Air Scoop July 2006

8/14/2019 Air Scoop July 2006

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EDITORIAL

The current playground of European LCCs is no longer suffi-

cient to bear their development. New routes are still availa-

ble inside Europe, but they are not profitable enough. Indeed,

profits drive routes opening. Thus, LCCs look for further markets to

open routes, such as in North Africa, Middle East or Eastern Europe.

Recent bases opening of LCCs leaders reflect this need to constantly

keep growing in order not to collapse. For instance, Ryanairan-

nounced it would launch up to 20 routes in Morocco in the coming

5 years. The base opening in Marseille was an interesting signal forfurther expansion of the airline in North Africa. Air Berlin, with

the support ofNikki, definitely looks at the Eastern markets and

Russia

To have the opportunity to serve these new markets, LCCs face

many restraints: longer distance between airports, problems due to

non-EU countries, longer turn-over on the ground, loss of time du-

ring security checks Distance and time are important challenges to

current business models. Indeed, most aircraft types used by LCCs

cant fly routes longer than four and a half hours. This implies they

will have to settle their future bases outside Europe in order to deve-

lop an inter-area network (Europe, Scandinavia, Africa, Middle East,Russia, Asia). They will then face specific restrictions in these

countries, like in airports (Casablanca in Morocco), PSO (Public

service obligations)

LCCs systematically promote deregulation of the markets, in par-

ticular through ELFAA, a low cost carriers association lobbying in

Brussels. Another solution to avoid restrictions will be to register

new companies under local jurisdiction. In a different way, but see-

king same goals, easyJethas envisaged a franchise with partners in

Middle East, an area highly regulated.

Highlights in this IssueConference Air Transport Summit p. 4

Essential Ancillary revenues for Ryanair p. 7

SkyEurope: New Share Issue to Get Cash p. 9

Deregulation of LCCs European Market p. 11

Strategies to respond to rising fuel costs p. 14

Air Scoop - July 2006 www.air-scoop.com

The Low Cost Carriers Analysis Newsletter

AIR SCOOP is proud to be anOfficial Media Partner of

these LCCs events

Sky Full of Possibilities

Bratislava, 26 May 2006

The Low Cost Air Transport Summit

London, 12-13 June 2006

The World Low Cost Airlines CongressLondon, 11-13 September 2006

Air Scoop Recruits!

We recruit more correspondents over Eu-

rope to cover regional news and analysis.

Your role will be to cover the Low CostCarriers market in your country and near

area. You will write about specific topics

and propose your own articles. We may ask

you to attend special events concerning the

LCCs market occurring in your country or

near area. It is a requirement to be a fluent

writer in English.

Join Air Scoop Team by sending us your

CV and a covering letter by email to:

[email protected]

We look forward to seeing your applica-

tion soon.

AIR SCOOP ANNOUNCEMENTS

Evolution of Low Cost Carriers Compared to other Aviation Segments


2/15Air Scoop - July 2006

DOWN TO EARTH

www.air-scoop.com

Interview of Maunu von Lders

(CEO of FlyNordic) Maunu von Lders ,CEO of FlyNordic

Air Scoop: Could you please present

FlyNordic to our readers? What are

your specificities compared to other

European LCCs? What do you do

better than your competitors?

Maunu von Lders: We do not call

ourselves a low-cost carrier anymo-re. We are a 3rd generation airline

which combines the best from the

low-cost and the traditional airlines

in such a way that our model will sa-

tisfy the Scandinavian market in the

best possible way. In order to do this

we must be better than or at least as

good as the dominating traditional

airline in the most important service

elements but at a lower cost to our

customers. We do not want to hu-

miliate our customers by depriving

them from service or ignoring their

expectations just because our fares

are low. We also do not want to rob

our customers by charging a lot for

features that are indeed traps created

by a monopoly situation. We simply

try to satisfy the most important cus-

tomer needs at a reasonable cost.

You already cover most of the Scan-

dinavian market; are there suffi-cient population catchment areas to

open new routes in Scandinavia? If

not, towards which market do you

tend to?

The frequency of travel is very high

in Scandinavia. Distances can be

great and travel times with other

means of transportation very long

which should create a favorable si-

tuation for airlines. But even thoughexceptionally many people travel by

air within Scandinavia and business

should be good, there are too many

players in the field which results in

destructive overcapacity. The market

is quite saturated and all viable rou-

tes have already been exploited. Fly-

Nordichas been successful on routes

between Stockholm and Northern

Sweden and also between Stockholm

and the other Scandinavian capital

cities. We can be even better in thesemarkets as we are developing a con-

cept of exceptional value.

Is there many low cost carriers

serving the Scandinavian market?

Who are your most dangerous com-

petitors: local LCCs or Islanders

(Ryanair, easyJet)?

