1. 01/07/05, Titel www.advolar.com © 1 Low Fare Model: How basic should it be? LARA: The Low Fare and Regional Aviation Summit Wolfgang Kurth London, 08. March 2005

2. 01/07/05, Titel www.advolar.com © 2 Agenda Business Environment Consumer Expectations Outsourcing to the Customer Aircraft Specification Partner‘s Activities Business Environment

3. 01/07/05, Titel www.advolar.com © 3 Life cycle of the aviation industries VOLUME/GDP TIME Africa Asia Middle East Latin America BEGINNING STAGE TRANSITIONRAPID GROWTH STAGE TRANSITION U.S. and Europe MATURE STAGE GDP Volume

4. 01/07/05, Titel www.advolar.com © 4 For what reason would you fly more often? Source: IATA Online Survey 2003 Today‘s demand is triggered by low fares

5. 01/07/05, Titel www.advolar.com © 5 0,0 2,0 4,0 6,0 8,0 10,0 12,0 14,0 LCCs Aircraft operation Airport fees FrillsSalesStaffFleetOthersTraditional airline Costs/ASK (€ cent) 6.0 2.7 1.2 0.8 0.6 0.40.2 0.112.0 Short turnarounds, direct flights, no transfer more seats per A/C Primary and secundary airports One class No Frills Extras are subject to additional rates No lounges No IFE Etc. Direct channels Bookings via travel agency are subject to addidtional charges Less staff (limited service, no transfers) Lower maintenance-, trainings costs simplified transfer of flight crews from flight to another No crew proceeding and hotac Source: AEA, Analysten Reports, Monitor Analyse Unit costs comparison

6. 01/07/05, Titel www.advolar.com © 6 Low-Cost Carrier Primary and secondary airports Direct channels, use of travel agencies only if extra costs minimal Standardised fleet (only one aircraft type), higher seating density (737-300: e.g. 146) Various aircraft types, low seating density (737-300: e.g. 134) Full Fare airlines International airports Most tickets sold via travel agencies and by the airline itself Fast turnarounds (up to 25 min.) Turnaround slowed down by use of major airports with large amount of traffic (approx. 45 min.) Retail Airports Fleet Utilisation Frills No Frills, extras paid for (e.g. catering, extra luggage) Entertainment program, quick check in, lounges, paper tickets, business class, catering Direct flights, no transfers, short routes Long haul and short haul routes with transfers Network High variable-proportion of salary (up to 26 %), better capacity utilisation High basic salaries (variable proportion up to 11 %), trade union affiliation Personnel Lower maintenance, spare parts and training costs, simpler swopping around of flight staff, higher utilisation of capacity Low-Cost advantages Lower airport charges Lower distribution costs, lower complexity Higher utilisation Lower ancillary costs, less complexity, additional income Lower complexity, higher capacity utilisation Lower fixed personnel costs Differences between LCCs and FSAs

7. 01/07/05, Titel www.advolar.com © 7 Source:http://www.verdi.de/verkehr/luftverkehr/sonstiges/zeitung_check-in Low cost business strategy: Staff

8. 01/07/05, Titel www.advolar.com © 8 * pilots are charged an application fee of £ 50 * Source: http://www.ryan-be-fair.org/pdfs/compare.pdf Low costs business strategy: staff

9. 01/07/05, Titel www.advolar.com © 9 Low cost carriers Britannia Regional airlines Scheduled airlines BA EasyJet LH AF KL IB Ryanair SK SWA ATA AS AWA NW DL CO US UA TW AirT AZ AA Average Route Length (Miles) Cents / ASM 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 Charter airlines 25 20 15 10 5 0 0200 400 600 800 1.000 1.200 1.400 1.600 Unit cost comparison

10. 01/07/05, Titel www.advolar.com © 10 -Low-Fares -Frequency -Main Airports -Frequency -Branding -Business -Branding -Low Fre- quency -Branded meals -Hot meals, -Lounges, -Paper tickets  Pure Low Cost Carriers Year round traffic Independent travelers Balanced directional flows Grow the market Avoid charter markets (for the time being!)  Hybrid Models Mix of business and leisure “A la carte” services Compete in some charter markets LCCs develop different market strategies

11. 01/07/05, Titel www.advolar.com © 11 Full Service Airlines LCCs Charter Airlines Migration of business models

12. 01/07/05, Titel www.advolar.com © 12 Full Service Airlines LCCs Charter Airlines Hybrids Migration of business models

13. 01/07/05, Titel www.advolar.com © 13 Agenda Business Environment Consumer Expectations Outsourcing to the Customer Aircraft Specification Partner‘s Activities Consumer‘s Expectations

14. 01/07/05, Titel www.advolar.com © 14  No meals, drinks and snacks for free, therefore reduction of costs for the catering itself but also for cleaning and loading plus add. revenue stream  No frequent-flyer programs  Excess baggage, sports equipment etc. is subject to additional charges  No cancellation  Change of bookings are charged  Free-seating  No lounges  No paper tickets, no IFE Low cost strategy of airlines: no frills

