot of synergies. I think we are We are already in the Scandinavian countries. Denmark’s
going to expand and grow much faster now than with our market is very small while Norway domestic is huge. Swe-
traditional owner. We will also gain from joint network, dish domestic market is important too, but only half of
distribution and things like that. Norway. So by having our stronghold in Norway and in the
Swedish market, it is a very powerful thing. Denmark is
As now you are a big player in Scandinavia, which car- interesting essentially because Copenhagen generates some
riers are your tougher competitors in Scandinavia? traffic and we can capture business travel there. As we are
We are competing with any carriers, not only LCCs, so SAS focused on business travel, our schedules are designed to
is our biggest competitor. We will definitely be a big oppo- fit to these passengers. I’m sure Norwegian and FlyNordic
nent to SAS. First, we are going to cover some routes that will cover major cities in Scandinavia any time soon.
they have, we will have some routes they don’t have, and We don’t have any long-haul projects for the moment.
we will have a very customer friendly proposition. For a The growing markets are Asia and Eastern Europe, so I’m
lot of customers, the choice between FlyNordic and SAS sure Central and Eastern Europe will be part of our ex-
will be based on price, schedule… I cannot see what we pansion strategy. It’s not much about regional targets but
couldn’t do that SAS is doing. more about specific interesting destinations, but definitely
Eastern Europe is interesting. Local carriers there are more
How do you explain the collapse of FlyMe? known in their home base, and in Scandinavia FlyNordic
It was an overcapacity from them; you cannot swallow a and Norwegian are well known, so if you talk about traffic
bigger piece than your mouth. It was an expecting thing, from Scandinavia to Eastern Europe, we have the strength.
and we were wandering how they survive so long. You can- It mainly depends on the direction of the market.
not keep growing without the resources necessary to grow
and without knowing if the grow will ever be profitable.
Growing for the sake of growing doesn’t make sense.
Daniel Skjeldam
Interview of Daniel Skjeldam (Director Network & Reve-
nue of Norwegian)
(Director Network and Revenue of Norwegian)

Do you believe Norwegian is protected on its own Scan- us a lot of synergies which will be used for our growth. It is
dinavian market against other LCCs competitors? very hard to say if there will be other consolidations in the
Yes, definitely. The reason is simple, it is because, on a lot Scandinavian market as the sector is really fast moving.
of routes, 70% of the market is originated in Norway, Swe-
den or Denmark. That’s why, with this outbound, domestic How do you feel about the “price war” launched by Rya-
carriers will always have the strongest positions. Our cus- nair?
tomers know our brand and check prices of our company It doesn’t affect us at all. We are competing on quite a few
with the ones of our competitors. If we are competitive, routes, but the price difference must be very high to see
we will sell the ticket; if they are competitive, they will our customers changing their flying habits with us. We ac-
sell it. tually see a boost in the routes on which we are competing
with them, and not a decline. It attracts customers to these
Now that Norwegian and FlyNordic are merged, what destinations because they spend more money on marke-
will be the main changes? What about the consolidation ting. Our customers always check first if the home base
of the Scandinavian market? carrier doesn’t have a flight on this route, and they compare
By acquiring FlyNordic, we get an interesting size to deve- the prices. If our competitors spend money on marketing,
lop in the future. We can use FlyNordic fleet, staff, routes it also affects other routes in a good way.
and of course its brands. This acquisition of FlyNordic gives
2 Air Scoop - July 2007 www.air-scoop.com
DOWN TO EARTH
‘‘IDEAWORKS AISLE’’
Kulula Strike a Unique Balance as a Low Cost Airline
and South Africa’s Largest Online Retailer

Kulula.com claims it is “South Africa’s biggest online re- by Jay Sorensen


tailer” with record sales of over 100 Million Euros. (President of IdeaWorks)
www.IdeaWorksCompany.com
This self-described “quirky” airline recently announced
a new slogan that invites customers to “Come fun with
us.” Kulula offers a unique brand positioning that pro-
mises spontaneity and energy, laughter and life, but most
Clicking on the cars, beds and cabs options opens a page
importantly - - simplicity and honesty. This consumer-
offering more information and specific choices. The choi-
focused and light-hearted strategy also encourages trave-
ces made during booking do not provide a confirmed re-
lers to purchase an array of additional services from the
servation, but are offered on a “request” basis. Reservation
airline.
details for cars, beds, and cabs are confirmed by telephone
or email within a defined time period. Fees for these ser-
Kulula began flying in 2001 as South Africa’s first low
vices are paid separately by the traveler and are not inclu-
cost carrier. The airline has carried over 7 million pas-
ded in the price of the airline booking. This simplifies the
sengers and currently operates 300 flights per week on
transaction for Kulula, which receives commissions from
12 domestic routes. Kulula’s online strategy drives 80%
its travel partners.
of its bookings and likely generates significant ancillary
revenue. The booking process promotes the sale of ho-
tel accommodations, car rentals, taxi transfers, and airport
parking. Consumers may also donate to Kulula’s chosen
charity and are encouraged to apply for its co-branded
credit card. All of these features are neatly integrated into
the Kulula.com web site.

The airline readily promotes itself as an online retailer,


but its basic airline product is relatively simple. Two pie-
ces of baggage can be checked without charge. Seat assi-
gnments are provided at the time of check-in. Additional
fees are not charged for bookings or payment with a cre-
The car rental choice presents the consumer with a menu
dit card. Snacks can be purchased on board and include
of options such as car sizes and features, standard or super
hot and cold drinks, sandwiches, muffins and more. But
insurance waiver, and length of rental. The hotel choice
its distinction as an online retailer becomes clear during
presents a variety of accommodations at different price
the booking process.
levels, and includes a short description of each hotel.
Taxi transfers are offered in a similar manner with prices
Brand personality supports the online sales strategy
quoted on the basis of travel zones. The following image
displays some of the hotel choices offered for Johannes-
The web site uses a natural conversational style by asking
burg.
questions. Consumers are asked, “Where are you going?”
instead of the usual drop-down menus to select an origin
and destination. The flight selection process is transpa-
rent and consumer-friendly by highlighting lowest fares in
a bold font. The conversational style continues by asking,
“Would you like to book any extras?” Consumers can
choose from cars, beds and cabs. The airline dedicates a
portion of the page to its charity initiative. Consumers
are encouraged to “do your good deed for the day” by con-
tributing to the Childhood Cancer Foundation of South
Africa.