The low-cost segment is growing

fast in Scandinavia. There are quite

a few low-cost carriers and more will

come. We do not consider the other

low-cost carriers as our most obvious

competitors. We target other markets

as we are predominantly offering sui-

table services for business travelers

within Scandinavia from primary

airports with a morning evening

concept. We are in direct competi-

tion with the likes ofSASrather than

other low-cost carriers.

The European Low cost carriers

market has reached a certain ma-

turity which leads to its consolida-

tion. During this transition, what

are, for you, the greatest threats

to the European Low cost carriers?

Fuel rising? Overcapacity? ...

You mentioned indeed in your ques-

tion two serious threats. As costs are

rising and the price elasticity remainshigh it will be more difficult for the

low-cost carriers to stimulate pro-

fitable growth. Consolidation is an

inevitable development as there will

be many troubled carriers without

a chance to manage the equations

between rising costs and diminishing

revenues. I do not see consolida-

tion as a threat but a natural way of

making the industry more effective.

The weakness of consolidation is the

common misfit between differentcorporate cultures which often re-

sults in long term corporate turbu-

lence and ineffectiveness. Some real

threats to the low-cost segment are

the prevailing protectionism in favor

of the flag carriers, predatory pri-

cing and other hostile actions by the

large incumbents and a tendency to

re-regulate through various taxes and

other restrictive measures.

You have adapted your flights ac-

cording to your passengers: Mor-

ning and evening flights for business

routes, daytime for leisure travelers

and week-ends with charters. How

do you manage such an adjustable

model?

It is quite easy logistically. The seg-

mentation of customers is only a

factor regarding schedules and des-

tinations. The rest is pretty muchthe same regardless if it is a business

flight, leisure flight or a charter. The

distribution mechanism and the fare

concept serve all scheduled traffic

whereas charters are sold by tour

operators. Catering and some other

service features may vary on charter

flights based on what the customer

requires but that too is easy to han-

dle. The main thing is to have the air-

crafts and crews in the air serving allour different customer categories as

well as they can.

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BIRDS EYE VIEW


Open Skies Agreement: New Markets for LCCs?Bosnia and Herzegovina, Bulgaria, Croatia, Iceland, Mace-

donia, Norway and Romania have signed the 9th of June

the agreement on the European Common Aviation Area

(ECAA) at a ceremony in Luxembourg. Thus they join the

Single European Sky of the EU member states under speci-

fic conditions for each country. This agreement still needs

to be ratified by national parliaments.

The creation of the ECAAwill put impetus on the po-

litical and economic integration of Europe, for which air

transport plays a key role. The agreement will open up

market opportunities for the aviation industry and give

people better travel options said Jacques Barrot, EU

Transport Commissioner.

Egypt also agreed to consider an open skies policy to allow

foreign airlines greater access to the Arab worlds largest

tourism market. The main issue in these open-skies ne-

gotiations will concern Cairo. Indeed, Cairo is the hub of

national carrier Egypt Airand is not freely accessible for

foreign carriers.

Do you believe that consolidation

of the market will lead to 2-3 main

LCCs in Europe, or do you think

there will always be many LCCs on

niche markets?

I do not think that consolidation will

result in only 2 or 3 large low-cost air-

lines. There are more variations among

the low-cost carriers than among the

traditional airlines. This variation has

developed out of a need for different

concepts in different markets. There

will always be a need for various ni-

ches. A niche carrier can however ne-

ver expect to grow large because thenit no longer serves a niche.

Are you worried about the shortage

of pilots and crew hitting LCC mar-

ket?

I am not worried but one must all thetime keep an eye on the situation. The

market for pilots is very much a local

matter. Pilots are people with homes

and family and not members of a hi-

ghly mobile workforce. A well-run air-

line should be an attractive employer.

If you stick to one aircraft type and

offer a good and rewarding working

environment you should have a better

chance to recruit and maintain a good

pilot workforce.

What are the options for FlyNordic

to transform its business model in or-

der to make more costs savings?

We are pretty close to have exploredmost of the cost saving areas. There

are naturally some savings to be gained

regarding service providers. Our own

organization is as small and effective as

it can ever be. If we can maintain our

cost structure but increase our earning

potential through customer oriented

and innovative product features, we

should be doing OK.

Low Cost Market Share Monthly Frequencies (June 2006)

To/From Germany (in percentage) Source : OAG MAX

Munich or Nuremberg as 5th

Germanwings base?

Germanwings is currently looking for

its 5th base in Germany, and another one

outside the country. Catchment area is

important to set a base, smaller airports

are then commercially not viable to sus-

tain a base of five aircraft as targeted byGermanwings.

Few rumors are, as usual, ongoing about

potentially airports: Munich Internatio-

nal Airportand Nuremberg Airport are

the most recurrent options.

