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Low Cost Carriers Phantom or Phenomenon

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Title: Low Cost Carriers Phantom or Phenomenon


1
Low Cost Carriers Phantom or Phenomenon
Wolfgang Kurth
Advolar
  • May 23, 2007
    Kraków, Hotel Stary

2
The LCC Experience
3
(No Transcript)
4
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

  • - neighbors life style provides
    guidance

  • - purchasing is based upon ratio

  • - status symbols are important

  • (my family, my home, my car!)

5
More Mature Customers
  • The Hybrid Customer
  • in any sozio-demographic group
  • mobile
  • non conformistic
  • picky, critical
  • thrifty and lavishly
  • cant 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

6
Customer Expectations
Expectations
Ranking of Product Elements
  • safety
  • reliability
  • good value for money
  • transparency/fairness
  • decent infrastructure
  • competence/professional attitude
  • flexibility

1 Set of criteria Aircraft (modern, looked
after), tidiness, competent crew 2 Extremely low
fares raise doubts with regards to
reliability Source Contest Census, 2002
Monitor Group Analyse
7
European Airlines Unit Costs
8
The Low-Cost Business Model
The low-cost idea has to start in peoples 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

9
LCC Mantra
We are not an airline, we are a culture. A
culture founded by optimists - and built by
believers. We are not an airline. We are
listeners, innovators and technology creators. We
are not an airline. ...

(Songs Credo)
When removing airlines from the bosom of
national politics, what remains is a simple
business!

(Ray Webster)

10
LCC Cost Structure
  • Primary and secondary airports
  • Simplified handling processes

14,0
0.1
12.0
0.4
0.2
12,0
0.6
0.8
1.2
10,0
2.7
  • Lower costs for maintenance, spare parts and
    training
  • Lower Det. Spec.
  • Less personal (lower service level)
  • Minimum overheads
  • More outsourcing

8,0
  • Single Class
  • No Frills
  • Extras at charge
  • No lounges
  • Re-usable boarding passes
  • Web check in
  • Etc.

Costs/ASK( cent)
  • Direct sales channels
  • Travel Agencies only if no extra costs
  • No tour operators
  • No CRS

6.0
6,0
  • Quick Turnarounds,
  • Point to point, no transfers
  • Higher seat capacity per A/C

4,0
2,0
0,0
Airport Charges
Low-Cost
Legacy Airline
Operation
Frills
Distribution
Personal
Fleet
Various
Source AEA Reports, Monitor Analysis
11
Price Transparency? (Vodafone)
11
12
Price Transparency!
12
13
Information (Power) To The People!
13
14
Why Buying Online?
Ability to compare options myself
Faster/saves time Offers lowest prices