3 Air Scoop - July 2007 www.air-scoop.com


DOWN TO EARTH
All of the options chosen by a consumer are neatly presented on a services, skydiving, jetfighter flights, hot air balloon
summary at the end of the booking process. Consumers may choose rides, safari experiences, and something with the
from three payment methods: Kulula Moolah, credit card, or later mysterious title of “Crocodile River Rafting.”
payment by bank transfer or deposit. Moolah is the airline’s loyalty
currency. Choosing the “later payment” method prompts the consu- Customers may click each listing for more infor-
mer with an offer for the Kulula.com co-branded credit card. mation, which includes a full text description and
an image. Pricing is offered for each experience,
Travelers can earn “Moolah” with the Kulula credit card and in a manner similar to cars, beds, and cabs, the
booking is made on a request basis with a confir-
Most co-branded credit cards offer a 1% rebate to cardholders. The mation made by telephone or email.
Kulula credit card is distinctive because it offers a 3% travel rebate
for monthly charge volume below 5,000 South African Rand (ap- We are more than an airline … We’re an entire
proximately 500 Euros). Higher monthly spending drops the rebate travel experience
to 2% for monthly charge volume of 5,001 through 10,000 Rand
(approximately 500 to 1,000 Euros), and 1% for 10,001 through The sincerity of this airline appears in everything it
20,000 Rand (approximately 1,000 to 2,000 Euros). does. The above statement appears on “Our Mis-
sion” page at the Kulula web site. The page also
The rebate is applied to a cardholder’s Moolah account, and can be includes the most unusual collection of brand at-
used to pay for tickets purchased at Kulula’s web site. For example, tributes likely found on an airline web site:
charge activity of 2,000 Rand would generate a Moolah credit of 60
Rand. Account balances are displayed on the cardholder’s monthly The easiest around - Simple - Totally honest - Great
statement, or when the customer accesses their Moolah account at fun - Safe and professional - Inspirational
Kulula.com.
Many airlines advance their ancillary revenue ob-
jectives at the cost of appearing as cold and mer-
The card offers an attractive sign up bonus of a 20% rebate on the cenary corporations. Kulula has taken a different
first 1,000 Rand charged by the cardholder. The annual fee for the approach by offering a standard travel experience
card is 150 Rand (approximately 15 Euros). Accumulated Moolah that doesn’t charge extra for features such as chec-
rebates do expire after six months if they are unused. As an ad- ked baggage and payment by credit card. The air-
ded loyalty marketing incentive, Kulula provides a 3% rebate on all line has chosen a retail approach by selling add-ons
charges linked to the purchase of airline tickets at its web site. such as accommodations, car rentals, and adven-
ture experiences.
The credit card generates ancillary revenue for the airline through
the charge activity of the cardholders. Kulula shares in the reve- Kulula has proven that low cost need not appear
nue realized by the issuing bank from the processing fees charged to the consumer as “cheap.” The airline is one of
to merchants. This revenue is used to fund the Moolah balance the few that has managed to achieve a delicate ba-
earned by cardholders. When Moolah is redeemed by cardholders, lance between aggressive ancillary revenue tactics
the revenue is returned to the airline in the form of airline ticket and a pro-consumer branding image.
purchases.

Kulula’s co-branded credit card is innovative because it delivers About IdeaWorks:


many of the benefits of a frequent flier program without the ad- IdeaWorks was founded in 1996 as a consulting
ministrative expense. Of course, choosing a credit card to provide organization building brands through innovation in
a loyalty benefit does restrict the audience to customers who are product, partnership and marketing and, building
credit-worthy, or a willing to open their wallet to another credit profits through financial improvement and res-
card offer. tructuring. Its international client list includes the
hotel, airline, marine, railroad, consumer products
What would you like to experience today? and health care sectors. IdeaWorks specializes in
brand development, customer service improve-
Kulula goes beyond accommodations and car rentals with its “Ku- ment, customer research, competitive analysis,
lula Kicks” adventure experiences. These services are offered un- creating partner marketing strategies, cost reduc-
der a separate category at the Kulula web site. They are offered at tion programs and business restructuring. Learn
four destinations: Cape Town, Durban, George, and Johannesburg. more at IdeaWorksCompany.com.
Selecting Johannesburg produces a list of more than 60 adventure
activities. The array of experiences is very broad and includes spa

4 Air Scoop - July 2007 www.air-scoop.com


DOWN TO EARTH
Vueling: Competition Cannot but Bites
Spanish budget carrier Vueling prefers to brand itself not The financial strategy of the airline involves first-level sha-
just as another LCC but as a “new generation” carrier. reholding structure and the position of the carrier is lar-
“New generation” means low prices, high quality, major gely dependent on the situation with shareholders. When
airports, modern planes with funky names, and overall Apax Partners, the former core shareholder, was reported
aggressive strategy. It was named the best Spanish airline to plan a bid for Iberia and to team up with BA and KLM
in 2006 and has been highly valued by the European pas- to prepare that bid and to merge Vueling with its com-
sengers; it too has been financially successful until it star- petitor Clickair, Vueling dropped 10%. After Apax had
ted bothering ‘major’ players. Even though the carrier nar- sold its 20.9% stake shares dropped even more. Vueling
rowed down its target area to the south Mediterranean, has managed to safeguard 5% so far by attracting Atalaya
the sky’s shortage has taken its toll. Now it competes with Inversiones, SRL which acquired this stake. With this
Iberia, Clickair, SpanAir (SAS subsidiary), Air Europa, new investor, which is characterised by Vueling as stable,
Ryanair in Spain and KLM – Air France group on inter- the picture of shareholders looks like this: Inversiones
national routes. Hemisferio (Lara family), JetBlue Airways, Atalaya In-
versiones.
The very first flight was a challenge. With slots shortage at
the airport of Barcelona and Iberia as unnegotiable leader Indeed, the 1st quarter report shows that despite the in-
the airline started operations to become the first succes- creases in load factor, net income fell by 127.9%. Notably,
sful Spanish low cost project. From the very beginning the main source of income this quarter was predominant-
and after opening the second base in Madrid especially ly achieved by ancillary revenues that constitute about a
it became clear that Vueling was not going to live in the half of the total revenue whereas for Ryanair it is estima-
shadow of legacy airlines. It started to pull out Iberia’s ted 1/5th of the revenue. Raising money through meal,
charter flights, notably those carrying football fans. That insurance, hotel accommodation should not be a business
actually forced Iberia to reconsider its international servi- priority for an airline. By the same token, this source of
ces in Barcelona and Madrid. income is not stable which means plausible financial pro-
blems in case it exhausts.
Vueling has launched ambitious expansion by opening its
first international base in Paris and is planning to open The year results are largely dependent on the results of the
the second international base in Italy next year. Connec- third quarter. However, the outlook is already pessimistic.
ting Paris with Amsterdam and reinforcing its presence at Even with the new “stable investor” Vueling continues to
the airport by opening new routes Vueling challenges the decline and has lost 7% adding to the previous 10%. The
home team – Air France-KLM. Whilst in Spain there is increasing capacity in Spain, including Iberia’s ambitions,
no big price difference between primary and secondary Ryanair’s attack and direct competition with Air France
airports, Paris-CDG and Schiphol are classy airports that – KLM, makes Vueling’s displacement very plausible.
hardly any LCC could afford. Up to date, financial strate-
gy which involves first-level shareholding structure with
such shareholders as Apax Partners, JetBlue Airways, In-
versiones Hemisferio, allowed investing money in risky
projects. A considerable sum of money – up to €5 mln
– was put into the promotion of the base in Paris. As-
sumingly, the future development and strategy basically
hinge on success/failure of this base.