Munich appears most expensive, but Nu-

remberg has already a strong presence of

Air Berlin, even if it is not a base. Setting

a base in Nuremberg could be the oppor-

tunity to attack its core market, but till

now Karl-Heinz Krger, CEO Nuremberg Airport, has always rejected proposals from easyJetand Germanwings. Fur-

thermore, a recent statistics indicated that only 10 % of flights out of Nuremberg were true LCCs while other German

airports, including Munich, have between 17 and 25 %.

Even if a Condorbase is scheduled in Munich (Lufthansamight try to avoid competition between its two LCCs), Mu-

nich Airport should be favorite to become the 5th Germanwingsbase.


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BIRDS EYE VIEW


Share of capacity in the low-cost segment, June 2006 (percent)

Conference Low Cost Air

Transport Summit

Air Scoopwas media partner of the

last IEAand Marketforce Communi-cationsConference that took place

in London, the 12th and 13th of June

2006: The Low Cost Air Transport

Summit (http://www.marketforce.

eu.com/lowcost).

This successful event was an oppor-

tunity to meet the main actors of the

European LCC market: managers of

LCCs, manufacturers, aviation ana-

lysts, airports representatives

Here are some of the main analysis

and points of view of the summit.

Brian Pearce(Chief Economist - IATA) has expressed few reservations concerning the European LCCs market: All

business models have challenges. He believes the low-cost business model struggles to meet its capital. In Europe, its a

winner-takes-all in the low cost market.

According to him, part of the problem is due to the value chain with uneven returns not reflecting risk of value. This

inability to rationalize capacity means leads the LCC industry as a whole to deliver returns Euros 8.7bn lower than inves-

tors expect. Furthermore, even if margins are improving world-wide, regulatory restrictions and the price of fuel keep

profitability lower than investors expected.

Willem Hondius(Director of Commerce - Transavia) presented his point of view on competition, differentiation andon the future of the travel industry. According to M. Hondius, most of the 56 LCCs in Europe loose money for few

reasons:

- The market is price driven, so the pressure is put on yields, and a higher dollar yields do not look as good in real

terms.

- Ryanairand easyJethave over 50% of European market share; the next competitor (Air Berlin) has only 6%.

- The competition has considerably increased between all the carriers. Business models of low cost, charter and network

carriers are increasingly overlapping each other, and in the next 5-10 years, their differences will become small, especially

between charters and LCCs.

- Finally, loyalty of their customers is limited, as it mainly depends on the price of the tickets.

Pointing out that most of the LCCs are small players, M. Hondiuspro-

posed few strategic options in order to compete with the market lea-

ders:

- Becoming a niche carrier on specific niche routes.

- Setting up alliances between small carriers, beyond current limited par-

tnerships.

- Growth by take-overs or merging.

- Changing the business model by developing hybrid models, interli-

ning

- Promoting vertical integration of the business.

- Widening their field of action through diversification.

Being big is not the issue, but the ability to adapt fast to changing

market circumstances

Willem Hondius

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BIRDS EYE VIEW


Maunu von Lders(President FlyNordic) summed up

its strategy in the LCC crowded marketplace: Listen to the

customer!.

Thanks to studies of LCCs customers, both decision ma-

kers and travelers, three main points lead: price, schedule

and punctuality.

He believes six dangers threaten low cost carriers:

- Regulatory problems (consumer protection, slots)

- The rising of costs

- Overcapacity (higher costs, but lower fares)

- Uneven cost structures between carriers (Eastern Euro-

pean cost advantages)

- Cannibalizing or complementary structures

- Traditional carriers transforming into low cost models

Read our exclusive interview ofM. von Lders(p. 2).

Carten Kroeger (Director of Sales Air Berlin ) insisted

on the low fares alliances in Germany. For instance, Air

Berlinshares its codes with HapagFly, owns 24% ofNiki,

and has links exchanges with dbawebsite. It is efficient

and cost cutting, but it is not a trend.

For more on German market and LCCs alliances, read our

June 2006 issue.

Tim Evans(Managing director BA Connect)

M. Evansdefended the regional airlines market faced to

LCCs:

- There is not a total domination from the LCCs, there are

still niche carriers

- There is an emergence of a kind of alliance or federation

among regional carriers

- Between regional carriers, there is an important growth

of capacity

Duncan Alexander (Managing director

Business Development OAG World-

wide ) presented MAX online, a useful

product of its company, sponsor of the

event.

OAGis a global travel information com-

pany which provides a suite of solutions

for managing, distributing, displaying and

analyzing passenger and cargo flight data.

Every ten seconds a flight is updated onthe OAG system which includes inter-

net timetables; flight analysis tools; flight

status displays and SMS alert services for

airports, airlines and travel-related web

sites.

