Challenges Facing Low Fares Airlines The European Perspective

Challenges Facing Low Fares Airlines The European Perspective Jan Skeels Secretary General

Overview European Low Fares Airlines Association Background The Challenges facing Low Fares Airlines in Europe The Future for Low Fares Airlines in Europe Summary

Liberalisation a success in Europe Liberalisation of air transport in Europe completed in 1997 Commercial considerations became key incentive for new routes, capacity offered and level of fares At present c. 60 airlines apply low fares model to varying degrees Many destinations, previously unserved, now have direct routes LFAs accounted for 24% of scheduled intra-european traffic in 2004 LFAs share in UK approaching 50%

Low-cost Carriers shown impressive growth since Liberalisation of Air Transport in Europe PAX numbers of European LCCs PAX (m) 90 80 70 60 50 40 30 20 10 0 Avg. growth p.a. 45 % 80 47 39 24 13 17 1999 2000 2001 2002 2003 2004E Source: Analystenreports, Unternehmensinformationen, Monitor Group Analysis

Example: Passenger Growth On The HLX CGN-HAM Route Since Start Of LCC - operation Development of the CGN - HAM - CGN route 2001-2003 50000 235% 45000 40000 35000 30000 215% 195% 175% 25000 155% 20000 15000 10000 5000 135% 115% 95% 0 75% Jan 01 Mrz 01 Mai 01 Jul 01 Sep 01 Nov 01 Jan 02 Mrz 02 Mai 02 Jul 02 Sep 02 Nov 02 Jan 03 Mrz 03 Mai 03 Jul 03 Sep 03 Nov 03 number of passengers moving average HLX passengers polynomial (number of passengers)

Today's Demand Is Triggered By Low Fares 50% For what reason would you fly more often? 40% 41% 30% 20% 17% 10% 11% 11% 6% 8% 8% 0% upgrades schedule safety ground low fares more FFP s safety board others Source: IATA Online Survey 2003

LFAs generate new passengers through low fares Data source: NFO Infratest, 2002; Monitor Group Analysis Shift w ithin airline market, 37% New demand, 59% Otherw ise w ould not have travelled, 71% No data, 4% Otherw ise by car, 15% Otherw ise by rail, 6% Others, 8% Low Air Fares have encouraged European integration & mobility

LCC Routes 2001 European Low Fares Airlines Association Caption: Ryanair easyjet Volareweb bmi Baby Hapag-Lloyd Express Germanwings Sterling Skyeurope jet2

LCCs Generators Of Regional Economic Prosperity Impacts on regional economies can be generally split into: Direct effects Mainly jobs at airlines, handling & related aviation activities (as being roughly half of total job effects). Total on-site employment of regional airports between 850 1200. 1,000 jobs created for every 1 million passengers through an airport. Indirect effects Regional airports support roughly 1200-1800 jobs within the regional or local economies. Studies have found regional airports to have comparable economic effects to several mid-size manufacturing plants. Revenues generated through local taxation. Catalytic effects Mainly effects stemming from attraction and detention of inward investment and the stimulation of inbound tourism. Especially the enhancement of competitiveness to local economies as well as the attraction of business and leisure passengers leads to higher generation of incomes and employment.

LFAs have achieved objectives of liberalisation of air transport in Europe LFAs have made direct contribution to Euro integration bring people closer together to economic growth & employment in Europe to making air travel possible for price sensitive consumers to the simplification of travel throughout enlarged EU LFAs have: Forced more efficiency in other airlines Forced more efficiency at airports Helped ease congestion at Europe s main airports Increased competitiveness of European aviation

and in addition. European Low Fares Airlines Association LFAs: Proved passengers fly if price right Stimulated growth across all sectors made important contribution to development of European aviation - brought back confidence in air travel LFAs played key role in restructuring of European Aviation industry Airlines forced to compete on service Better punctuality Fewer lost bags Rapid response to complaints Publishing customer service charter Performance statistics published Consumers can make informed choice

Benefits to Regional Airports European Low Fares Airlines Association Airlines guarantee long term passenger growth in exchange for lower costs Increased employment Airports benefit from much increased commercial revenues Airports have become more cost efficient Fixed costs, previously not recovered, now recovered and profits generated. The rules of the game have changed airports now acting as commercial undertakings Several studies carried out highlight these benefits