EVENTS
Air Scoop is proud to be media partner of Airports 2007. This conference will be hold in Warsaw the 19-20th September
2007. This year’s edition of Airports 2007 Conference will be dedicated to extension of airports and challenges that every
airport should equal to with reference to EURO 2012 that was granted to Poland and Ukraine. We’ve invited represen-
tatives from Portuguese and German companies, that not long ago had an occasion to organize huge sport events like
EURO 2004 and Mundial 2006. Our intention is also to invite representatives of Ukrainian ports so they can share with
their plans of airport infrastructure extension.
More information: http://www.actiaconferences.com/www/index.php?pid=_en
5 Air Scoop - July 2007 www.air-scoop.com
BIRD’S EYE VIEW
SWOT TEAM
SWOT Analysis of easyJet
easyJet is Europe’s leading low fares airline. Formed in In April 1996, easyJet took delivery of its first wholly-
1995 by Sir Stelios Haji-Ioannou, it has grown rapidly to owned aircraft (started operations with two leased Boeing
become Europe’s fourth largest airline by passengers car- 737-200) and went international with first services to
ried. Sir Stelios has credited easyJet’s success to two stra- Amsterdam from London Luton. easyJet launched its
tegic imperatives. The first was “sweating the assets”, that website, easyJet.com which provided information about
is making sure that the planes were as full as possible and the airline. In September 1997, easyJet placed an order
flying as much as possible. The second was a sophistica- for 12 brand new Boeing 737-300s for delivery by 2000.
ted yield management system which would set an infinite In October, easyJet also launched its second UK base at
number of fares for a given flight, based on the demand Liverpool Airport.
and supply position for that flight. The prices for the seats
fluctuated depending on the demand for them at a parti- easyJet bought 40% of a Swiss charter operation, TEA Ba-
cular time. easyJet was the first LCC to start the sale of its sel AG, based in Basle for a consideration of three million
airline tickets online. Swiss francs in March 1998. This airline was later renamed
In 1999, Stelios was voted London Entrepreneur of the ‘easyJet Switzerland’ and moved to Geneva where the
Year at the London Electricity Londoner of the Year first European base was opened. In April, 1998, the airline
Awards. In the same year, easyJet was voted «Best Low sold its first seat online at easyJet.com while telephone sa-
Cost Airline» by readers of Business Traveler magazine les continued. easyJet ordered 15 brand-new Boeing Next
for the first time. Generation 737-700 aircraft in July 1998, with a list price
in excess of $500 million.
easyJet was selected as a Business Superbrand by the Su-
perbrand Council which recognizes companies with an In June 1999, easyJet increased stake in easyJet, Switzer-
outstanding brand name in November 1999. Other Super- land to 49% and acquired an option over the remaining
brand companies include such globally-recognized names 51%. In July 1999, easyJet Switzerland inaugurates servi-
as Virgin, Coca-Cola and Manchester United. In Decem- ces from Geneva to Nice, Amsterdam and Barcelona (the
ber 1999, ‘Marketing’ magazine described the launch of first easyJet services wholly outside the UK). easyJet seat
easyJet as «one of the 100 great marketing moments of sales over the Internet passed the one million mark in Oc-
the 20th century». tober 1999.

Stelios entered the Guinness Book of Records for being easyJet became the first low-cost airline to launch a flight
the world’s youngest international scheduled airline chair- arrivals information service on its web site in April 2000.
man when he launched easyJet in 1995 at 28 years of age. Internet sales reached 85% of total sales in September. ea-
Sir Stelios was knighted by the Queen in June 2006, for syJet entered the London Stock Exchange Listings in No-
services to entrepreneurship. vember 2000 at an offer price of 310p and sold 25% of the
stock to public. The IPO earnings went mainly towards
The combination of favorable market conditions, robust financing the purchase of the new Boeing 737-700 order
operating principles and world-class marketing, underpin- placed in March 2000 taking fleet size up to 44 aircraft by
ned by the entrepreneurial vision of the man now known 2004.
to the public simply as Stelios, brought success and fame
to easyJet. It established London Gatwick as its fifth base in Decem-
ber 2001, and becomes the second largest scheduled airline
History at the airport.

The easyJet airline was founded in 1995 by Stelios Haji- In August 2002, easyJet and Go combined to become Eu-
Ioannou, with £5million family loan and 20 staff members, rope’s largest low-cost airline and two months later, in Oc-
based on the Southwest Airlines model. The first bookings tober, they ordered Airbus A319 aircraft. Since then, the
were made on the easyJet telephone reservation centre Airbus A319, together with Boeing 737-700s, are inter-
opened at easyLand, the home of easyJet at London Luton changeable on all easyJet routes, so maintaining the “any
Airport. Its first passengers flew from London Luton to aircraft, any route” aspect of the easyJet business model.
Glasgow and Edinburgh for the ludicrously low price of In November 2002, Stelios stood down as Chairman of
£29 one way on November 10th, 1995. easyJet and Sir Colin Chandler took over the position.

6 Air Scoop - July 2007 www.air-scoop.com


BIRD’S EYE VIEW
easyJet launched pioneering online technology which al- top gadget.” The two leading technological innovators have
lows customers to view and change their bookings onli- teamed up for the development of the new Windows Vista
ne in July 2003. easyJet established a new base at Berlin and the 2007 Microsoft Office System to create a range
Schönefeld in November 2003, dramatically expanding the of desktop «gadgets» and web services to ensure travel
existing network with the addition of 11 new routes. is seamless from desk top to touch down. The «easyJet
desk top gadget» enables customers to personalize flight
In February 2004, easyJet announced new base at Dort- information and booking services using the Microsoft Vista
mund, increasing the existing network with eight routes. technology.
On 28 May 2007, easyJet made history by checking in an
entire flight through the new, ground-breaking self-check- Strategy and business model
in kiosks at Nottingham East Midlands airport. In July 2004,
easyJet introduced Europe’s most generous hand baggage easyJet’s operational policies were based on keeping costs
allowance by removing the 5 kg weight restriction and in to a minimum to allow the airline to offer the lowest fares
December, Hotelopia and easyJet teamed up to launch ex- possible. It adopted a number of practices that helped curb
clusive accommodation products and services as easyJet wasteful expenses and provided the best possible service
Hotels. within the limits prescribed by cost.

EuroAirport-Basel-Mulhouse-Freiburg is announced as the easyJet’s strategy has six key foundations:


airline’s next base in January 2005. In May 2006, Ray Webs-
ter, the Chief Executive of the Company steps down from 1. Strong branding: easyJet has invested a lot in PR and
his post. In June, Gatwick became the airline’s biggest base advertising. It has been coming in airline TV programs and
with flights to 29 destinations. In a bid to further improve created strong brand profiles in catchment areas through
its offering to business travelers, easyJet and ServisAir in- advertising. The neon orange ‘easy’ brand represented value
troduce easyJet Lounges, for money. Sir Stelios has been known come out in public
and demonstrate against any increase in taxes and also ex-
easyJet joined the European Low Fares Airline Associa- hibit strong support to a greener environment.
tion (ELFAA) on 1 October 2005. In October, easyJet and 2. Pricing and revenue management: The airline follows a
Europcar introduced the opportunity to purchase car ren- one-way, time- dependent pricing with only online reser-
tal at the same time as flight bookings through ‘dynamic vations except for two weeks before take-off, when tele-
packaging’. easyJet has already been offering «dynamically booking is allowed.
packaged» travel insurance to its UK market since March 3. Lower unit costs: Although easyJet does have lower
2005. In October, easyJet announced a new base at Milan’s operational costs, its operating margins are much lower
Malpensa Airport. Malpensa was the airline’s 16th base in than Ryanair. This is because it flies to major airports most
Europe and first in Italy. easyJet became the first major of the time, uses two main types of fleet, invests heavily
low-cost airline to roll-out internet check-in for its UK in advertising and public relations and adopts limited fuel
passengers in February, offering a 15-minute gate arrival hedging. Its fares are also much higher than that of Ryanair
time for those traveling only with hand baggage. Andrew (but it gets to some extent gets neutralized by the higher
Harrison, the new Chief Executive of the company, took distance of Ryanair airports from city and town centers).
up his post on 1 December 2005. 4. Network strategy: easyJet follows a point-to-point route
connection and grows by joining dots. It focuses on catch-
The airline expanded into new markets outside the EU to ment areas and low prices to obtain traffic. Unlike Rya-
Marrakech, Istanbul, and Rijeka in March 2006. The airline nair, it flies to destinations within cities but uses smaller
appointed Ogilvy UK as the airline’s first Pan-European ad- airports (like Luton and not Heathrow, London) within
vertising creative agency in May 2006. It launched a new the cities itself throughout Europe. It expands by increasing
base at Madrid’s Barajas airport in August and in Novem- frequency of flights. It operates 289 routes from 79 airports,
ber, and introduced a new facility of ‘Speedy Boarding’ that connects 36 cities and has 17 main bases.
will give passengers greater choice over their seating ar- 5. Employee culture: easyJet employs around 4,859 people
rangements onboard the aircraft. Profit after tax in 2006 around Europe. In terms of culture, easyJet favors an infor-
increased by 59.4% over 2005. Basic earnings per share in- mal company culture with a very flat management struc-
creased by 56.8%. ture, which eliminates unnecessary and wasteful layers of
management. All office-based employees are encouraged to
In January, 2007, easyJet, Europe’s leading low-fares air- dress casually. Ties are banned - except for pilots! Remote
line, and Microsoft launch the pioneering “easyJet desk working and ‘hot-desking’ have been characteristics of ea-

