Aircraft Finance % Commercial Aviation, Geneva, www.advolar.com © 1 A Review Of Regional Growth And Sustainability In The LCC Market Aircraft Finance & Commercial Aviation MBA Workshop Wolfgang Kurth 22nd Annual Geneva International Aviation Forum Geneva, 27th February 2008

Aircraft Finance % Commercial Aviation, Geneva, www.advolar.com © 2 Two Distinct Business Models Legacy Carrier An airline revolving around a hub & spoke network providing First Class/Business Class, Lounges, FFPs, Frills (food, beverage etc.), entertaining Alliance Memberships, offering multiple distribution channels incl. GDS Low-Cost Carrier An airline category defined primarily by low fares but also by a focus on reducing operating costs by eleminating (or charge for) product elements which don‘t provide added value

Aircraft Finance % Commercial Aviation, Geneva, www.advolar.com © 3 USA The Hub of Deregulation /1993/ ? <2010? 1978

Aircraft Finance % Commercial Aviation, Geneva, www.advolar.com © 4 LCC A Global Phenomenon Source: ecac-ceac.org/UK/Whatsnew/1-Franke

Aircraft Finance % Commercial Aviation, Geneva, www.advolar.com © 5 Start-Ups And Liberalization Start-Ups rel. to Existing A/Ls Liberalization RegulatedFully deregulatedTransition High >30% Moderate 20% - 30% Low <20% Beginning of deregulation stimulates Start-Ups Market entrance barriers in regulated markets prevent Start Ups Competition in fully liberalized markets disincentives Start-Ups => Timing is of essence!

Aircraft Finance % Commercial Aviation, Geneva, www.advolar.com © 6 Prospective Airline Start-Ups Prospective Airline Start-Ups Source: Ascend Nbr. of Start-Ups Africa Asia/ Pacific Central/South America Europe Middle East North America Russia/CIS Nbr.of existing operators

Aircraft Finance % Commercial Aviation, Geneva, www.advolar.com © 7 Great potential for LCCs in Asia Population : 290m Number of LCCs : 10 Deregulation : 1978 LCC Market share : 30% Population : 290m Number of LCCs : 10 Deregulation : 1978 LCC Market share : 30% Population : 375m Number of LCCs : Deregulation : 1997 LCC Market share : 20% Population : 375m Number of LCCs : Deregulation : 1997 LCC Market share : 20% Population : 3.5b Number of LCCs : Deregulation : in process LCC Market share : 5% Population : 3.5b Number of LCCs : Deregulation : in process LCC Market share : 5% North AmericaEuropeAsia & Japan Source: Airbus Industries

Aircraft Finance % Commercial Aviation, Geneva, www.advolar.com © 8 Liberalization Drives LCC Growth 37 airports with LCC operations 113 airports with LCC operations Intra Asia* 4% Domestic* 96% Domestic* 90% Intra Asia* 10% * % of total LCC seats. Source : OAG/ST September. ** Conservative scenario September 2001September airports with LCC operations Domestic* 77% Intra Asia* 23% September 2014** Source: Airbus Industries

Aircraft Finance % Commercial Aviation, Geneva, www.advolar.com © Annual growth rate 2004 market share Europe USA LCC Maturity: Growth and Market Share Emerging Developing Maturing Asia 0% 5% 10% 15% 20% 25% 0%10%20%30%40%50% Source: Airbus Industries

Aircraft Finance % Commercial Aviation, Geneva, www.advolar.com © 10 From Boom to Bust Nbr. of Airlines Time Pioneering Markets Example: USA, UK app. Year 5 app. Year 7

Aircraft Finance % Commercial Aviation, Geneva, www.advolar.com © 11 From Boom to Bust Nbr. of Airlines Time app. Year 3 Adopting Markets Example: Germany

Aircraft Finance % Commercial Aviation, Geneva, www.advolar.com © 12 German LCCs 2002/ / LCC Routes in/out of Germany 2 LCCs operating in Germany 4 LCCs in Europe 2003/ LCC Routes in/out of Germany 15 LCCs operating in Germany 49 LCCs in Europe

Aircraft Finance % Commercial Aviation, Geneva, www.advolar.com © 13 Sponsored LCCs (app. 17 world wide) Deutsche Lufthansa Delta United British Airways FSA LCC Subsidary Status Re-integrated ??? ???/sold to AB 2002: sold Go 2006: start BA Connect/sold LOT For Sale?? TUI