Some Key Trends - June 2006 Vs June

2005

85% more Low cost flights to/from Bal-

tic States ; 59% more Low cost flights

to/from Scandinavia ; 48% more Low

cost flights to/from Western Europe ;

47% more Low cost flights to/from Eas-

tern Europe

Air Scoophas established a partnership

with OAGwhich will provide aviation

data for our next newsletters.

www.oagmax.com

Increase of Low cost flights from/to these markets

Source : OAG June 2006

Low Cost Carriers Operating To/From Major European

Countries By Frequency

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BIRDS EYE VIEW


Dr Andreas Bierwirth(Managing director Germanwings) introduced Germanwingswhich is the only pure German

low cost carrier and bigger than Air Berlinwhich is mix-model between LCC and charter. Germanwingsis located in

Germanys regions with the strongest purchasing power.

Purchasing power of cities in Germany Germanwingss bases

Dr Andreas Bierwirthentered the question of the Fuel surcharge: Is it a

viable strategy for the low cost model?

For Dr Bierwirth, LCCs need to respond to rising fuel costs as any other

airline. Communication and public awareness about high fuel costs will

help implementing a Fuel surcharge. The main problem comes from the

high price sensitivity among large parts of the low cost passengers. So hi-

gher the fuel surcharge will be, higher is the risk to loose parts of the highly

price sensitive generated demand.

Jason Bitter(Chief Operating Officer SkyEurope ) made his presenta-

tion about: Delivering an Optimal Fleet Strategy for Future Growth. He

explained which points are important when buying an aircraft: Fleet re-

quirements

= population density balanced with purchasing (purchasing power per person BIP)

- High Seat Load Factor

- Improved earning capacity

- Short turnarounds / high utilization of

aircraft

- Home base concept

- Young and integrative aircraft fleet

- Reduced need for airport infrastructure

lowers costs

- Make-or-buy services (engineering,

stations/hubs)

- Staff costs and crew employment

- Maximizing online sales

- Outsourcing uncontrollable costs

(airport, fuel, credit card)

Keyfactors for Maximising

Operational and Cost Efficiency

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BIRDS EYE VIEW


Jason Bitteralso insisted on the fact that fleets have real

and artificial costs.

Mike Rutter(Chief Operating Officer FlyBe) described

its company and their efforts to reduce costs. FlyBeis a re-gional low cost airline with frills, concentrating on domes-

tic travel (80% weight). FlyBehas developed a defendable

niche within the domestic sector which is supported by its

cost structure, its choice of fleet and its strong retail brand.

FlyBeoperates 25% of UK/France routes and 35% of regio-

nal French routes by flying to disadvantaged regions.

He also pointed out the important spending on advertising

by UK LCCs.

Advertising spent in the UK air travel

market (Nov 2005 Jan 2006)Source NMS

Essential Ancillary Revenues

for Ryanair The business model ofRyanairis not meant to generategrowth only through the selling of tickets. Money genera-

ted by tickets has never been sufficient to cover operating

expenses. Ryanairs boss had the cleverness to use this

weakness as a marketing tool with a slogan: Flying with

Free Tickets.

Free tickets are not a reality yet, but here are some ways

Ryanairplans to reduce, always more, the price of its tic-

kets.

The core activity of the Irish airline is to carry its passengers

across Europe. To earn extra-revenues from its passengers,

tickets are low, but the services around are not. The LCC

proposes (or will propose) meals and drinks, in-flight enter-

tainment and gambling Every opportunity to get money

is considered, even if the airplane must become a flying

advertising.

To sustain the growth of operating costs and reassure shareholders, Ryanairhas strengthened ancillary activities. On the

corporate website, the airline already offers car hire and hotel room reservation. Recently, the carrier announced it would

provide its customers with car and home insurance products.

All these extra-revenues are essential to Ryanairto face fuel rising, to offset low revenues from the tickets and to show

good results to the stock markets.

Real & Artificial Costs of a Fleet

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BIRDS EYE VIEW


Interview of Bertolt Flick

(CEO of Air Baltic)

Air Scoop: Could you please present Air Baltic to our

readers? What are your specificities compared to other

European LCCs? What do you do better than your com-

petitors?

Bertolt Flick: Air Baltic is, in a way, a very unique Low

Cost Carrier, if we can call Air Baltica Low Cost Carrier.The company has been established in 1995 by Latvian Go-

vernment, investment funds and Scandinavian airlines. Air

Baltic is the national carrier of Latvia and combines still

some features of very traditional airlines, with business

class, full services in business class, as well as connecting

flights, combines this with the best practices from LCCs.

The cost structure ofAir Balticis definitely comparable to

any of the best LCCs in Europe. However, we do offer a

product which is a very original product on markets which

are not served by LCCs.