Offers wider selection of suppliers Easier/simple
r to handle
Offers more Frequent Flyer Miles
Source PhoCusWright Inc., Online Travel Shopping
and Buying Behavior
14
15
LCC Routes 2000
16
Market Potential For European LCCs
Prediction for the European Low Cost Market
2001E2009F
Market potential of the GermanLow Cost Segment
2001E2009F
Optimistic
30
Number of passengers of Ryanair easyJet at
basis of announced capacities
Estimation formed by the use of US market share
travel frequency to the German population
19
PAX(m)
PAX(m)
15
Pessimistic
actual
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
17
Potential For LCC Routes
Potential new LCC lines each year in Europe
History
Forecast
Source Airbus Industries
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, 2004
4) Devinix.com, 2004
5) ICMA.com, 2004
19
LCCs In Asia
Source LHT AG, FH Worms, 2004
20
Number Of Airlines On The Rise
21
114 LCCs Worldwide (February 2007)
Canada (4) Canjet HMY Airways Sunwing Westjet
Europa (58) Aegean Airlines BMI Baby
Iceland Express
SmartWings Air Arann British
European InterSky
Snalskjutsen Air 2000 Budget
Air Itali Airlines
Snowflakes Air Baltic
CentralWings Jet2
Sterling Air Berlin
Clickair LTU
Sun Express Air Finland
Condor Meridiana
Thomson Fly Air Scotland
Corendo Monach Airlines
TUIfly Air Service Plus EasyJet
My Travel Lite
Transavia Air Southwest Evolavia
MyAir
Virgin Express Alpi Eagles Excel
Airways Nordic Airlink
VLM Airlines Baboo Fare4U
Norwegian Airshuttle
Vueling Airlines Belle Air
FlyMe Pegasus Airlines
Windjet Blue1
GermanWings Ryanair
WizzAir Blue Air
Globespan Scanjet Blu-Express
Helvetic Airways SkyEurope
USA (9) Air Tran Allegiant Air ATA JetBlue
Airways Midwest Express Southwest Airlines Spirit
Airlines USA 3000 Airlines Ted
Middle East, Asia, South Pacific(26) Adam Air
Jetstar Asia Aero Pacific
Jetstar Australia Air Arabia
Kingfisher Airlines Air Asia
Lion Air Air Blue
Nok Air Air Deccan
One-Two-Go Air India Express
Paramount Airways Bangkok Air
Skymark Airlines Cebu Pacific Air
Skynet Asia Airways Freedom Air
SpiceJet Go Air Tiger
Airways IndiGo
Valuair Jazeera Airways Virgin Blue
Latin South America (12) Aero California
Mexico Alma de Mexico Aviasca de Mexico Avolar
Mexico Azteca Mexico Bra Brazil Click
Mexicana Gol Brazil Interjet Mexico Ocean Air
Brazil Viva Aerobus Mexico Volaris Mexico
Africa (5) 1 Time Atlas Blue Jet4You Kulula Mango
22
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
Ryanair Dream 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 2005 Fairline Austria Bankrupt 09Jun2004
, Fly Eco Will probably never start, Fly West
Website disappeared July 2005, Flying Finn
Bankrupt 27Jan2004 Free Airways Never started,
Fresh Aer 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
BankruptAsia 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
2006USA America West Merged with US Airways
Independence Air Bankrupt Early 2006, Interstate
Jet Bankrupt 2005 Song Air Fake low-cost
airline discontinued by Delta in 2006, Southeast
Airlines Bankrupt 01Dec2004 TransMeridian
Airlines Bankrupt 2006 Virgin USA Never started
Source http//www.etn.nl
23
US LCC Aircraft Deliveries
Source Seabury Group, ACI Airline Restructuring
Conference, Septt 0, 2004
24
Customer Profile
Age distribution
25
Parking At LCC Airport
26
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. OLeary, original sound
track
27
Customer Satisfaction
28
Customer Segmentation
FSA FSA/LCC
high potential LCC market
Source Harris Interactive Airline Segmentation
Study
29
Different Market Strategies
  • Pure Low Cost Carriers
  • Year round traffic
  • Independent travelers
  • Balanced directional flows
  • Grow the market
  • Avoid charter markets (for the time being!)
  • Hybrid Models
  • Mix of business and leisure
  • A la carte services
  • Compete in some charter markets

-Hot meals, -Lounges, -Paper tickets
-Business passenger -Branding -Low
Frequency -Branded meals
-Main Airports -Frequency -Branding
-Low-Fares -Frequency -Grass strips
29
30
LCC Range of Product Elements
31
LCC Operational Strategies
To remain competitive LCCs incorporate FSA
elements into their operational strategies
  • Expansion into and use of major/hub airports
  • - Southwest PIT, PHL and DEN
  • - JetBlue JFK, BOS
  • Increasing international service
  • - Jetblue, Frontier, Air Tran,
    Spirit, America West, ATA
  • Code-share agreements and alliance membership
  • - Southwest and ATA
  • - US Airways / America West
    membership in Star Alliance
  • Increasing fleet complexity
  • - Embraer 190 to jetBlues A320
    fleet
  • - A319 to easyJets B737 fleet

Source SHE
32
Connecting LCC Passengers
33
Network Overlaps
Source McKinsey
34
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 gt 25 mio passengers within 5
    years.
  • Conclusion
    No
    longer national markets will belong exclusively
    to National Carriers!!