7 Air Scoop - July 2007 www.air-scoop.com


BIRD’S EYE VIEW
syJet since the beginning. Employees can buy company red to traditional carriers with rapid turnaround times, and
shares and also are given performance awards appreciating progressive landing charge agreements with airports;
their services.
6. Commitment to customer service: It targets both busi- � Paperless operations: Since its launch, easyJet has sim-
ness and leisure travelers. Customer proposition of easy- plified its working practices by embracing the concept of
Jet is “Low cost with care and convenience”. easyJet has the paperless office. The management and administration
adopted the philosophy of providing basic service with a of the company is undertaken entirely on IT systems which
smile. It has been achieving above average customer satis- can be accessed through secure servers from anywhere in
faction, proven by the awards that it has been receiving the world enabling huge flexibility in the running of the
over the years. It does not have any weight restrictions airline;
on hand baggage but only limits the size of baggage. They
also have the facility of accommodating a passenger who � Safe and efficient flight operations: The average age of
has missed flight on the next flight at an extra charge of easyJet fleets is about 2.5 years. It has only one class in
just £35 within two hours of the departure of the original flights. easyJet’s Airbus A319 have two pairs of overwing
flight. It also provides seating in easyJet lounges at a rate exits instead of the standard one-pair exits, fulfilling extra
where the early passenger can wait and relax. safety requirements required for higher passenger density.
It also uses the internet and the telephone as efficient mar-
Features of the business model: keting tools.
easyJet keeps costs low by eliminating the unnecessary
costs and frills. Their business model meets the customers’ Ancillary sources of Revenue are:
demand for a simple, budget-driven travel alternative.
This is achieved in a number of ways: a) Credit card fees;
b) Excess and extra baggage charges;
� Pioneer in the use of internet: easyJet was one of the c) Speedy boarding fees;
first airlines to embrace the opportunity of the internet d) Sporting equipment fees;
when it sold its first seat online in April 1998. Now over e) Ticket changes charge;
95% of all seats are sold online, making easyJet one of f ) Infant fees;
Europe’s biggest internet retailers, substantially reducing g) easyJet lounge fees;
its distribution costs. The passengers who book online h) Profit share from in-flight sale of food, beverages, and
receive an email containing their travel details and con- boutique items;
firmation number, rather than tickets through the post. i) Commissions received from products and services sold
Online buyers also benefit from paying the price of a local for e.g. hotel bookings, car hiring, travel insurance, credit
call, instead of the standard national rate of easyJet’s boo- card etc.
king line. easyJet’s internet booking process is simple and
straightforward for which it has won many awards; Issues:

� Maximizing the utilization of substantial assets: easy- The airline seems to be positioned very well, with experts
Jet flies its aircraft intensively, with swift turnaround ti- predicting strong growth in the low cost-sector. Given
mes each time it lands. This gives it a very low unit cost the saturated market and the shortage of other options
with maximum utilization of its fleet. It has permission to in the UK, competition is likely to intensify – inevitably
carry passengers , cargo and mail in aircrafts of 20 or more followed by consolidation, an early sign of which is easy-
seats; Jet’s purchase of GO. The UK market offers little growth
opportunity; therefore concentration will be on the con-
� Ticketless travel: Passengers receive booking details via tinental market and other new EU member markets. So
an e-mail rather than paper and hence resulting in ticket- easyJet must look at some issues with a long term pers-
less travel. This helps to significantly reduce the cost of pective. These issues are:
issuing, distributing, processing and reconciling millions of
transactions each year; � What should be the long term game plan to combat
competition and hostile takeover bids?
� No “free lunch”: The airline has eliminated unnecessary � How should it grow and expand its operations without
services which are complex to manage such as free ca- affecting its operating margins?
tering, pre-assigned seats, interline connections and cargo � Which are the most lucrative geographical markets and
services. This keeps the total cost of production low; niche segments that it must focus on?
� Should it plan for expanding outside Europe in a major
� Efficient use of airports: easyJet flies to main destination way?
airports throughout Europe, but gains efficiencies compa- � How can it increase its sources of ancillary revenue?

8 Air Scoop - July 2007 www.air-scoop.com


BIRD’S EYE VIEW

9 Air Scoop - July 2007 www.air-scoop.com


BIRD’S EYE VIEW

10 Air Scoop - July 2007 www.air-scoop.com


BIRD’S EYE VIEW
SWOT Analysis margins must make a definite plan to overcome this hur-
dle without comprising its ‘no-frills’ advantage.
easyJet’s mission statement:
4) The value price segment to which easyJet is targeting
“To provide our customers with safe, good value, point-to- is bound to increase in numbers, but also the variety of
point air services. To effect and to offer a consistent and choice available to them is also increasing. So easyJet has
reliable product and fares appealing to leisure and business to devise strategies to retain customers and build customer
markets on a range of European routes. To achieve this we loyalty.
will develop our people and establish lasting relationships
with our suppliers.” 5) Expansion into Russia. Middle-East, Africa and Asia
should be part of any dynamic player in the airline indus-
Vision and objectives are: try in the face of intense competition within Europe and
saturating demand.
� Low fares and high frequency between major European
airports; 6) easyJet should increase its sources of ancillary revenue
� Consumers willing to pay ( a little ) more for value- in-flight and on ground to reduce its vulnerability to exter-
added proposition; nal forces not under its control.
� Growth based on joining the dots and adding frequen-
cy. Conclusion

Recommendations easyJet’s major strength besides its business strategy has


been the aggressive, flamboyant marketing approach adop-
1) easyJet is already catering to business travelers by ope- ted by its ex-chairman Sir Stelios which has enabled the
rating from within city airports, but it needs to further brand name to earn very high recall and recognition. Ho-
innovate its services to attract the frequent business tra- pefully this will continue and serve the company well in
veler. the competitive markets.

