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Innovation & Cost Leadership, 15. November 2004 www.advolar.com © 1 The Low-cost Idea The low-cost idea has to start in people´s mind! Low-cost means......not simply reducing the price,...but primarily changing well-known processes. In doing so the simplicity of the new processes is most important.
Innovation & Cost Leadership, 15. November 2004 www.advolar.com © 2 Low-Cost Business Strategy Of Airlines: CEOs Joachim Hunold Chariman of executive board Air Berlin Airliner: no Wolfgang Kurth CEO Hapag-Lloyd Express Airliner: yes Onno van den Brink CEO Transavia Airliner: no Christian Mandl CEO SkyEurope Airliner: no Michael O´Leary CEO Ryanair Airliner: no Jozef Varadi CEO Wizz Air Airliner: no Ray Webster CEO Easyjet Airliner: yes CEOs of LCCs don´t necessarily have an airline background Tim Claydon Senior Vice President JetBue Airliner: no Herbert D. Kelleher CEO Southwest Airliner: no David Neeleman CEO JetBlue Airliner: no
Innovation & Cost Leadership, 15. November 2004 www.advolar.com © 3 We are not an airline, we are a culture. A culture founded by optimists - and built by believers. We are not an airline. We are listeners, innovators and technology creators. We are not an airline. We are magicians, musicians, acrobats and sprinters focused on a single goal: to give style, service and choice back to the people who fly. That´s why we cast our stars - to make sure each and every one is attentive and gracious. Why we offer everyone 24 channels of real time, satellite TV and CD quality MP3 audio. Why we hand picked a socially-conscious chef - to prepare fresh meals and cater to diverse tastes. Why Kate Spade designed a collection for our stars, why we created exlusive programming for families, and offer cosmopolitans in the air. All in all, it´s why we offer more. And now it´s time to dig deeper. You see, we realize our difference doesn´t lie solely in the choices we offer, but also in how we offer them.... Song´s Credo
Innovation & Cost Leadership, 15. November 2004 www.advolar.com © 4 Song´s Credo Cont. This means paying attention to those subtle, all-important details that give someone or something a certain specialness. This means understanding that style isn´t just about the uniforms we wear, but in how we wear them. It means remembering not only to say please and thank you - but how old is your son and happy birthday. It means recognizing that some guests desire a sense of well-being and others - a sense of humor. It´s knowing that smiling is contagious, technology is empowerment, and that some people like their martini - ice cold - with olives - shaken, not stirred. It´s each and every day - in the lobby, the parking lot, on the web site and in the plane - demonstrating that we truly understand the frustrations our guests have with airline travel and exceeding their expectations with choices that are special and surprising. Here, lies the Song difference. Because in the end, as we all know, the proof is in the pudding. And if it needs to be low-fat, organic pudding - so be it. We are in tune with our guests. We are not an airline. We are Song.
Innovation & Cost Leadership, 15. November 2004 www.advolar.com © 5 LCCs Have A Competitive Edge 0 2 4 6 8 10 12 14 30055080010501300155018002050 Virgin Express Ryanair GO easyJet Lufthansa Southwest Hapag-Lloyd Flug Costs/ASK ( cent) Sector lenght (in km) Comparison of the cost structure of different airlines Source: Unternehmensberichte und -Websites, Analystenreports, AEA, Monitor Group Analyse Full Fare Airlines Charter Low-Cost
Innovation & Cost Leadership, 15. November 2004 www.advolar.com © 6 Comparison Of The Average Unit Costs For Intra-European Flights 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
Innovation & Cost Leadership, 15. November 2004 www.advolar.com © 7 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 Fast turnarounds, direct flights, no transfer more seats per A/C Primary and secundary airports Standardized classes No Frills Extras are subject to additional rates No lounge Etc. Direct channels Bookings via travel agency are subject to addidtional rates Less staff (limited service, no transfers) Lower maintenance-, trainings costs simplified change of flight personnel Unit Costs Of LCCs Are Only Half Of The Costs Of Traditional Airlines Source: AEA, Analysten Reports, Artikel, Monitor Analyse
Innovation & Cost Leadership, 15. November 2004 www.advolar.com © 8 Differences Between Low-cost & Traditional Carriers 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 capacity utilisation 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
Innovation & Cost Leadership, 15. November 2004 www.advolar.com © 9 Distribution, Staff And Network Planning Business processes Sales Direct sales channels Processes such as information, booking, seat-reservation and payment are relocated to the client Bookings via Call-Center or travel agency are subject to additional charges No paper tickets Pricing-strategies Aggressive marketing Staff Lean-management Fast decision making Less staff (e.g. no service) Flexibility and motivation of staff Network planning Point-to-point traffic High frequencies usually short distance flights (max. 1.500 km)
Innovation & Cost Leadership, 15. November 2004 www.advolar.com © 10 Low-cost Business Strategy Of Airlines: Sales Sales channels as per bookings in % in 2004 Sales channels as per revenue in % 2004 1 including 79% Internet, 4% flyloco/LTUR, 9% Skyagent 2 including 2% CC, 2% Agencies via CC 3 e.g. group-, press- and member of staff bookings 1 including 74% Internet, 5% flyloco/LTUR, 13% Skyagent 2 including 3% CC, 1% Agencies via CC 3 e.g. group-, press- and member of staff bookings 2 2 33 11
Innovation & Cost Leadership, 15. November 2004 www.advolar.com © 11 Low-cost Business Strategy Of Airlines: Sales Cont. Website performance per month Page visits: 2,0 m Page impressions: 14,8 m Newsletter subscription: >560.000 Conversion rate: 16 % (August 04) Cooperation with Flyloco.de offers: Dynamic packaging. Hotel data base With about 2400 hotels Average prices from 85 to 130 per double room 40 % of these hotels in 3-stars segment Sales via internet is essential
Innovation & Cost Leadership, 15. November 2004 www.advolar.com © 12 HLX Rock Buttom Site Clearly laid out overview of the cheapest flights Happy HLX Hours Regular promotion at especially favourable conditions (Tuesday- Wednesday) Partner HLF and others Distribution synergies due to piggy backing on partners´ natioal website Targeted promotion generates demand Low-cost Business Strategy Of Airlines: Sales Cont.