35
For sun seekers nothing has changed.
we still like going on vacation!
36
A Package Tour
Yesterday Highly complex integrated product chain
Brochures
Travel Agency
Transport
Incoming
Transfer
Tourist Guide
Hotel
Beach
Essential? no
Essential? no
Essential? yes
Essential? no
Essential? no
Essential? no
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
  • ..

37
Mapping
38
Tourists Are Most Sensitive To Airfare
Business travellers are more sensitive to airline
and schedule
Portion of travellers naming factor as "most
important"
17
25
10
7
19
Airfare
Schedule
Airline
30
Airplane
36
57
Tourists
Business travellers
Source Boeing-sponsored traveller survey
39
Protect Your Fare
40
Protect Your Fare
41
Websites Used For Holiday Bookings
Source Mintel
42
Distribution Product Trends
43
In The US Stage Length Is Increasing
44
Stage Length Is Increasing In Europe As Well
Avg. Stage Length Ryanair
Kilometer
2000 2001 2002 2003
2004 2005
2000 2001 2002
2003 2004 2005 2006
Source Davy European Transport and Leisure,
15.2.2005, wwww.ryanair.com
45
Impact Of LCC Entry On Charter Routes
gt 4 fhrs
LON
lt 3 fhrs
2000 2005 Routes served in competion
(white) Charter - 50.6 (avg) Routes served by
Charter only (yellow) -10.5 (avg)
46
LCCs Eating Into Charter Markets
Ryanair, easyJet, Volareweb, bmi Baby,
Hapag-Lloyd Express, Germanwings, Sterling,
SkyEurope, jet2
232
118
Routes to Spain
69
48
17
2002 2003 2004
2005 2006
Source CH-Aviation
47
Fragmented Value Chain
Yesterday Highly complex integrated product chain
Brochures
Travel Agency
Transport
Incoming
Transfer
Tourist Guide
Hotel
Beach
Essential? no
Essential? no
Essential? yes
Essential? no
Essential? no
Essential? no
Essential? yes
Essential? yes
Today Fragmented product chain
T/O required? no
T/O required? no
T/O required? ???
T/O required? no
T/O required? ???
T/O required? no
48
Conclusion
  • The market will .
  • continue to appreciate Value for Money
    products.
  • see an increase in travel opportunities, i.e.
    more destinations
  • from more origines
  • be affected by increasing costs which will hit
    the leisure segment
  • offer plenty of supply and price sensitive
    demand
  • The consumer will .
  • take advantage of oversupply and unlimited
    information available
  • to him
  • be hard to predict, no easy segmentation

49
Conclusion
  • LCCs will .
  • continue to grow.
    Market share
    of 35-40 in Europe by 2010 seems realistic.
  • move into leisure destinations where
    traditional charter carriers have a significant
    seat only volume.
  • increase frequency on leisure routes but will
    reduce the number of departure airports.
  • enter into arrangements with tour operators
    provided their business model will not be
    affected.
  • adopt quality elements or product features
    from full fare airlines provided costs and
    complexity remains untouched or they are
    providing another revenue stream (seat
    reservation, IFE).
  • move into business destinations which today
    have only indirect connections.
  • negotiate corporate fares.

50
Conclusion
  • FASs will .
  • cut costs, adopt elements of the LCC business
    model.
  • simplify tarifs and travel rules.
  • focus on on-line distribution.
  • improve long haul product
  • apply agressive price strategies to fight LCCs
  • loose on indirect routes lt 2 fhrs
  • Charter Airlines will
  • disappear

51
Conclusion
  • Co-operations will .
  • take place between selected LCCs (Cross
    Marketing).
  • start between international (non-Alliance) long
    haul carriers
  • and LCCs.
  • Merges will
  • take place between mid size LCCs and smaller
    LCCs to grow
  • quickly into international markets.
  • Re-integration will
  • affect most Sponsored LCCs (LCC subsidaries
    of FSAs)
  • Fatalities will
  • reduce the flock of European LCCs to 3 -4
    strong Pan European
  • LCCs and about 10 -12 national/niche
    LCCs

52
Airline Segmentation
Source AEA
53
Size Is No Guarantee For Survival
54
Conclusion no phantom, no phenomenon -
Reality!
55
Thank you for your attention!
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