2) The airline should make a definite plan to expand into But the need of the hour for easyJet is to broaden its vi-
low cost medium haul sector as the short haul routes are sion to include progressive measures for becoming a global
getting filled up. With adding a little more of services on player by refining its current strategic business model. This
its flights, it should be able to easily adapt to this sector. is very important as the current European markets would
definitely get saturated and as the LCC industry is moving
3) The growth of the low cost market will slow down con- towards consolidation it has to look for new avenues for
siderably in the next five years which will increase opera- growth and expansion.
ting costs. So easyJet, which has very sensitive operating

Taxes and Global Warming Impact on LCCs


When it comes to using LCCs, the impact on people’s pocket is a far bigger po-
tential deterrent than concerns about the environment itself. Three out of ten
people would be put off flying to and from France if a new ‘green tax’ on LCCs
was imposed according to a survey by the online magazine website FrenchEn-
tree.com.
LCCs created the problem of rising passenger numbers. Indeed, according to
the Civil Aviation Authority figures, 3.1m travelled from the UK to Europe on
LCCs in 1996, and by 2005, it was 51.5m! Air travel will be the fastest-growing
source of carbon emissions by 2050. Already by 2020, we will take half a billion
flights annually (up from 189m in 2002), and aviation does far more damages
than its perceived 2 per cent of UK emissions. In a review of the economics
of climate change last year, Nicholas Stern put aviation’s share just at 1.6% of
global greenhouse gas emissions. In fact, LCCs contribution to global warming is two to four times that because of the
amplification of negative effects of burning kerosene at altitude.
“Planes are 10 times more damaging to the climate than trains, so if we don’t do something about the growth in aviation,
Britain will find it very hard to meet its global warming targets.”, said John Sauven, Greenpeace Director.

11 Air Scoop - July 2007 www.air-scoop.com


DOWN TO EARTH

12 Air Scoop - July 2007 www.air-scoop.com


BIRD’S EYE VIEW
Fifty LCCs in Europe, and a « Bloodbath » Expected

The European LCC leader Ryanair is well-known for its bloody there as some of these carriers have strong finan-
very pugnacious vision of the air transport, as confirmed cial weakness. Will SkyEurope, introduced on the Stock
by the company’s Northern Europe manager, Wilhelm Exchange in 2005, be able to defeat its local challengers
Hamilton, describing the future of the market in a con- and to resist Ryanair and easyJet, in a « Centralers » Vs «
ference in March in Helsinki: “It will be a bloodbath”, he Islanders » fight?
said. Participating to the same conference, officials of Ger-
manwings, Lufthansa’s LCC, agreed. Another important stake of the “bloodbath” may be the
newly announced intercontinental flights. Air Berlin bou-
Michael O’Leary already used the term of “bloodbath” ght the charter airline LTU to develop long-haul flights.
three years ago, as the air transport market was in great Fiercely opposed to this strategy few years ago, Michael
difficulties, with increasing costs and a strengthening com- O’Leary finally announced in April his plans to create in
petition. He wanted to stress the point that the sector 2010 a subsidiary for flights to small North American air-
would have to face a strong consolidation, and that many ports like Baltimore or New York Long Island, with fa-
LCCs would go bankrupt or have to merge. According to res starting at 10 Euros without taxes. In 2008, open sky
him and now to many analysts, only one or two big LCCs agreements between Europe and the US will be effective.
will fly the European skies on the medium term. For customers, such “bloodbath” could have positive ef-
For now, about 50 LCCs are operating in 22 European fects. It will mean new routes, both in Western Europe
countries, and 23 of them operate more than 50 daily fli- and in « peripheral » areas (Scandinavia, Central and Eas-
ghts - they were 14 in 2005. That means the number of tern Europe, North Africa...), and also an increasing pres-
significant players has reached their highest peak. But ob- sure on fares. Ryanair and easyJet have launched a “price
viously LCCs are too numerous, and many small players war” in order not to lose their passengers and to keep as
will disappear! When the market leaders (Ryanair, easy- high as possible their falling load factors. To balance, com-
Jet, Air Berlin…) speak about a “bloodbath”, they do not panies emphasize on ancillary revenues such as priority
refer to themselves of course, but to the swarm of smaller check-in, snacks, reservation of hotels... For instance, these
airlines that will undoubtedly be swallowed in a move of ancillary revenues now count for 50% of Vueling’s reve-
bankrupts and mergers. nues! In such conditions, load factors are indeed extremely
important: no passengers equal no ancillary revenues…
On the German market, the consolidation has already be-
gun. This country is a real LCC battlefield; six European EVENTS
LCCs operate 90% of the flights. Within less than one
year, three airlines disappeared or were acquired: Air Ber- French Connect 2008 - Courchevel
lin bought LTU and DBA, and the two TUI-airlines HLX
and HapagFly merged into TUIfly. With its partnership
with the small Austrian LCC Niki, and its acquisition Next year, French Connect will take place from 9th to
of 49% of the Swiss Belair, Air Berlin has also begun a 11th April 2008 in Courchevel.
transnational expansion. Consolidation is not over in Ger- Keep checking www.FrenchConnect.net for updates
many… on the new programme format.

In Ireland, Ryanair wanted to take control over the na- To have more informations about last edition of
tional company Aer Lingus introduced on the Stock Ex- French Connect in La Baule, read the full coverage in
change at the end of 2006. The European Commission Air Scoop May 2007.
will decide about this merger on July, 4th. In Scandinavia,
Swedish FlyNordic has just been acquired by Norwegian
airlines, and after FlyMe’s bankruptcy in March 2007, the
Danish Sterling immediately placed its airplanes on two
of FlyMe’s former routes!
Central and Eastern Europe is the area with the most im-
portant potential in Europe, hosting several small local air-
lines, sometimes operating the same routes (SmartWings,
Centralwings, Wizz Air, SkyEurope...) and a growing
amount of Western companies. The battle will also be

13 Air Scoop - July 2007 www.air-scoop.com


BIRD’S EYE VIEW
Rough Times: Duty Rises – Shares fall

With the emergence of LCCs two separate but yet in- All this reminds of arms race. To gain more profits airlines
tertwined markets appeared: low-cost travel market and are buying more planes and opening new routs glutting
low-cost share market. Whilst the first one is believed to the market with offers and breaking out fare wars. Pe-
remain relatively stable, the second depends on numerous rhaps, it is time to realize that mutual and balanced reduc-
things to be considered: fuel prices, new duties, security, tion would safeguard profits. However, LCCs have proved
position amongst other airlines and many other factors themselves as uncompromising.
that are simply out of LCCs’ control.

Listing an airline on the stock exchange depends on share-


holders, partners and other supporting bodies. To increase
shareholders’ funds is as an important part of LCCs’ eve-
ryday business as increasing passenger flow. Expanding
market share and price influence is yet another battle
field for any airline that whishes to be profitable. Though
LCCs do create a common market phenomenon it would
be wrong to say that all LCCs are treated equally by inves-
tors. On contrary, every airline creates its specific market.
And when two competing markets contest it can drop
drastically their shares. It is exactly the case of easyJet and
Ryanair. Ryanair Shares Historical Chart

Ryanair was listed on the Irish stock exchange in 2001


and ever since then its share price varied from 3.16 € to
6.35 €. Its position as a leading company creates certain
stability in the market. Though the carrier has demonstra-
ted considerable growth in profitability, it does not mean
that investors will never shun its shares. Share performan-
ce is dependent on virtually any change in the market.
Seemingly, decisive factor for Ryanair is the publication
of interim results. Given that the airline is one of the most
profitable, share price should reach its peak shortly after
the publication which mean May and October. This year
the airline encountered a considerable drop. Reporting
that the doubling of UK’s passenger tax had influenced
load factor and created softer yield environment, O’Leary easyJet Shares Historical Chart
killed almost 5% of Ryanair’s share price.