Innovation & Cost Leadership, 15. November 2004 www.advolar.com © 13 Course of the day: 8:00 to 24:00, high utilisation also beyond the travel agency time Low-cost Business Strategy Of Airlines: Sales Cont.
Innovation & Cost Leadership, 15. November 2004 www.advolar.com © 14 Low-cost Business Strategy Of Airlines: No Frills No Frills No meals, drinks and snacks for free, therefore reduction of costs for the catering itself but also for cleaning and loading No frequent-flyer programs Excess baggage, sports equipment etc. is subject to additional rates No cancellation Changes of booking are charged Free-seating / seat reservations are changed No lounges
Innovation & Cost Leadership, 15. November 2004 www.advolar.com © 15 Airlines Meals Quelle: Die Welt, 08.10.2004 Lufthansa breakfast HLX breakfast
Innovation & Cost Leadership, 15. November 2004 www.advolar.com © 16 Aircraft / Fleet Homogeneous fleet, therefore low costs for maintenance, cockpit training and stand by crews Higher number of seats, therefore higher capacity and higher utilisation of the aircraft In future functions will be paid instead of the hardware, e.g. functions such as CAT IIIA, MTOW and thrust are paid according to the actual utilisation instead of being an integral part of the purchase Low-cost Business Strategy Of Airlines: A/C and Fleet
Innovation & Cost Leadership, 15. November 2004 www.advolar.com © 17 Low-cost Business Strategy Of Airlines: Airports Airports Utilisation of secondary airports, thererfore lower airport fees, lower traffic and congestion, fewer delays Basing of the fleet at several airports, aircraft return to their base at the end of the day, no hotel expenses for the crew, crew rostering is more efficient
Innovation & Cost Leadership, 15. November 2004 www.advolar.com © 18 Low-cost Business Strategy Of Airlines: A/C Basing LCCs spread their bases across Europe National / flag carrier usually have one or two national bases only
Innovation & Cost Leadership, 15. November 2004 www.advolar.com © 19 Low-cost Business Strategy Of Airlines: A/C Basing LCCs spread their bases across Europe National / flag carrier usually have one or two national bases only
Innovation & Cost Leadership, 15. November 2004 www.advolar.com © 20 Low-cost Business Strategy Of Airlines: A/C Basing LCCs spread their bases across Europe National / flag carrier usually have one or two national bases only
Innovation & Cost Leadership, 15. November 2004 www.advolar.com © 21 Flight operation Higher productivity due to faster turnarounds (20 to 25 min. in comparison to 45 min and more from flag carriers) due to: Less traffic and less delays at secondary airports No waiting time due to transfer-passengers and baggage Simple boarding and loading processes Time-saving fueling processes No cargo Cleaning by cabin crew Catering for four legs Outsourcing of catering and bordshop, airline only provides staff and sales area Low-cost Business Strategy Of Airlines: Flight Operation
Innovation & Cost Leadership, 15. November 2004 www.advolar.com © 22 Low-cost Business Strategy Of Airlines: Staff Source:http://www.verdi.de/verkehr/luftverkehr/sonstiges/zeitung_check-in
Innovation & Cost Leadership, 15. November 2004 www.advolar.com © 23 Low-cost Business Strategy Of Airlines: Staff Cont. * pilots are charged an application fee of £ 50 * Source: http://www.ryan-be-fair.org/pdfs/compare.pdf
Innovation & Cost Leadership, 15. November 2004 www.advolar.com © 24 Low-cost Business Strategy Of Airlines: Maintenance Maintenance New service concepts for LCCs Suppliers should provision according to the data they have collected during hundreds of checks (e.g. knowledge of most frequent material repair) LCCs want air time, suppliers want ground time, there´s a conflict of interest, less incentive for suppliers to improve themselves Development of equalised maintenance concepts, shorter ground time and higher availability of the aircraft For LCCs there is little incentive to take on board anything other than line maintenance work. What LCCs really do well is flying passengers from point A to point B, develop product and markets, manage yield and revenue Cost reductions will have to come from smarter maintenance planning. Doing the right work at the right time and not over-maintaining Source: Service Challenge, Airline Business, October 2004
Innovation & Cost Leadership, 15. November 2004 www.advolar.com © 25 Price development of different airlines 1,2 Index 1 Research 5.3.2003-11.3.2003, indicated floating average, (basis: one-way incl. taxes and fees 2 Ryanair: Frankfurt-Glasgow, Lufthansa: Munich-London, Aerolloyd: Düsseldorf-Malaga Source: Monitor Group, 2003 Days prior to departure Low-cost Business Strategy Of Airlines: Pricing Remarks LCCs flexibly adjust their prices to the respective demand Prices rise towards departure time the higher the demand the higher the price Pricing of flag carriers is usually more inflexible Price curves proceed flater, however they rise as well Price structures of Charter-Airlines are contrary to those of LCCs Prices decline towards departure time LCCs flexibly adjust their prices to the respective demand Prices rise towards departure time the higher the demand the higher the price Pricing of flag carriers is usually more inflexible Price curves proceed flater, however they rise as well Price structures of Charter-Airlines are contrary to those of LCCs Prices decline towards departure time
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