In Central and Eastern Europe, there are already many

low cost carriers (SkyEurope, WizzAir, Estonian Air,

CentralWings), how do you manage competition with

so many carriers? Are Islanders (Ryanair, easyJet)

your main competitors?

A few years ago, Air Balticwas a very traditional company

focused on the business travelers; and around 2002-2003,

we started to turn around the company to be competitive

with LCCs on all destinations. Currently, about a half of

our destinations that we fly to Western Europe, we have

Low Cost competition. It has been our aim to restructure

the company in a way that we can successfully compete

with LCCs. So we have competition with Ryanair, easy-

Jet, Aer Lingusand Norwegianon a number of destina-

tions, and actually we do fairly well in direct competition.

In most cases, despite the fact that we are a much smaller

airline, we get a very fair share of the market and we are hi-

ghly profitably on all destinations where we fly with direct

competition with LCCs. In the future, we expect to have

Low Cost competition practically on all destinations to

Western Europe. But in the same time, we fly a lot more to

the former Soviet Union and to Eastern Europe which are

markets which still are not served by LCCs, and obviouslywe take a very determining step into these markets.

Do you believe that consolidation of the market will lead

to 2-3 main LCCs in Europe, or do you think there will

always be many LCCs serving niche market?

Neither for the LCCs, nor for the traditional airlines, I see a

real consolidation taking place. First of all, there are plenty

more markets that can be served by LCCs. A lot of the

networks do not overlap. I cannot see us going out of bu-

siness just because easyJetgets bigger or starts flying in

Spain. We do not overlap and where we compete in directflight, we do very well, and so it goes for many other airli-

nes. I think it is a total myth to assume that the consolida-

tionis a necessity; theres no proof for this and some of the

second rank LCCs are already very substantially airlines.

Quite frankly, I think this is just a journalist truth.

All the flights from Eastern Europe to/from Western

Europe stop at your Baltic hubs. Do you plan in a near

future to offer direct flights between eastern cities and

western ones?There is a very big difference in flying to Western Europe

than to the former Soviet Union. The markets outside the

EU are fully regulated; you need the designation from the

ministry of Transport which you only get when the compa-

ny is majority nationally owned and controlled, and theres

no open sky to those countries, so we are allowed to ope-

rate, for example, to Russia, only from Riga and not even

from our base in Vilnius. This is not something that we

will significantly change in the case of Russia, Georgia and a

number of countries in the near future. There are countries

like Ukraine which are developing to an open sky system

and it is not totally impossible that once the open sky will

be implemented in a country like Ukraine, there could be

direct flights from Ukraine to other parts of Western Eu-

rope. But for the time being, this is not yet possible. We

profit from the fact that the Baltic States, Riga in particular,

as a historically part of the former Soviet Union, have a

very strong demand to a number of destinations in Russia,

Ukraine, Belorussia, as well as Azerbaijan or Georgia.

You operate a star network, do you consider serving

cities inside blocks (inter-cities in the western block,

and inter-cities in the eastern block)?Not everything that is allowed by open sky makes com-

mercial sense. It is for us very important to operate out

of our bases. Of course this looks like a star, but this is a

question of also developing a certain size in a given market.

From a third market to a third market, you have very little

marketing power, thats why it is at the moment not so

interesting for us to fly from, lets say, Roma to Marseille. In

Lithuania or in Latvia, we have to develop a certain market

presence, and we will rather look at a third place that starts

operating flights from third markets to third markets.

Warsaw and Budapest are located between the two

blocks. Do you plan to convert them into hubs access

points like Riga or Vilnius?

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BIRDS EYE VIEW


We have no specific interests in Warsaw or Budapest. If

we look at a third base, we look for a place with strong

traffic to the Baltic States. The Baltic States being a part of

the former Soviet Union have very little trade relationships

with Hungary or even with Poland. Warsaw and Budapest

are being very served by a number of carriers, and we defi-

nitely have no interests in those two places.

Are you focusing more on Business or Leisure passen-

gers?

Depending on the destinations that we serve, we have of

course a number of destinations which are primarily for

the interest of leisure passengers, and other destinations,

like our flights within the Baltic States, will attract more

business passengers. What we see in the former years, we

used to have 70% business travelers. Nowadays, the share

is equally divided which has to do with the kind of des-

tinations we serve and also with the fact that the BalticStates have become more attractive for tourism which was

simply not true just ten years ago.

To face strong competition, Air Baltic has adapted its

model into a mix model which means having LCC and

legacy passengers in same flights. How do you manage

such model?