Economic Impact Of Frankfurt-Hahn Airport Development of passengers 3.500.000 3.000.000 3.000.000 2.500.000 2.431.551 2.000.000 1.500.000 1.457.527 1.000.000 500.000 18.000 20.814 29.337 140.706 380.281 450.774 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 estimated Source: http://www.hahn-airport.de/sycomax/files/508010_11statistik.doc

Economic Impact Of Frankfurt-Hahn Airport Development of company settlements at the airport 120 100 89 96 98 109 107 110 80 65 60 55 40 30 20 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 estimated Source: http://www.hahn-airport.de/sycomax/files/508010_11statistik.doc

Economic Impact Of Frankfurt-Hahn Airport 3000 Development of jobs at the airport 2500 2.262 2.500 2000 1500 1.290 1.560 1.611 1.819 1000 968 500 350 600 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 estimated Source: http://www.hahn-airport.de/sycomax/files/508010_11statistik.doc

Cost And Productivity Advantages For Companies In The CGN Region Due To LCCs At CGN In 2003 benefits relating to % of companies realising economies 1 avg. benefits (in % of the travel expenses) benefits per trip (avg.) benefits due to LCC in CGN ticket prices 86,0% 15,7% 242 87,3 m hotel and travel expenses 63,7% 8,9% 66 23,7 m working hours 68,2% 3,2% 2,1 h 59 2 755.000 h 20,7 m price reductions of tickets of non-lcc 63,8% 3 5,2% 58 15,9 m total 147,6 m 1 basis: all companies with LCC business trips 2 calculated with an average hourly wage rate of 28 3 basis: all companies with non-lcc business trips Source: Die regionalwirtschaftlichen Auswirkungen des Low-cost Marktes im Raum Köln/Bonn, IfV Universität Köln, 2004

Taxes* Paid As A Result Of The Value-added Effects Generated By The LCC-market In CGN 2002 taxes paid to the federal government: 76 m taxes paid to the federal states: 70 m taxes paid to local authorities: 21 m taxes paid total: 167 m * for example: income taxes, business taxes, VAT, consumption taxes Source: Die regionalwirtschaftlichen Auswirkungen des Low-cost Marktes im Raum Köln/Bonn, IfV Universität Köln, 2004

Economic Impact Of Carcassonne Airport Routes from London-Stansted launched in April 1998 and from Brussels-Charleroi in April 2001. Passengers in 2003 accounted for roughly 253.000, 74.1% of which were inbound visitors. Economic impact of these services is estimated at 8,4m in direct income to the region, 135 m in indirect monetary flow, including all tourist expenses and real estate investments, and 272,4m of so-called induced flow. Social impact of the air services amounts to a total of 3.049 new jobs. Carcassonne Source: Ract Madoux - Groupe Second Axe, Rapport d'etude: Impact socio-economique de la compagnie aerienne Ryanair dans la region et alentours de Carcassonne, Decembre 2003

Economic Impact Of Pisa G.Gallilei Airport Low-cost incoming-passengers turnover (2003) Total passengers arrived at Pisa Airport with international low-cost flights 484.041 % foreign passengers (average) 65,3% Nbr. incoming pax arrived at PISA Airport in 2003 % foreign passengers flying for business or other reasons (no tourism) Nbr. foreign passengers flying for business or other reasons (no tourism) Per capita consumption of foreign passenger flying for business or other reasons (no tourism) 316.079 37,8% 119.478 431,40 % foreign passengers flying for tourism 62,2% Nbr. foreign pax flying for tourism 196.601 Per capita consumption of foreign passenger flying for tourism 496,52 Economic impact of foreign passengers flying for tourism Economic impact of passengers flying for business or other reasons (no tourism) 97.616.653,84 51.542.245,05 Total economic impact of foreign passengers 149.158.898,89 Source: study by S.Anna Univerity (Pisa)

Overview European Low Fares Airlines Association Background The Challenges Facing Low Fares Airlines in Europe The Future for Low Fares Airlines in Europe Summary

Do Key Stakeholders provide what LFAs need? Airline Aircraft Manufacturers Airports ANSPs Policy Makers Cost efficiency Provision of what needed Punctuality - Understand LFA business

Air Navigation Service Providers Most activity is within European airspace 34 different States operating to common principles Charges represent c. 14-18 % of cost base % will increase as other charges decrease Will be totally impacted by outcome of Single European Sky Regulations US c. 60% more effective than Europe Only biting legislation will ensure service provision and cost efficiency

