1. February 06 How Low Can Low Cost Go? Wolfgang Kurth, advolar GmbH

2. February 06 Content  Why is the low-costs model different?  How much of the market is low-costs?  Can low-costs keep growing?  Is there any hope for full-service carriers?  Conclusion

3. February 06 Content  Why is the low-costs model different?  How much of the market is low-costs?  Can low-costs keep growing?  Is there any hope for full-service carriers?  Conclusion  Why is the low-costs model different?

4. February 06 The Low-Cost Business Model The low-cost idea has to start in people´s mind! Low-cost means...... not simply reducing the ticket price, … but primarily  changing traditional business processes,  using demand driven pricing,  applying aggressive marketing strategies

5. February 06 Business Models

6. February 06 Difference Between LCC and FSA

7. February 06 European Airlines Unit Costs

8. February 06 Labor Efficiency

9. February 06 Joachim Hunold Chariman of Executive Board Air Berlin Airliner: no Almar Örn Hilmarsson CEO Sterling Airways Airliner: no 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: yes Ray Webster CEO Easyjet Airliner: yes CEOs Don´t Necessarily Have An Airline Background Dr. Joachim Klein CEO Germanwings Airliner: no Herbert D. Kelleher ex CEO Southwest Airliner: no David Neeleman CEO JetBlue Airliner: yes

10. February 06 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.... (Song‘s Credo) LCC Mantras „When removing airlines from the bosom of national politics, what remains is a simple business!“ (Ray Webster)

11. February 06 Content  Why is the low-costs model different ?  How much of the market is low-costs?  Can low-costs keep growing?  Is there any hope for full-service carriers?  Conclusion  How much of the market is low-costs?

12. February 06 Caption: Ryanair easyjet Volareweb bmi Baby Hapag-Lloyd Express Germanwings Sterling Skyeurope jet2 LCC Routes 2001

13. February 06 Caption: Ryanair easyjet Volareweb bmi Baby Hapag-Lloyd Express Germanwings Sterling Skyeurope jet2 LCC Routes 2002

14. February 06 Caption: Ryanair easyjet Volareweb bmi Baby Hapag-Lloyd Express Germanwings Sterling Skyeurope jet2 LCC Routes 2003

15. February 06 Caption: Ryanair easyjet Volareweb bmi Baby Hapag-Lloyd Express Germanwings Sterling Skyeurope jet2 LCC Routes 2004

16. February 06 Caption: Ryanair easyjet bmi Baby Hapag-Lloyd Express Germanwings Sterling Skyeurope Jet2 etc, etc LCC Routes 2005

17. February 06 LCC Market Shares By Country 18.9% (2005)

18. February 06 Market Share Of European LCCs

19. February 06 Growth Rates And Market Shares Europe: annual growth rate p.a. for LCCs, passenger

20. February 06 Content  Why is the low-costs model different ?  How much of the market is low-costs?  Can low-costs keep growing?  Is there any hope for full-service carriers?  Conclusion  Can low-costs keep growing?

21. February 06 Pessimistic Optimistic Number of passengers of Ryanair & easyJet at basis of announced capacities 19% 15% 30% Prediction for the European Low Cost Market 2001E–2009F Market potential of the German Low Cost Segment 2001E–2009F 1 Low case: Number of no-frills journeys in Europe reach current UK / Ireland level (0.25 trips / capita) over 8 years 2 High case: Number of no-frills journeys in Europe reach the same level as currently in the U.S. (0.5 trips / capita) over 8 years Source: Analyst Reports, Monitor Analysis Estimation formed by the use of US market share & travel frequency to the German population PAX (m) Market potential for European LCCs actual

22. February 06 European Growth Potential

23. February 06 Significant Global Growth Potential 1) OAG 2004, non stop seats Intra European, no charter seats 2) Internet World Stats, 21.11.2005 1) 3) WebSite101.com, 2004 4) Devinix.com, 2004 5) ICMA.com, 2004 2) 3) 4) 5)

24. February 06 Business Environment VOLUME/GDP TIME Africa Asia Middle East Latin America BEGINNING STAGE TRANSITIONRAPID GROWTH STAGE TRANSITION U.S. and Europe MATURE STAGE GDP Volume

25. February 06 Business Environment VOLUME/GDP TIME Africa Asia Middle East Latin America BEGINNING STAGE TRANSITIONRAPID GROWTH STAGE TRANSITION U.S. and Europe MATURE STAGE GDP Volume ?