Aircraft Finance % Commercial Aviation, Geneva, www.advolar.com © Months of Press Clippings TIMES online: - „ … the price differences between no-frills and full-service airlines are very slightly indeed!“ - „ … London – Malaga: BA is UKP more expensive than EasyJet“ - „ … KLM ko‘d BMI baby‘s Tiny fares to Amsterdam“ - „ … BA beats MyTravel on points to Paphos HLX Press Release: …more service: magazines, newspapers, food and drinks foc … …fare reductions: kids 2 <12 years 50% discount …flex fares for business travellers with extra Bonus Miles …golf bags, diving and sking equipment foc Germanwings Press Release: …we are THE Quality Carrier! We serve primary airports only! We offer a FFP („Boomerang Club“)! We provide leather seats! OAG.FACTS: BA takes on low cost rivals in new fares war. … one-way all incl. tickets from UKP 29,- … FOXNEWS.COM: - „Low-cost carriers add lounges, leather seats to woo high flyers“ - Clickair: primary airports (LHR!) - Virgin Blue (Australia): extra leg room, FFP, lounges focus Money: Lufthansa Attacks LCCs: aircraft devoted to European LCC routes - Leather seats in Economy - 99,- Euros r/t californiaaviation.org: „Budget long-haul airline Oasis to take off from Hong Kong“ - $ 130,- o/w HKG-LGW (30% of lowest price available)

Aircraft Finance % Commercial Aviation, Geneva, www.advolar.com © 15 LCC Business Models Have Evolved Over Time Source: United Airlines

Aircraft Finance % Commercial Aviation, Geneva, www.advolar.com © 16 LCC Range of Product Elements Source: United Airlines

Aircraft Finance % Commercial Aviation, Geneva, www.advolar.com © 17 -Low-Fares -Sector pricing -On line sales -No frills -Secondary Airports -Frequency -Demand driven pricing - Leisure passenger - Head line prices - Focus On Line sales - Hot meals, - Lounges, - Paper tickets - Complex fare structure - Hubs - Business passenger Low Cost Carriers Year round traffic Independent travelers Balanced directional flows Grow the market No arrangements with tour operators No multi channel distribution (on line only) Full Service Airlines Hub& Spoke Network On Board service Focus on business travellers Hybrid Models Mix of business and leisure “A la carte” services Compete in some charter markets Different Market Strategies Service Level Costs

Aircraft Finance % Commercial Aviation, Geneva, www.advolar.com © 18 Business Complexity Time LCC Market Growth Rate LCC FSA Growth Rate

Aircraft Finance % Commercial Aviation, Geneva, www.advolar.com © 19 Full Service Airlines LCCs Charter Airlines Migration Of Business Models

Aircraft Finance % Commercial Aviation, Geneva, www.advolar.com © 20 Full Service Airlines LCCs Charter Airlines Hybrids Migration Of Business Models

Aircraft Finance % Commercial Aviation, Geneva, www.advolar.com © 21 Hybrid Carriers With LCC Background: - offer seat reservation - catering service at no extra charge - provide audio & video entertainment - offer FFPs - offer connectivity and interlining - offer through check-in - offer different fares for different services (super saver, saver, flexibel) - use the travel agencies - cooperate with tour operators and coporates ……. With FSA Background: - increase „ticket flexibility“ - reduce on board catering - reduce turn around time to <30min - use agressive marketing technics - offer lower head line prices - offer sector pricing - push direct sales - introduce performance related pay systems - operate more P2P …….

Aircraft Finance % Commercial Aviation, Geneva, www.advolar.com © 22 F/CL, C/CL Up Grades Business Jets NetJets VVIP Terminals Many LCC – Start Ups Two digit growth rates for LCCs Access into developing markets FSAs offer heavy discounts Battle for survival of “Stuck-in-the-middle“ – Airlines Successful High End Airlines Huge number of Hybrid Airlines competing on product and prices Successful „Hard Core“ LCCs Segmentation Of Airline Market

Aircraft Finance % Commercial Aviation, Geneva, www.advolar.com © 23 Airlines „Stuck in the Middle“ Source: AEA

Aircraft Finance % Commercial Aviation, Geneva, www.advolar.com © 24 Business Cycle All players are similar Competitors‘ business models are similar…competition on tactics All players are similar Competitors‘ business models are similar…competition on tactics „New“ models enter the market lower costs lower prices „New“ models enter the market lower costs lower prices „New“ models are copied and expand more new entrants expansion due to success „old“ model businesses fail „New“ models are copied and expand more new entrants expansion due to success „old“ model businesses fail „New“ model becomes “Norm“ „new model players compete on non-price basis „old“ model players disappear or re-invent themselves „New“ model becomes “Norm“ „new model players compete on non-price basis „old“ model players disappear or re-invent themselves Source: acc. SH&E ?

Aircraft Finance % Commercial Aviation, Geneva, www.advolar.com © 25 Market Potential By Business Model FSA‘ market Hybrid Airlines‘ market „Hard Core“ LCC‘ market Ryanair avg. fare € easyJet avg. fare € BA avg. shorthaul fare € 114,- Source: Davy Obviously demand is much more stimulated by low fares than by high fares!

Aircraft Finance % Commercial Aviation, Geneva, www.advolar.com © 26 Conclusion  LCC market share will continue to grow in particular in P2P markets < 3hrs flight time  There is still huge potential globally  Increasing costs and insufficient cost control will push break even yield/SLF  Higher costs will push fares which are still attractive to the business traveller but no longer for leisure passenger  Business passengers require product elements which are not necessarily part of a LCC business model => further increase of costs  LCCs will start fighting head to head with FSAs  Business models will migrate

Aircraft Finance % Commercial Aviation, Geneva, www.advolar.com © 27 Thank you for your attention!