15. 01/07/05, Titel www.advolar.com © 15 Quelle: Die Welt, 08.10.2004 Lufthansa breakfast LCC breakfast Airline catering

16. 01/07/05, Titel www.advolar.com © 16  Safety  Dependability  Value for money (Price!!)  Transparency/Fairness  Airports easy to reach  Competence/Experience  Flexibility  Catering, Entertainment etc  Paper tickets  Lounges etc. Consumer ExpectationsRanking essential important nice to have Customer expectations

17. 01/07/05, Titel www.advolar.com © 17 Agenda Business Environment Consumer Expectations Outsourcing to the Customer Aircraft Specification Partner‘s Activities Outsourcing to the Consumer

18. 01/07/05, Titel www.advolar.com © 18 Yesterday: Check-In counters - Long lines - Passenger inconvenience - Expensive Check-In counters - Labour intensiv (cost, quality) Today: Check-In kiosks - Shorter lines - - No Check-In counters => lower costs - No Check-In staff => lower costs but - Investment in hard-/software - Maintenance Tomorrow: Online Check-In - No lines - No counters => lower costs - No check-in staff => lower costs - No hardware => lower costs - No maintenance => lower costs Outsourcing to the customer: Check-In

19. 01/07/05, Titel www.advolar.com © 19 „Super Size“ Overhead Compartments: - More cabin luggage reduces costs related to baggage loading processees (check-in, loading and off-loading etc.) - No baggage related airport charges - Passenger convienence - reduced lost baggage rate Outsourcing to the customer: On Board Luggage

20. 01/07/05, Titel www.advolar.com © 20 Agenda Business Environment Consumer Expectations Outsourcing to the Customer Aircraft Specification Partner‘s Activities Aircraft Specification

21. 01/07/05, Titel www.advolar.com © 21 Note: $ 1.0 mio in a/c aquisition price ~ $ 8.0 – 12.0 k/month in lease rate or > 160.000 free flights/month on Ryanair !* * based on 80 a/c Current LCC Det. Spec. comparison

22. 01/07/05, Titel www.advolar.com © 22 B717 Det. Spec. review

23. 01/07/05, Titel www.advolar.com © 23 B717 Det. Spec. review

24. 01/07/05, Titel www.advolar.com © 24 Leaner Specs - reduce the a/c aquisition price - reduce the inventory costs - reduce the weight => the fuel burn - reduce the maintenance costs but may affect the residual value! Window shades: app.10 kg* Seat actuator: app.45 kg* Gasper fans: app. 30 kg* * B737-700, 4000 b‘hrs/year TTL.: 85 kg = app. 11.000 ltr. fuel p. a/c and year * LCCs get below the baseline

25. 01/07/05, Titel www.advolar.com © 25 Agenda Business Environment Consumer Expectations Outsourcing to the Customer Aircraft Specification Partner‘s Activities

26. 01/07/05, Titel www.advolar.com © 26 Established network carriers Tourism industry Airports Unions Aircraft manu- facturers New tariffs New products and sales channels (emphasis on the web / catering against payment) Agressive marketing in favour of the consumer Charter airlines obtain a different role Package tours versus individual tours Dynamic packaging Hotel portals Destination sites Airports serve as gateways for regions / integration into the region Growths of a/p‘s primarily due to LCCs Different service concepts to meet LCCs‘requirements Unions realize significance of LCCs (according to ver.di 70% of all LCCs are unionised) Business model is reflected in the collective labour agreements a/c modifications (A319) growth due to LCCs LCCs change the industries

27. 01/07/05, Titel www.advolar.com © 27 Source: http://www.hahn-airport.de/sycomax/files/7064_1LowCost.doc  No glamourous passenger terminals (e.g. no sophisticated docking units and computer reservation systems)  Therefore, investment costs for a terminal are less than € 5,00 per passenger  The current capacity for app. 5 mio passengers p.a. was created for less than € 17 mio (compared to an average of € 100 mio needed at other German locations for a similar scale) Airport Frankfurt Hahn

28. 01/07/05, Titel www.advolar.com © 28 Index 1994 Constant Dollars Yield per passenger versus price per seat

29. 01/07/05, Titel www.advolar.com © 29 0,05,010,015,020,025,0 300 Seater 150 Seater MAINTENANCE MATERIAL MAINTENANCE LABOUR MTOW FUEL % improvement on parameters needed to get a 1% cash cost decrease

30. 01/07/05, Titel www.advolar.com © 30 „Flights for free“

31. 01/07/05, Titel www.advolar.com © 31 „Flights for free“

32. 01/07/05, Titel www.advolar.com © 32 „Pay per Body Index“

33. 01/07/05, Titel www.advolar.com © 33 „per aspera ad astra“

34. 01/07/05, Titel www.advolar.com © 34 Thank you for your attention!