26. February 06 Travel Intensity Without Significant LCC Market Share

27. February 06 Travel Intensity With High LCC Market Share More trips because of cheaper travel (at const. disposable income)!

28. February 06 Index 1994 Constant Dollars Yield Per Passenger vs Price Per Seat

29. February 06 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

30. February 06 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

31. February 06 Reducing Turn Around Time Boarding through Forward and Aft Entry Door

32. February 06 Reducing Turn Around Time Relocation of Forward Entry Door

33. February 06 „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

34. February 06 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

35. February 06 Content  Why is the low-costs model different ?  How much of the market is low-costs?  Can low-costs keep growing?  Is there any hope for full-service carriers?  Conclusion  Is there any hope for full-service airlines?

36. February 06 For what reason would you fly more often? 11% 8% 41% 8% 6% 17% 0% 10% 20% 30% 40% 50% upgradesschedulesafety ground low faresmore FFP´s safety board others Source: IATA Online Survey 2003 Low Fares Trigger Demand

37. February 06 Business travellers are more sensitive to airline and schedule Portion of travellers naming factor as "most important" Source: Boeing-sponsored traveller survey 57% 19% 17% 7% Tourists 30% 36% 25% 10% Business travellers Airfare Schedule Airline Airplane Tourists Are Most Sensitive To Airfare

38. February 06 But flight length is a key factor in determining what is important to tourists Portion of travellers naming factor as "most important" Source: Boeing-sponsored traveller survey 63% 19% 16% 2% Flights of less than 2 hours 52% 19% 18% 11% Flights of more than 5 hours Airfare Schedule Airline Airplane Airfares are Less Important on Longer Flights

39. February 06 Impact Of LCCs On FSAs Southwest entry into the Sacramento-Portland Market

40. February 06 In The US Stage Length Is Increasing

41. February 06 Stage Lenght Is Increasing In Europe As Well 2000 2001 2002 2003 2004 2005 Source: Davy European Transport and Leisure, 15.2.2005

42. February 06 -Low-Fares -Frequency -Grass strips -Main Airports -Frequency -Branding -Business passenger -Branding -Low Frequency -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

43. February 06 Trends In The Airline Industry

44. February 06 Trends In The Airline Industry

45. February 06 Trends In The Airline Industry

46. February 06 Trends In The Airline Industry

47. February 06 Trends In The Airline Industry

48. February 06 Full Service Airlines LCCs Charter Airlines Migration Of Business Models

49. February 06 Full Service Airlines LCCs Charter Airlines Hybrids Migration Of Business Models ?

50. February 06 Content  Why is the low-costs model different ?  How much of the market is low-costs?  Can low-costs keep growing?  Is there any hope for full-service carriers?  Conclusion

51. February 06 Conclusion Re-engineering of processes (not only doing the same at less cost) Pass-on of cost savings to customer Stimulate demand, increase LF Efficient use of expensive recources ( e.g. A/C, labour) Reduction of unit costs Pass-on of cost savings to customer Stimulate demand, increase LF

52. February 06 Different Strategies Of LCCs And FSAs

53. February 06 LCC Business Model Within FSA  Push direct sales channels  Use promotional fares  Apply agressive marketing  Improve asset utilization  Improve labour productivity  Eliminate frills  Simplify fare structure No change  Up-grade check in service  Modify Loyalty Program to keep customer with A/L on short/medium haul  Improve passenger services  Fast Tracks at A/Ps  Personalized service  Post flight CRM Short/ Medium Haul Long Haul Economy Class Business Class

54. February 06 LCC Business Model Outside FSA Deutsche Lufthansa Delta United British Airways FSA LCC Subsidary Status Re-integrated ??? 2002: sold Go 2006: start BA Connect

55. February 06 Migration and Segmentation LCCs will continue to grow. Market share of 35% in 2010 seems not unrealistic. LCCs in Europe will move into leisure destinations (sector length 2-3 f‘hrs) where traditional charter carriers have a significant „seat only“ business. LCCs in Europe will increase frequency on leisure routes but will reduce the number of departure airports. LCCs will adopt quality elements or product features from Full Service/Charter Airlines provided costs and complexity will not increase or they are providing another revenue stream (FFPs, IFE, seat reservation etc.) LCCs will enter into arrangements with tour operators provided their business model will not be affected.

56. February 06 Thank you for your attention!