Saying we have a mixed model between LCCs and legacy

sounds a bit negative. What we really have is a cost base

which is lower than most of LCCs. In Economy class, we

have no difference between ourselves and most LCCs. Ourprices are for one way ticket without any conditions. We

also keep the business class, particularly because of the fli-

ghts to Eastern Europe and also to Western Europe which

is of the free choice of the passengers to buy the business

class, not like in the earlier days when he was forced by

conditions to seat in business class. There is no real ma-

nagement difficulty with this model. However, the LCCs

model is easier and simpler, and I will not exclude in the

future that we will transfer to a single class model if we see

the time for it.

Your routes to the Scandinavian market serve capitals

(Helsinki, Stockholm, Oslo). Do you plan to extend your

routes network in Scandinavia?

Its quite clear that initially the traffic even to the capital

cities was very limited. We see the traffic to Scandinavia

growing very fast and we are definitely considering to look

at secondary destinations there. We have already started,

we have opened Bergen in Norway, and we are looking

at other Norwegian destinations, Swedish destinations, Da-

nish destinations or Finish destinations.

Are you worried about the shortage of pilots and crew

hitting LCC market?

I dont think there is a reason for panic yet concerning pi-

lots. However, within the local market, we do not have a

sufficient supply of pilots, thats why we have to recruit

our pilots all over Europe. The pilots in our company comefrom over 18 countries, and we unfortunately have to pay

salaries, which are not comparable to low cost salaries, but

which are fully competitive with European salaries.

You already have few partnerships with other carriers

(Spanair, Blue1, AtlasJet), can you tell us what is your

strategy with these partnerships? Do you plan to form a

low cost carriers alliance?

We have one very important strategic partnership with

SAS which covers the Scandinavian countries, and with

some SAS group companies such as Spanairand Blue1.When we operate into the former Soviet Union, we try

to cooperate with the local partners. Partnerships can have

all kinds of depths and shapes; we have a very close par-

tnership now with Aeroflotto serve Moscow, and we have

also a partnership with Austrian Airlinesto serve Vienna.

At the moment, LCCs dont have a combined nor uni-

fied global reservation system. And before there is a link

between different airlines systems, I do not see any LCCs

alliance making any sense.

SkyEurope: New Share Issue to Get CashSkyEurope Airlinesshareholders approved the planned in-

crease in share capital; 20 million new shares should be is-

sued which will raise share capital to 40 million Euros. The

cash generated will be used to buy new aircraft and deve-

lop the network (Read Air Scoop May 2006). The time of

the issue will depend on the situation of the market, but

this summer is rather a bad moment since the situation on

the bourses in the region is not good, said Andrea Hofer,

Manager for investor relations. The Air BerlinIPO is the

latest example.

SkyEuropehad a lost worth 33,75 million Euros in the first

half of fiscal year 2005-2006. According to SkyEurope, this

loss is due to investment in capacity expansion and launch

of new flights. In fact, the Slovak LCC is facing, like other

LCCs, the impact of fuel rising. Fuel rising has a direct im-

pact on operating costs which rose of more 46% compared

with first semester 2005.

Even ifSkyEuropetransported 216 246 passengers in May

2006, which represents a 44,2% increase over March 2005,

the load factor in May 2006 decreased to 70,5% due to the

opening of new routes including the new base in Prague, a

reduction in non scheduled services and a strong increase

of available seat capacity.

Set up in 2001, SkyEurope made an IPO in September

2005 through the Warsaw and Vienna Stock Exchanges.

Shares on Warsaw bourse debuted at 6 Euros, while their

price in June 2006 fluctuated around 4 Euros.

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BIRDS EYE VIEW


The former triple Formula 1 world champion Niki Lau-

da(1975, 1977 & 1984) has quite early switched from the

steering-wheel to the joystick. In 1979, when he was stillcompeting in the Formula 1 championship, he created the

Austrian charter company Lauda Air, focused on holiday

destinations. It was sold to the national leader Austrian

Airlinesin 2001.

Two years later, Niki Lauda, who sometimes pilots his

planes himself, attempted a new breakthrough on the air

transport market: in November 2003, he bought the Aus-

trian affiliated company of the German Aero Lloyd, who

had gone bankrupt, to create a new airline, Niki.

The new company started with two planes operating

charter flights. Three years later, with five planes, it re-

mains a small business, divided between charter and low-

cost routes. But the company is growing: in 2005, Niki

carried 1 million passengers, and made profit for the first

time. It expects to carry 1.2 million customers in 2006, and

to achieve a turnover of about 135 million Euros (+5%).

The company also plans to buy one new plane every year

until 2011.

In order to survive in the very competitive air transport

market, Niki Lauda, 57 years old, quickly decided to lean

on an important European airliner to gain solidity. Few

months after the creation of Niki, he negotiated a par-

tnership with the German Air Berlin, the third low-cost

company in Europe. It was the first European low-cost

alliance ever. Air Berlinnow owns 24% ofNiki.