easyJet started its stock performance in 2000 that got


really strong with the acquisition of Go Fly. Another si-
gnificant booster for easyJet’s shares was the idea to create
a global low-cost airline in the beginning of 2007. Appa-
rently, this May has demonstrated the real intensity in the
market and complex pricing situation. easyJet shares that
dived drastically indicated that yields pressure was a ge-
neral phenomenon. Being primary concerned with the re-
venue, easyJet intends to lower ticket prices and increase
promotion. However, Ryanair was the first to offer the
greatest seat sale. The airline also stakes on ancillary ser-
vices.
Air Berlin Shares Historical Chart

14 Air Scoop - July 2007 www.air-scoop.com


DOWN TO EARTH
The Analysis of the Romanian Low Cost Carrier Market
Romania has the seventh largest population in the Euro- vious issues of Air Scoop. Currently, there are 7 inter-
pean Union. According to UN estimates, it was approxi- national airports in Romania that are served by at least
mately 22.2 million people in July 2007. The sheer size of one of the low-cost carriers. The most important ones
its population implies that the country may have great po- are located in the capital of the country. Bucharest-Ba-
tentials in the low-cost carrier market. However, the share neasa (its full name is «Aeroportul International Bucuresti
of low-cost carriers from the total air traffic is significantly Baneasa Aurel Vlaicu») is the most preferred airport of
lower than in the already analysed three countries, Hun- the LCCs and it is also the main operational base of Blue
gary, Slovakia and the Czech Republic. Based on Eurocon- Air. However, between 10th May and 31st July 2007, this
trol data, the low-cost market share in Romania (based on airport is closed due to construction works, therefore in
total flight movements, excluding overflights) was 7.7 % in this period all flights will depart from the other airport of
the second half of 2006, while the same figure in Hungary the capital, Bucharest-Otopeni (Aeroportul International
was 15.5 %; in the Czech Republic it was 13.9 %, whereas Henri Coanda). Originally, this is served by AlpiEagles
Slovakia demonstrated the highest share of 37.9 %. (1) and Vola Wind Jet and some other LCCs, playing a minor
role in Romania. However, 5 international airports used
by LCCs are in the countryside, and are located near large
cities. The airport of Arad is served exclusively by Blue
Air, while the airport of Timisoara, which is the second
largest airport of the country and is only 60 km away from
Arad, is served by AlpiEagles. Targu-Mures, the city in
the heart of Transylvania is served by Wizz Air, while the
airport of Cluj (approximately 100 km to the east from
Targu-Mures) is served by both Blue Air and AlpiEagles.
The last airport to be served by an LCC is in Bacau, which
hosts Blue Air.

According to the summer schedule of 2007, currently 12


countries and 57 routes are served by low-cost carriers
Given that the country joined the European Union only from Romania. The geographical distribution of the final
this year, a further wave of entry of low-cost carriers is destinations shows a very one-sided nature: 72 % of the
yet to come. Still, LCCs have shown a surprisingly low routes lead to Italy or Spain and only 16 of them lead to
activity in Romania so far. Only a dozen of them are pre- other countries. On the one hand, the strong presence of
sent in the country, but half of them serves just one single the Italian LCCs in Romania may explain this rather stran-
route (including such major European players like Ger- ge phenomenon. However, their presence in the country
manwings and easyJet). The carriers that offer service on is not a coincidence, therefore, on the other hand, it may
more than one route are the local low-cost player, Blue be explained by another substantial factor. Recently, a
Air, the Hungarian Wizz Air, the Slovakian Sky Europe huge flow of outward (labour) migration has been charac-
and finally, the Italian LCCs, AlpiEagles, Vola Wind Jet terised Romania. The main destinations of these migrants
and My Air. Even this relatively simple image of the Ro- were Spain and Italy, because of already established cultu-
manian market can be further simplified, since AlpiEagles ral ties and perhaps because Spanish and Italian languages
offers flights to its main hub, Venice Marco Polo airport, are easy to learn for Romanian native speakers. According
and then further flights will take the passengers to the fi- to unofficial estimates, more than 1.2 million people left
nal destinations. In short, AlpiEagles uses the «hub-and- the country and this strong outward migration is likely to
spoke» concept as its business strategy, similarly to Vola continue in the future, too. In essence, the migrants pose a
Wind Jet, whose main hub is Forli Airport, near Bologna. constant, strong demand for air travel, and this may be the
Therefore, only Blue Air, Wizz Air and My Air are those reason why one can observe the absolute dominance of
of the more significant players in Romania that offer direct Mediterranean routes offered by LCCs in Romania.
flight connections to the indicated destinations.
In this sense, it is not surprising at all that Wizz Air con-
Nevertheless, the Romanian market is more diversified siders the country as its most important business oppor-
in terms of international airports hosting LCCs, than the tunity after Poland. A substantial part of the company’s
other Central European countries analysed in the pre- business strategy is to build on the market niche of mi-

15 Air Scoop - July 2007 www.air-scoop.com


DOWN TO EARTH
grant workers and their demand for flights between the flights per week of Wizz Air results in a total seat offer of
home and host countries. This is the reason why Wizz Air’s 13320 seats, Blue Air’s maximum weekly passenger capa-
network is concentrated between Polish cities and the UK city for this summer can be estimated around 18 thousand
and Nordic countries, as most Polish migrants are working seats. In sum, there is indeed a great competition between
in this region. Following its strategy, Wizz Air has already the two carriers, although the market is subject to strong
established a strong presence in Romania as well, and poses growth in the future.
a great challenge to the local player, Blue Air.
Some city-pairs are already «crowded», especially the Bu-
charest-Barcelona, Bucharest-Rome and Bucharest-Milan
pairs. Five LCCs offer flights to Barcelona from Bucharest
while 4 fly to Rome and Milan from the Romanian capi-
tal. Five other routes between city-pairs are served by two
LCCs, however, all the other destinations are served by a
single air carrier. Given the one-sided structure of the geo-
graphical distribution of destinations, and given the relati-
vely low market share of LCCs in Romania, there may be
still a lot of opportunities left for low-cost carriers to enter
this market. Routes to Germany, the UK and to the Nordic
countries are the most likely to be open in the future and
these are also those routes that may bear great profitabi-
lity. Since the regional airports are developing dynamically
and since their catchment area is also significant in terms
of population, Romania seems to be an Eastern European
market worth observing in the immediate future.

(1) Eurocontrol Low-Cost Carrier Market Update, December


2006 (available: www.eurocontrol.int/statfor accessed on 14
Based on the summer schedule of 2007, and accounting June, 2007)
for all the currently served and planned routes (those that
will be open later during the availability of the summer
schedule) the following can be derived in connection with
the rivalry of Blue Air and Wizz Air. Blue Air will offer
approximately 150 weekly flights (with its four Boeing
737 aircraft, with a seat capacity of 123, 136, 144, and 167
seats, respectively), while Wizz Air will increase its num-
ber of flights to a maximum of 74 per week (Airbus-A320
aircraft, 180 seats). As Blue Air operates flights between
its hubs (Arad, Bacau, Bucharest and Cluj), and some of
its international flights are offered through these domestic
connections, the actual number of weekly flights will be
less than the indicated estimate of 150. Therefore, if the 74

Air Berlin Offices Searched in Insider Trading Probe


Prosecutors searched for evidence of insider trading in connection with last year’s
takeover of competitor DBA in Air Berlin’s offices. The investigators look throu-
gh emails and board-meeting minutes, and five managers including CEO Joa-
chim Hunold and Supervisory Board Chairman Johannes Zurnieden are under
investigation.
«The management board and supervisory board chairmen alone acquired shares
worth 1.47 million Euros», the prosecutor’s office declared.
BaFin’s initial probe led to a formal investigation last year, when the regulator as-
ked the company to provide documents. BaFin sent its findings to the Stuttgart
prosecutors in March and asked them to investigate further.
16 Air Scoop - July 2007 www.air-scoop.com
DOWN TO EARTH
EVENTS
The Institute of Economic Affairs 2nd Annual Conference
The Low Cost Air Transport Summit
13th & 14th June 2007, The Waldorf Hilton, London

This summit came at a time when the low cost model is under pressure, and carriers are fighting to differentiate them-
selves and compete effectively in a crowded marketplace. In addition, they are facing an increasingly stringent regulatory
burden as the environmental impact of air transport moves up the political agenda.
‘The Low Cost Air Transport Summit’ has tackled these issues, in a focused forum dedicated to asking the question,
‘Where Next for Low Cost Carriers?’