Policy Makers European Low Fares Airlines Association LFAs are success story of liberalisation Other legislation should be supportive it is not! Legislation being decided without full understanding of wide-ranging benefits LFAs bring Passenger compensation legislation Guidelines for agreements between airlines and publicly-owned airports

Passenger Compensation Legislation Previous legislation relating to Denied Boarding Compensation due for review EC decided to include compensation for long delays and cancellations Compensation for denied boarding for flights < 1500 kms = Euro 250; 1500 to 3000 kms = Euro 400 and flights >3000 kms = Euro 600 Cancellations : Refund & free flight back or alternative travel to destination and meals, refreshments, hotel accommodation etc. ALSO where airlines fault - compensation payments as above Long delays of: < 1500 kms =2 hours, 1500 to 3000 kms = 3 hours and flights >3000 kms = 4 hours airlines must give meals, refreshments and even hotel accommodation to passengers -even when not the airlines fault..delays over 5 hours : refund and flight back to initial point of departure. Levels of compensation = 5/6 times fare paid 85% delays & cancellations outside LFAs control need many additional passengers to cover cost consumer choice: increased protection or low fares Awareness too late to significantly influence legal challenge under way.

EC Guidelines for Agreements between Airlines and Publicly-owned Airports European Low Fares Airlines Association EC to issue guidelines for state aid rules to public airports. Initial indications are: Aid restricted to 50% of start up costs on route with time limit of 5 years Only routes with no existing high-speed rail link No consultation with all stakeholders only States No economic impact assessment Use of smaller regional airports important part of low fares airline model. Regional economies will be adversely affected. Lobbying to influence outcome

The European Co-Decision Procedure for Regulation Commission Proposal to Euro Parliament (EP) & Council European Low Fares Airlines Association EP amends (AM) EP Amends EP takes no action Council Accepts QM ACT ADOPTED Council Common Position Council approves (QM) ACT ADOPTED EP agrees or takes no action EP 2nd reading 3 months EP rejects common position (AM) ACT ADOPTED EP amends common position (AM) Council has 3 months ACT NOT ADOPTED Commission Opinion Council approves EP amendments (QM) Council does not approve EP amendments Conciliation Committee EP/Council/Commission 6 weeks No Joint text EP rejects (AM) Joint text ACT NOT ADOPTED ACT NOT ADOPTED EC approves (AM) Council approves (QM) Council rejects (QM) ACT NOT ADOPTED ACT ADOPTED

How ELFAA came about European Low Fares Airlines Association Legislation & pricing policies not taking LFAs into account LFA needs not being represented Lack of understanding about our business & customers E.g. Passenger Compensation Legislation European Bodies welcomed LFAs views encouraged formal set up ELFAA established and launched at end January 2004

Mission Statement European Low Fares Airlines Association to ensure that European policy and legislation promote free and equal competition to enable the continued growth and development of low fares into the future, allowing a greater number of people to travel by air. This will be achieved by: Identifying areas affecting the LF sector Effectively influencing regulatory issues Promoting common interests of members in European institutions

ELFAA Airline Membership European Low Fares Airlines Association Together operate 249 aircraft flying more than 50 m passengers in 2004 Together serve over 900 routes connecting over 200 cities in 2004

The Future Successful liberalisation in Europe now threatened by: Re-regulation through inappropriate legislation Reduce efficiency Increase costs Undermine competitiveness Example: Passenger Compensation Legislation Misapplication of the State Aid Rules Originally to ensure no unfair advantages given by States to National Carrier Now trying to stop competition by applying same rules to Regional Airports Proposed guidelines place publicly-owned airports at a disadvantage Airport growth & regional prosperity threatened as a result Answer: A better understanding needed by decision-makers The whole game has changed ELFAA published a study to help deliver a better understanding The full economic impact of liberalisation should be assessed BEFORE decisions are made

To summarise: European Low Fares Airlines Association LFAs are a rapidly growing sector of the market & here to stay Many Europeans travel only because of low air fares LFAs voice needed in Europe to protect low fares into the future Rules of the Game have changed Low Fares generate great economic benefit to airports & regions Re-regulation is a big threat to successful liberalisation A better understanding of the Low Fares sector urgently needed ELFAA study on the benefits of the Liberalisation of European Air Transport available on www.elfaa.com

Thank you for your attention!