Niki plays the role ofAir Berlins extension in Austria,

operating for instance flights from Wien to Palma de Mal-

lorca, from where Air Berlinbrings the passengers fur-ther to Spain and Portugal. During the winter, Air Berlin

and Nikiwork together to carry Spanish and Portuguese

passengers to the Austrian Alps. Air Berlinalso provides

logistic support to its Austrian partner (Internet, call-cen-

ter...).

Niki, which already serves four airports in Austria (Wien,

Salzburg, Linz, Graz), nineteen in Germany, and a few

other in Europe, now plans to extend to Eastern Europe,

in spite of an aborted attempt to fly to Poland in 2005.

Niki Laudawants to land in Moscow at the beginning of

2007, and then possibly in Saint Petersburg. Thereby, Niki

challenges Austrian Airlines, leader in Austria, which

main market is already in Eastern Europe. Air Berlin, also

willing to expand to the East, would of course benefit

from its partners routes to Russia.

The Wien-based companys symbol is a fly. Trying to de-

velop the low-fare business model, Niki Laudaalso

created a car leaser, Lauda Motion.

AIRWAY MARKERSNiki: Ex-Formula 1 ChampionCreates Austrian Low-Cost

UPS AND DOWNSRyanair:

Money Back in BelgiumRyanair has lost an important High

Court bid. The Belgium High Courtrefused an application by the Irish car-

rier to stay proceedings brought against

it by the Kingdom of Belgium.

Belgium seeks to recover 2.8m Euros

provided by Belgian authorities to Rya-

nairduring the development of its base at Charleroi. Many of the

financial arrangements agreed between Ryanairand Belgiums Wal-

loon were declared state aid incompatible with the common mar-

ket said the European Commissionin February 2004.

The European Commissiondecision still has to be regarded by the

Irish courts as having the force of law, but if the airline does notsucceed in Europe, Ryanairwill have to give the money back to

Belgium. Money had already been paid into an account. Analysts of

the market wonder if this case wont be the first of many, as the Eu-

ropean Commissionintends to clarify aids to Low Cost Carriers.

Air Berlin:

Best low-cost airline in Europe!

With around five million airline passengers, the

Skytrax surveyanalyzed their opinion on a range

of customer satisfaction criteria.

Air Berlinhas been named best low-cost airline

in Europe. easyJetis second and Vuelingis third.

Furthermore, Air Berlin has been named theworlds best low-cost airline. JetBlue Airways

finished second and easyJetin third place.

Skytrax survey:

http://www.worldairlinesurvey.com

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Low Cost Carriers in Italy and ENAC:

The Challenge of Working Together

If Low Cost Carriers in Italy, Sicily, and Sardinia had their

way, theyd enjoy the flexibility of initiating flights to and

from the islands that would connect with LCC hubs spread

across Italy. From the LCCs point-of-view, such flights

would not only benefit the airlines; but would also benefit

consumers, and in the bigger scheme of thing benefit tou-

rism: more flights, more passengers, more reason to travel

and more profits. Everyone goes home a winner.

Achieving those goals seems easy enough: the number of

available flights to and from Sicily, Sardinia and Lampa-dusa is strictly regulated by ENAC (Ente Nazionale per

LAviazione Civil) the civilian aviation air regulatory

commission for Italy. Since 1997, ENAC has created a set

of ground rules that govern how airlines conduct themsel-

ves and where they can fly. ENACs position covers a lot

of ground, and theyve been proactive on many levels re-

garding the airline industry, for example identifying LCC

and legacy airlines that dont meet its stringent safety stan-

dards for aircraft and passengers.

However, in the eyes of many LCCs, ENAC has also ta-

ken steps that seem to limit the growth of Low Cost Car-

riers; particularly in the south. Consider the recent frustra-tions ofRyanair-- unquestionably the LCC heavyweight

throughout Europe -- which is currently fighting an ENAC

decision that regarding air service in and out of Sardinia.

Ryanairhas written to the European Commissionover

what it termed the abuse of regulations governing Public

Service Obligation (PSO) routes by the Italian Aviation

Authority. It contacted the Commission following the an-

nouncement that Alitaliawould be allowed to fly on a

PSO route which, according to Ryanair, it did not apply

for when initially offered to carriers.

Following allegations by Ryanairin May that the ItalianCivil Aviation Authority blocked Ryanair and easyJet

from offering low fares, competition and choice to consu-

mers wishing to travel between mainland Italy and Sardi-

nia, the European Commission launched an investigation

into the application of PSO rules in Italy.

While thats a matter for the courts to decide, ENAC Di-

rector General Silvano Maneraadds that, ENAC rules

are impartial toward low-cost and legacy carriers. Evalua-tion parameters are identical for all carriers. A certified EC

carrier with an operating licence issued according to EC

Regulation 2407/92 and meeting all technical, operational,

insurance and safety requirements is apt to operate, on the

national territory, on all routes not subject to restrictions.

