1. The Future Shape of the Air Transport Industry Dr Peter Morrell Director of Research Department of Air Transport Cranfield University Brighton, 7 June 2006

2. Dr Peter Morrell, Cranfield University, 7 June 2006 2 Outline  Future passenger market trends  Short- versus long-haul?  Can constraints be overcome?  Business model shift  The airline product and segmentation  IFE  Conclusions

3. Dr Peter Morrell, Cranfield University, 7 June 2006 3 Future market trends  Strong growth expected in long-haul leisure, but security will limit potential destinations  Strong growth in short break holidays, with greater choice offered in terms of: Departure times/days Hotels and quality of service Booking and payment processes  Network airlines focus on connections to their more lucrative long-haul services  More holiday de-packaging, but still a role for on- line consolidation

4. Dr Peter Morrell, Cranfield University, 7 June 2006 4 Where can we go on holiday? (January 2005) Algeria India Indonesia Israel Nigeria Pakistan Philippines Russia UK government advises against all travel to Somalia and Ivory Coast, and to parts of 30 other countries, including: Israel Lebanon Nigeria Pakistan Sri Lanka Thailand UK government advises against all but essential travel to CAR, Guyana, Haiti and Iraq, and to parts of 24 other countries, including:

5. Dr Peter Morrell, Cranfield University, 7 June 2006 5 Source: The Economist 13 May 2006 Don’t forget outbound travel from fast-growing economies with large populations

6. Dr Peter Morrell, Cranfield University, 7 June 2006 6 BAA UK airport passenger profile  Core market of more experienced, frequent travellers  More independent travel by the young and ‘silver surfers’  Above average growth in:- long haul - short breaks  More women, particularly on business  More non-English speakers  Less ‘pure’ business, more leisure and business/leisure mixes  Socio-economic profile closer to the average Source: Stan Maiden, BAA Presentation, 2004

7. Dr Peter Morrell, Cranfield University, 7 June 2006 7 Spending patterns?  Rising disposable incomes  More flexible working, labour mobility, short breaks  Ageing populations (health care and pensions)  Early retirement (more time for travel, but savings?)  Competing attractions (saving/investing, sport, eating out, TV/films/gambling, more expensive car/house …) Support ratio in China: 6 people of working age supporting each person over 65 in 2000; falls to less than 2:1 in 2050

8. Dr Peter Morrell, Cranfield University, 7 June 2006 8 Forecasting leisure travel  Leisure travel purpose: Crash out and do nothing (usually sun/sea) Activity (ski, dive, climb, walk, explore)  Greater discretionary income, lower prices, easier to purchase and good marketing  Travellers historically perceived the air fare as the largest component in air travel cost; no longer so on many short sectors  Forecasters and planners need to understand these demand drivers

9. Dr Peter Morrell, Cranfield University, 7 June 2006 9 UK Government forecasts: UK Residents (Passengers) Source: UK Department for Environment, Transport & Regions: Air Traffic Forecasts for the UK 2000, May 2000

10. Dr Peter Morrell, Cranfield University, 7 June 2006 10 Constraints: Fuel prices  Limited impact of current high fuel prices on the world economy, and thus air traffic growth rates  Some reduction in demand from high fuel surcharges, but more than outweighed by low cost airline growth  Era of $50-70 crude oil will lead to: Economical extracting of alternative (non-OPEC) supplies Economical application of known technologies extracting of alternative (non-OPEC) supplies Economical application of known technologies to engine and aircraft design for greater fuel efficiency

11. Dr Peter Morrell, Cranfield University, 7 June 2006 11 World airlines: share of fuel in total costs In 2005/06: British Airways: 20% compared to Singapore Airlines 24%

