Wolfgang Kurth 1. February 2005 How will airline business models evolve? 8th Aviation Conference Hamburg Wolfgang Kurth 1. February 2005

Industry life cycle VOLUME/GDP TIME BEGINNING STAGE TRANSITION Africa Asia Middle East Latin America BEGINNING STAGE TRANSITION RAPID GROWTH U.S. and Europe MATURE GDP Volume

Rise of the Package Holiday Past Sources of Growth UK Charter Pax (Millions) Product Innovation Rise of the Package Holiday Source: Stan Maiden, BAA

Tour operator‘s committment over time (1) End of the 70ties: one flight: one tour operator Until mid 80ties: one flight: two tour operators Until end of the 80ties: one flight: two tour operators plus „pro rata“

Tour operatot‘s committment over time (2) Beginning of the 90ties: one flight: several tour operators and seats with no committment Within less than 15 years commercial risks were shifted from the tour operator to the airline!

Market and business environment in the 90ties

Market and business environment in the 90ties

LCC routes 2001 Caption: Ryanair easyjet Volareweb bmi Baby Hapag-Lloyd Express Germanwings Sterling Skyeurope jet2

LCC Routes 2002 Caption: Ryanair easyjet Volareweb bmi Baby Hapag-Lloyd Express Germanwings Sterling Skyeurope jet2

LCC Routes 2003 Caption: Ryanair easyjet Volareweb bmi Baby Hapag-Lloyd Express Germanwings Sterling Skyeurope jet2

LCC Routes 2004 Caption: Ryanair easyjet Volareweb bmi Baby Hapag-Lloyd Express Germanwings Sterling Skyeurope jet2

LCC in touristic destinations: Spain 2002 Caption: Ryanair easyjet Volareweb bmi Baby Hapag-Lloyd Express Germanwings Sterling Skyeurope jet2

LCC In Touristic Destinations: Spain 2003 Caption: Ryanair easyjet Volareweb bmi Baby Hapag-Lloyd Express Germanwings Sterling Skyeurope jet2

LCC in touristic destinations: Spain 2004 Caption: Ryanair easyjet Volareweb bmi Baby Hapag-Lloyd Express Germanwings Sterling Skyeurope jet2

London Stansted’s Growth Million Pax Low Fare Scheduled FSAs Charters Source: Stan Maiden, BAA

Charter volume is declining

Limits to growth? Source: Stan Maiden, BAA

Passenger profile by service type Socio Economic % Source: Stan Maiden, BAA

Passenger profile by service type % Age

Passenger profile by service type Reason for Travel % Charter Low Cost Scheduled

Network comparison

LCCs grow into leisure destinations Source: AENA

Differences between LCCs and Charter Low-Cost Carrier Charter airline Lower Maintenance spare parts and training costs, simpler swapping around of flight staff Limited marketing & sales forces in charter airlines, small marketing budget!!! Low-Cost advantages Lower handling fees Lower TOW, lower airport charges significant for ttl. trip costs Lower ancillary costs, less complexity, additional income Lower complexity, higher capacity utilisation Lower fixed personnel costs Utilisation Fast turnarounds ( 25min.) Short sector length (< 1.5 hrs) Turnarounds approx. 45 min. Avg. sector length ~ 2.7 hrs. Frills No Frills, extras paid for (e.g. catering, extra luggage, no discounts for children) IFE, „Day before“- check in, lounges, paper tickets, comfort class, discounts for kids, baggage allowance for minors, catering Airports Primary and secondary airports, symplified processees Primary and secondary airports Fleet Standardised fleet (only one aircraft type), higher seating density (737-300: e.g. 149) Various aircraft types Marketing/ Retail Direct channels, use of travel agencies only if no extra costs Aggressive marketing Most trips sold via tour operator or travel agencies Limited marketing Network Point to point, no interlining, no transfers Short/medium haul routes (1.5/5.0) sometimes via hubs Personnel High variable-proportion of salary (up to 26 %) High basic salaries (variable proportion up to 11 %), trade union affiliation

Average Route Length (Miles) Unit costs 25 20 15 10 5 Regional airlines SK Scheduled airlines AZ AF US LH BA KL Cents / ASM AA EasyJet UA IB AS Low cost carriers NW AirT CO Charter airlines TW AWA Ryanair SWA ATA DL Britannia 0 200 400 600 800 1.000 1.200 1.400 1.600 ASM: Available Seats Miles Source: CASM Form 41, Air Transp. World June 2001 issue, Stage length data from the Airline Monitor Nov. 2001 issue; AirTran data Air Tran 10-Ks BAH Analysis Average Route Length (Miles)

LCCs „own“ the customers Booking Sequence: 1st flight - 2nd hotac simultanously 1st hotac - 2nd flight

Destination sites

Destination sites

Destination sites

www.mallocafacts.com

www.mallocafacts.com

www.mallocafacts.com

Trends in distribution

Price-conscious business passengers Quality-conscious business Positioning of LCCs Price-conscious business passengers Quality-conscious business passengers Non-business passengers Regional airlines LCCs Short-haul routes Charter Long-haul routes Network carrier Source: Mercer Management Consultants 2003

LCCs: Migration and segmentation (1) LCCs will continue to grow. Market share of 35-40% in 2010 seems not unrealistic. LCCs will move into leisure destinations where traditional charter carriers have a significant „seat only“ volume. LCCs will increase frequency on leisure routes but will reduce the number of departure airports.

LCCs: Migration and segmentation (2) LCCs will adopt quality elements or product features from full service /charter airlines provided costs and complexity remains untouched or they are providing another revenue stream (seat reservation, FFPs, IFE) LCCs will enter into arrangements with tour operators provided their business model will not be affected

Thank you for your attention!