Keith Mason, Director of the Business Travel Research Centre and Senior Lecturer in the De-
partment of Air Transport Cranfield University

«With years, average fares have increased, so low fares is the main objective. Chasing ancillary
revenues could be counter-productive», Dr Keith Mason

«There is not a lot of room to reduce costs in long-haul (…) You need to have a business class or
at least a two cabin (…) The cutting in price is just not possible»

Ryanair and easyJet dominate the European LCCs market. We should no-
tice that only 13 companies carry more than 500 000 seats per year.
Cranfield forecast for 2015:
Due to maturation of the market (or its fatigue?), European LCCs market
would be dominated by 2 or 3 large carriers, plus a number of smaller player.
Low-Cost Carriers in long-haul market won’t be easy as opportunities to
gain lower costs and significantly undercut incumbents is limited. Long-haul
flights are less likely to stimulate this market as much as short haul. Further-
more, there is an increasing likelihood that passengers will self connect at
LCCs airport «hubs», and therefore opportunities to sell insurance for self
connections.

Low Fares Airlines Seats in September 2006


Source: OAG, easyJet

The LCCs environmental paradox: On one hand, high load fac-


tors give lower seat emissions, but on the other, if the market
had not grown, far fewer people would be travelling. If 60%
of trips on LCCs are stimulated by low fares, environmental
taxes could have a significant impact on the European LCCs LCCs strategy comparison: Network Avoiders Vs
market. Network Supplanters

Network Choices

17 Air Scoop - July 2007 www.air-scoop.com


DOWN TO EARTH
Maunu von Lueders, CEO of FlyNordic
(read our interview page 2)

«Biggest increases are to Asia, Eastern Europe and the Baltic countries»,
Maunu von Lueders

Which of the following factors are most important Which of the following factors are most important when
when your company chooses an airline to enter into an choosing an airline for business trips?
agreement with?

«Price is important but only together with other value


adding factors»

Sweden to Europe with SAS has one way fares which are
at LCC levels.
Swedish domestic full service carrier offers full in-flight
service with fares that are successfully competing with
LCC carriers.

«The basic LCC model is losing ground and some of its


competitive advantage.
Environmental concerns will increasingly be afecting the
On which of the following measures do you think your demand for air travel.»
company should focus as regards business travel?

Alex Cruz, CEO of Clickair

«Since the demise of Air Madrid, the Spanish CAA has increased inspections ten fold»,
Alex Cruz

«10 of 28 routes were previously Iberia. Clickair is still highly dependant on Iberia (handling,
maintenance, aircrafts…. )»

«The battle for the summer will be bloody, main airports, short haul. We have till summer 2008
to prove ourselves»

18 Air Scoop - July 2007 www.air-scoop.com


DOWN TO EARTH
Enda Corneille,
Commercial Director of Aer Lingus

«Cost is the key while price is the driver»,


Enda Corneille

When price becomes the sole focus of a message or


a company’s marketing activities, you are undermi-
ning your chances of being perceived as unique.

Aer Lingus optimum position should be customer centric and


differentiate itself from other low-cost/no-frill carriers. It is es-
sential to remain consistent with the business model, to build
on some natural and core strengths, and to develop new ones
in the future.

Aer Lingus has carefully chosen product


differentiators that are valued by customers
while maintaining simplicity and low costs.
For instance, centrally-located city airports,
allocated seats, one-way fares, online advan-
ce seat selection, transparent pricing through
website, Frequent flyer programme, self ser-
vice check-in, customer care in the event of
disruption...

David Doctor,
Director of Airline Business Group

LCCs trends are not only to grow volumes, but


also to increase prices. Surveys show that busi-
ness passengers pay up to 40% more than leisure
passengers, one reason is because they want flexi-
bity.

19 Air Scoop - July 2007 www.air-scoop.com


DOWN TO EARTH
Daniel Skjeldam
(Director Network & Revenue of
Norwegian)

«Our worst ennemy is the Nordic winter! A real


challenge for aircrafts», Daniel Skjeldam

With the acquisition of FlyNordic, Norwegian is


now the largest LCC in the nordic countries with
more than 30 aircrafts and between 9 and 10 mil-
lion of customers in 2008. 108 routes to 70 desti-
nations and 1100 employees. 70% of the market
comes from inside Scandinavia.

Distribution

Tim Jeans
(Managing director of Monarch Airlines)

«Environmental attacks is the most important threat to the LCC business», Tim Jeans

«Then comes taxation and airports in the UK which make a lot of damages to the business.
Moreover, slots are today a real break on flexibility.»

Andy Harrison
(CEO of easyJet)

Andy Harrison has un-


veiled a model termed
the ‘Eco Jet’.

easyJet Routes in %

«Global warming is a near certainty. Environmental de-


bates have an impact on passengers demands»,
Andy Harrison

Philippe Wilmart
(Marketing Director of
Marseille Airport)

How can airports work with airlines to attract low-cost traffic? Airports, like in Marseille, can
identify all potential customers segments (size and location of communities, second home mar-
kets…) and therefore tailor made marketing plans.
MP2 also had to educate, inform and stimulate its local markets, and helped establish and develop
the LCCs brands locally.

