ACAC Workshop Rabat, 2-4 July 2012

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1 Low-cost Carriers Silvia Gehrer ACAC Workshop Rabat, 2-4 July 2012

2 Outline Historic Developments Characteristics of Low-cost Carriers Statistics: Traffic Development, etc. Success Factors Cost Reduction Strategies LCCs and Airports LCCs and the Economic Crisis Business Model Example Flyniki Prospective Developments

3 Historic facts US developments Southwest Airlines (1971) 1971: 3 aircrafts, 3 destinations, <0.5m passengers 2011: 558 aircrafts, 73 destinations, 104m passengers, 3,200 daily flights Airline Deregulation Act (1978) Liberalisation of fares, routes and market access currently 8 US low-cost carriers (LCC) > 30% LLC Capacity Chare (domestic transfers) in 2011

4 Historic acts European developments Ryanair (1985) - Restructuring according to LCC-principles (1991) 1986: 2 aircrafts, 2 destinations, 82,000 passengers 2011: 294 aircrafts, 175 destinations, 76.4m passengers Deregulation of the European Aviation Market (1997) currently 42 LCC serving the European market > 35 % LLC Capacity Chare (transfers within Europe) in 2011

5 How to define a low-cost airline? High seating density Single class configuration Short turnaround time at airports No in-flight services Low fares, simpler fare scheme Point-to-point traffic No Cargo High aircraft utilisation Single aircraft type Frequent use of secondary airports Short-haul/medium-haul route structures

6 Growing importance of LCCs 30,0% 25,0% 20,0% LCC Capacity Share (%) of Total Seats, worldwide Source: CAPA Centre for Aviation 19,3% 21,1% 21,9% 23,4% 24,3% 26,4% 15,0% 10,0% 5,0% 8,0% 9,5% 11,5% 13,5% 14,9% 16,7% 0,0%

7 Passenger developments Ryanair ( )

8 LCCs serving the European Market LCCs Takeoffs Routes 1 Ryanair Easyjet Air Berlin Flybe Vueling Norweigian Air Lingus Wizz Air Arabia Maroc Air Asia X flydubai 9 3

9 Success factors Basis: liberalisation of aviation markets Strategies for price reduction Air services supply dominated by network-carriers Target group: less price-sensitive business travellers LCCs attract steadily increasing number of price-sensitive consumers in leisure traffic segment Product differentiation by brand Competition against established full-service carriers vs competition against other traffic carriers Creativity, Fun

10 Cost saving potentials (1) High seat density Single class configuration Reduced in-flight services; generation of ancillary revenue Minimum crew numbers; multiple roles for employees

11 Cost saving potentials (2) High aircraft utilisation Reduction of turnaround time at airports Operation of less congested, secondary airports Off-peak hours (avoid traffic delays & reduced costs due to lower airport charges) No cargo Point-to-point services No seat reservation 20 % reduction of travel time

12 Cost saving potentials (3) Single aircraft type (reduced staff training and service costs) Modern and energy efficient fleet Boing 737, Airbus A320 type Reduced airport charges Avoidance of gates that include gateways Negotiation of profitable long-term agreements, exploit market power

13 Cost levels per seat km - Example bmi British Midland: 7.1p easyjet: 4.6p Ryanair: 3.9p cost reduction enables low fares to be offered to consumers

14 Impacts on airports and econ. region Traffic growth induced by LCCs direct, indirect and induced effects increased value added in region higher income at airports job creation 950 additional jobs in regions around European airports per 1m workload units increased air traffic connection positive effects on business location

15 LCC and airports (1) LCCs important for regional airports Expansion of catchment area E.g. East Midlands Airport (UK) Before LCCs: catchment area of 7.3m people After LCCs: catchment area of 24m people (+228%!) Increasing importance of LCCs for medium hub airports >70% of European airports connected point-to-point engagement of LCCs can ensure market share of medium hubs (40-60% transfer traffic)

16 LCC and regional airports (2) LCCs exploit market power hidden subsidisation via marketing aids (e.g. Ryanair/Charleroi Airport) service charges do not cover costs for airports conclusion of long-term contracts Airport have to bear costs of necessary extension of infrastructure (e.g. Ryanair/Dublin, EasyJet/London) in return LCCs offer substantial increase in passenger volume increased profit opportunity for airports strategies to increase passengers average length of stay at the airport

17 LCCs and economic crises LCCs were not strongly affected by the fuel-driven crisis of 2008 moderate net-loss of 27 LCCs in 2008 net-profit of 27 LCCs in 2009: >1bn dollar net-loss of IATA members in 2009: 9.4bn dollar Effects of oil price increases on LCCs? strong effect, since fuel expenses constitute major part of LCCs total production costs minor effect, due to higher aircraft utilisation and energy efficient fleets

18 Criticism Non-transparent fare scheme Hidden surcharges Safety issues Abuse of market power

19 LCC Business Model Flyniki (1) It is part of the NIKI philosophy to be active on both leisure and business-oriented markets NIKI builds on a 3 tier business strategy

20 LCC Business Model Flyniki (2) Flexible distribution approach Internet, Call Centres (direct sales) Corporate sales platforms Global Distribution Systems (Amadeus, Galileo, Sabre,...) Leisure distribution systems (CETS, TOMA) Retailers Consolidators Tour operators

21 LCC Business Model Flyniki (3) Pricing strategy in scheduled services sales

22 LCC Business Model Flyniki (3) Product characteristics: Hybrid airline, quality low cost Quality inflight product free snacks & drinks free newspapers magazines Inflight Entertainment Buy-On-Board menues Frequent flyer programme Seat assignment at check-in Internet, MMS check-in features Supporting online and interline transfer traffic through check-in, etc.

23 Passengers (000) Revenue (Mio EUR) LCC Business Model Flyniki (5) Pax k Revenue mio eur % % +26% % % % %

24 LCC Business Model Flyniki (6)

25 Future developments Can cost advantage be maintained? Increase wage in order to avoid high turn-over rates? Higher fixed costs due to modernisation of fleet? Can cheap airport charges be maintained? EU legislation - costs for passenger compensation? LCCs are strongly affected by (environmental) taxation on aviation Tendency of convergence between LCCs and FSCs? LCCs will maintain cost-advantage due to higher seat density and aircraft utilisation (FSCs dependent on business passengers)

26 Thank you!!! Silvia Gehrer

The Challenge of the Low-cost Airlines

The Challenge of the Low-cost Airlines Air Transport Management Seminar Universidade Lusofona Lisbon 7th - 11th January 2008 Dr Keith Mason Director Business Travel Research Centre www.businesstravelresearch.com