12. Dr Peter Morrell, Cranfield University, 7 June 2006 12

13. Dr Peter Morrell, Cranfield University, 7 June 2006 13 Environmental constraints  Local noise concerns: major airports attract housing and industry  Local air quality regulations: coming soon from Brussels; a condition for new (short) runway at London Heathrow  Climate change: air transport currently only small contribution, but greater impact at cruise altitude  Proposals for aircraft engine emissions trading and an emissions tax unlikely to impose excessive cost on industry: already coping well with fuel price escalation  Difficult to achieve future fuel efficiency increase in excess of traffic gowth rates: but laminar flying wing estimated to give 70% reduction in fuel burn per tonne-km vs existing aircraft

14. Dr Peter Morrell, Cranfield University, 7 June 2006 14 Type of flight in 2004 IATA world plus major LCCs

15. Dr Peter Morrell, Cranfield University, 7 June 2006 15 Main airline business models  Network carriers Global networks and hubs feeding traffic on to long-haul flights Part of strategic alliance structure  Low Cost Carriers (LCCs) Point-to-point, with self service transfers Simple product and fare structure  Regional airlines Some feed to network carriers and inter-regional low density flights with small jets or turbo-props  Charter/leisure specialists Lower frequency flights to leisure destinations Tour operator ownership: most seats still ‘packaged’

16. Dr Peter Morrell, Cranfield University, 7 June 2006 16 European seat-kms by airline group 19992004 Network carriers 84% 77% Regional carriers 14% 12% Low cost carriers 2% 11% Total seat-kms (ASKs) per week in June 2004: 24 billion Over same period: LCCs increase share from 3% to 15% of total departures Regional carriers’ departure share drops from 29% to 21%

17. Dr Peter Morrell, Cranfield University, 7 June 2006 17 Network vs LCC model Both dedicated to safe and punctual flights  The network model adapts operations to the various market segment needs  The LCC model is based on lowest cost scheduled operations: assume that low fare is major requirement (passengers adapt to airline)  Both models increasingly see advantages of separate pricing for extra services (ancillary revenues)

18. Dr Peter Morrell, Cranfield University, 7 June 2006 18 Network carriers: Weighted average long-haul aircraft seats by class, 2005 F/C ClassY ClassTotal seats% F/C Lufthansa6424530821 British Airways6423830221 Iberia4924028817 KLM4323928215 Air France4822527318 SAS5420726121 Austrian2622725310 Alitalia3221724913 Swiss5515721226 Source: JP Fleets and airline websites

19. Dr Peter Morrell, Cranfield University, 7 June 2006 19 Market segmentation by flight  More business class only flights on long-haul  LCCs greater focus on leisure passengers, but some (easyJet, JetBlue etc) targeting business passengers as well: Some network airlines copying LCC tricks, and lowering service standards LCC product generally not attractive to business, especially on longer sectors (eg no seat allocation, 30” seat pitch) easyJet experimenting with priority boarding

20. Dr Peter Morrell, Cranfield University, 7 June 2006 20 IFE needs: long-haul  Premium class passengers Own equipment (laptop, phone..)? Sleep on flight: disturbance from neighbour? Extra revenue or include in price?  Economy class passengers Lower comfort, greater need for entertainment More children: high video/games users Sleeping more difficult (can sleep on arrival) Generally higher usage Charge extra?

21. Dr Peter Morrell, Cranfield University, 7 June 2006 21 IFE needs: short/medium-haul  Premium class passengers Own equipment (laptop, phone..)? Extra revenue or include in price?  Economy class passengers Tight seat pitch: need for IFE on longer sectors More children: high video/games users Aircraft weight saving: mobile units? Ryanair trial not successful Charge extra?

22. Dr Peter Morrell, Cranfield University, 7 June 2006 22 Conclusions  Large potential market if prices remain affordable  Business and leisure markets will both be huge, greater number of trips satisfying both demands  Short-haul will remain dominant in terms of passenger numbers, but growing revenue share of long-haul  Specialisation and ‘one-stop’ shop models of airline service will co-exist  LCC model will increasingly target business passengers  IFE needs to meet varying demands depending on flight sector length