20 Air Scoop - July 2007 www.air-scoop.com


BIRD’S EYE VIEW
Exclusive Analysis for Air Scoop

www.airlinebulletin.com
Are LCC Mergers Effective?
With the recent merger activity in the LCC industry, as Approximately 60 LCCs presently operate in Europe, and
well as the slowdown in demand, rumors abound about many of them are vulnerable to competition. Ryanair and
additional consolidation. Airlines engage in mergers for a easyJet are much more powerful than any other LCCs,
variety of reasons, and this article explores the ever-shif- and they will ultimately move into most regions around
ting LCC merger environment. LCC mergers are typically Europe. Ryanair and easyJet also have lower costs than
used to help LCCs consolidate in a given region, in order most other LCCs, so they pose the greatest threat to less-
to further trim costs and better compete with other car- competitive LCCs. Smaller LCCs are most likely to con-
riers. LCC mergers are often designed with a long-term solidate, especially when vulnerable to LCC competition.
outlook, and the main goal of any airline merger is to in- When Ryanair entered Scandinavia and lowered fares
crease worker productivity, particularly in the managerial drastically, other LCCs were hurt. Since the market is rela-
and aircraft crew positions. According to Dr Keith Mason tively small, airlines were fighting for relatively few passen-
at Cranfield University, high worker productivity is most gers, and Ryanair’s lower fares attracted a significant share
correlated with LCC profit, and ultimately, LCCs are fo- of the market. To compensate, Norwegian and FlyNordic
cused on increasing profits with any merger. In the larger merged, and other Scandinavian LCCs, including Sterling,
merged company, redundant worker positions can be eli- may be vulnerable to takeover.
minated and others can be streamlined. Flight attendant
and pilot scheduling can be optimized to better meet the Consolidation could create regional airlines that could
needs of the company. However, savings also exist from have costs similar to Ryanair or easyJet’s, but which tar-
many airport jobs, including ground crew and maintenance get a particular market. The Norwegian/FlyNordic and
staff, but are more elusive since many LCCs outsource the- the Air Berlin/DBA mergers created two large airlines in
se functions. Mergers typically do less to increase aircraft their respective regions. The most rampant consolidation
productivity, since most LCCs already use their planes as will be seen in markets that are less penetrated by Ryanair
much as possible, and a merger doesn’t change that para- and easyJet and which also lack a dominant low-cost car-
digm very significantly. rier. Such regions, which include Spain/Portugal, Italy, and
Eastern Europe, could see merger activity, depending on
Mergers give the new carrier additional market share and additional circumstances, particularly those that are con-
often, reduced costs, critical to a LCC’s survival. Market tributing to the present slowdown, including higher inte-
share provides pricing power, and more leeway to adjust rest rates, higher taxes and landing fees, and the amount of
capacity to meet the demands of the market. With LCC competition already in a market.
growth slowing, airlines need to raise fares. And airlines
can most easily do that by controlling capacity to better In Spain and Portugal, Vueling has struggled to expand in
meet the needs of the market. When LCCs are small, mar- the face of stiff competition from Ryanair, easyJet, Clic-
ket share is difficult to acquire, but as a LCC grows and kair, and SpanAir. The upstart Clickair has had a lot of
matures, it often has lower costs, greater name recognition, success, with costs that are close to Ryanair’s. A Clickair/
and more pricing power. Some LCC mergers, especially Vueling merger could create an airline that offers exten-
between smaller carriers, will be focused more on efforts sive domestic service as well as substantial service to Por-
to pare costs as much as possible. When these mergers oc- tugal, France, Italy, and Germany thereby becoming more
cur, fleet and airport commonalities are more important, as competitive with many of its low-cost competitors. Since
they allow the two carriers to sync operations more quic- both Clickair and Vueling operate A320 aircraft, there
kly and more immediately realize the cost benefits from would be significant fleet commonalities, and the new air-
their connection. Other mergers, typically between larger line could deliver a streamlined, uniform service to quic-
carriers, are more focused on acquiring more market share kly realize cost benefits of the deal. It’s also possible that
for the combined company. Fleet and airport commonali- Vueling or Clickair would merge with SpanAir to create
ties are less important, and the two airlines involved in the a Spanish low-cost powerhouse, but that seems less likely
deal often continue to operate separately for the indefi- right now because the benefits of that merger would be
nite future. Many mergers take place even though the two less immediate due to differences in fleet types as well as
airlines operate completely different fleet types or from network structure and overall business model.
different airports. For example, even though FlyNordic
operates MD-80 series aircraft, while Norwegian operates
737-300s, the two companies merged.

21 Air Scoop - July 2007 www.air-scoop.com


BIRD’S EYE VIEW
In Italy, with a less developed LCC market, the merger pic- Consolidation may even be seen in other markets where
ture is more difficult to predict. It’s less likely that a merger a dominant LCC already exists. In this case, a larger LCC
between two Italian LCCs will occur than in Spain. Howe- may merge with a smaller carrier in order to give the larger
ver, a buyout of an Italian LCC by a larger LCC, such as Air carrier more leverage in a given market. For example, in
Berlin or easyJet isn’t out of the question, since both those Scandinavia, rumors abound that Sterling may merge with
companies have fleet commonalities with Italian LCCs and easyJet. That could enable easyJet to expand quickly into
are fighting for greater market share in the country. And a virtually untapped market for the company, Scandinavia.
one merger between two Italian carriers isn’t out of the It would give the new operator greater worker produc-
question. A merger between My Air and WindJet would tivity, providing a competitive edge against the already-
enable the merged carrier to have significant market share struggling SAS.
and pricing power on routes to and from Sicily.
Unlike easyJet and most other LCCs, Ryanair has a uni-
In Eastern Europe, the picture is also hazy. Ryanair has que rationale about mergers. Ryanair doesn’t look for cost
made a very strong push in Poland, and has developed con- reduction through mergers, since the airline has by far the
siderable market share there. It’s possible that Ryanair or lowest costs in Europe and any further cost reductions
easyJet may make an acquisition, as both carriers want to would be marginal. Instead, Ryanair looks for acquisitions
gain additional market share in the region. Eastern Europe that will help the company gain share in a new market
will probably someday see around two to three large LCCs quickly. For example, an acquisition of Blue Air in Ro-
because of the diversity of markets that can be served from mania would enable Ryanair to become a leading carrier
that region, since there are so many different countries, and in the country overnight. Ryanair could greatly stimulate
there is potential for services not just to Western Europe, traffic with lower fares than Blue Air had been offering and
but also to Russia, Turkey, and the Middle East. Air Berlin expand service from the country to destinations east and
or another LCC that uses hubs might consider an acqui- west. In Eastern European countries where many working
sition in the market and using that leverage to create an class citizens are looking for cheap travel to Western Eu-
Eastern European hub to funnel passengers from Western rope, Ryanair’s low fares greatly stimulate traffic, which
Europe to emerging low-cost markets in the Middle East. in turn enables Ryanair to offer service to additional mar-
kets. That reality could work to Ryanair’s advantage in Ro-
Both Wizz and SkyEurope suffer from competition with mania. However, Ryanair has a very successful formula,
Ryanair and even legacy competitors. Wizz seems to and the airline has been very careful not to tinker with that
have the biggest problems with Ryanair right now, and formula very much. For this reason, Ryanair is less likely
the airline may need to join with another to diversify the to merge with another carrier than easyJet, Air Berlin, or
markets it serves and to grow more quickly. easyJet and another large LCC, and any merger or buyout would be
Wizz could be good partners, since easyJet is looking for conducted on terms favorable to Ryanair because Rya-
an additional presence in Eastern Europe, but Wizz also nair has so much leverage.
has other opportunities that it can’t ignore.
Although there’s a lot of buzz about potential mergers, I
Also possible, though less likely, is that two LCCs from doubt that there will be a sizable number of mergers in the
different parts of Europe could link up to create a trans- marketplace soon. Airline mergers are complicated, time-
European network, potentially offering customers the consuming, and risky, so they will likely be conducted spa-
ability to connect to certain destinations. For this reason, ringly. It’s possible that up to two or three additional LCC
Vueling and Wizz might make a perfect match. Both com- mergers could occur over the next year or two, but I doubt
panies are struggling with competitors, both operate A320 more. However, those airlines that do decide to merge
aircraft, and both want to pare costs. A merger between could change the marketplace in a region dramatically, and
these two carriers could create an airline with a network with the downturn in the industry, those changes could be
spanning Europe, offering customers in Spain and Portugal magnified. And that could potentially lead to an additional
the ability to access destinations in Eastern Europe and vice round of consolidation in the future.
versa. That would distinguish the company from SpanAir,
which focuses primarily on routes to Germany, Italy, and
Scandinavia, as well as Ryanair, which has little presence
in the Spain/Portugal-Eastern Europe market.

Air Scoop is a Registered Trademark of Global Wings Publications.


Subscription to Air Scoop: 290 euros for 1 year (10 issues)
Copyright 2006-2007 - Unauthorized distribution or reproduction is forbidden.
http://www.air-scoop.com ; http://airscoop.blogspot.com (free portal news)

22 Air Scoop - July 2007 www.air-scoop.com

You might also like