The possibility to operate under a PSO regime is open

to all carriers, which have to comply with the limit of

the maximum fares, the commitment to operate all year

round, a minimum number of daily flights (going back and

forth on the same day) tailored to the users needs.

The challenge then may be to work within ENACs esta-

blished perimeters. WindJet Airlines-- by far the most

profitable Italian LCC in the South -- refers to this issue

as one of territoriality. Remarks Windjets Commercial

Director Mr. Massimo Polimeni In Sicily, there are

no real travel restrictions per se, except those related to

connections to the major islands and the minor islands (for

example Pantelleria and Lampedusa). In Sardinia, there is

a regulation that refers to territorial continuity which

means that only airlines which fall under the authority

of ENAC have access to the airspace. This pretty muchspells out which companies are permitted to fly from the

mainland to the islands and vice-versa. Obviously this

creates an enormous limitation on the number of inde-

pendent low-cost airlines which can operate, but thats the

way it is

WindJet has found a way to work within these guide-

lines while at the same time demonstrating unparalleled

growth in the marketplace. Not all LCCs have been so

successful. The discussion of territorial continuity was

the topic of discussion in a recent ENAC general assembly

meeting that addressed whether AirOneand Meridiana

could increase the number of flights they offer from Sardi-

nia during peak holiday and vacation periods.

DEREGULATION OF LCCs EUROPEAN MARKET

Deregulation of the European market is a big issue for Low Cost

Carriers. During the latest two conferences on LCCs, the topic

was omnipresent because deregulation has a huge impact on

current and future market.

Air Scoopdecided to publish different points of view to cover

the largest spectrum of this issue.

- Case study: LCCs in Italy Vs ENAC

- Point of view of Eurocontrol (European institution)

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Remarked Manera, The Minister of Transports, accor-

ding to EC Regulation 2408/92, has levied public service

fares on certain routes to/from Sardinia, with the aim to

guarantee territorial continuity with the Peninsula. All EC

air carriers owning an operating licence as per EC Regula-

tion 2407/92, regardless of their being low cost or legacy,can conform to the public service fares or, should no car-

rier accept, present their offer for the public tender, for the

entrustment of operations under a public services regime.

The PSO (Public Service Obligation) routes are subject

to restrictions and can only be operated by the carrier/s

which has/have accepted the conditions imposed by Mi-

nisterial Decree or, on an exclusive basis, by the carrier

which won the public tender for the operation of services

under a PSO regime. I take this opportunity to remind

that ENAC is the enforcing Authority of rules set forth

by a Joint Services Conference, convened by the Presidentof the Region Sardinia on the authority of the Minister of

Transports. It is Sardinia itself which deems it a priority to

safeguard mobility as well as territorial continuity needs of

its citizens

Regarding the increase of flights, ENAC President Vito

Riggio remarked that such an augmentation was possi-

ble if it involved code-sharing with other LCCs -- that

is -- booking passengers from other airlines. A decision is

pending.

The relationship between LCCs and ENAC is either chal-

lenging or strained depending on ones point of view. LCCs

remain committed to their goals: striving to offer low pri-

ces while at the same time remaining competitive in an

ever-growing marketplace. ENAC -- likewise -- remains

loyal to its charter as well, enforcing European and

national standards in Italy, adopting an impartial stance,

regardless of an airlines status as low-cost or legacy, with a

view to to the passengers rights, the service level offered

by airports and the operators of the civil aviation system

and taking into account, primarily, the safety safeguard.

Eurocontrol and Deregulation of European Low Cost Carriers Market

Deregulation allowed low-cost carriers to compete with

flag-carrying and network airlines. This liberalisation hap-

pened first in the United States, in 1978, and Europe fol-

lowed suit in 1997. It was a process that changed air trans-

port irrevocably.

In Europe, using a series of liberalisation packages, the Eu-

ropean Commission eroded the monopoly position of the

major airlines, allowing start-ups to compete with slashed

ticket prices on routes between and within Europeancountries.

The result has been intense competition which has af-

fected not only the industrys former leaders but the new

budget airlines too, some of whom have failed, especially

in the United States. In Europe, the number of low-cost

carriers has remained more or less constant at around 50

for the last few years.

Impact

The impact on Europe has been tremendous. In fact,

Ryanairs Chief Executive, Michael OLearys, claim that

Low-cost airlines are the new Europe is not as far-fet-

ched as it might seem at first.

A new generation of Europeans has now built their lives

around cut-price tickets, which make it easily affordable

for most citizens to travel widely within the continent.

Low-cost carriers are shoring up the ideal of free move-

ment of goods and persons. Labour mobility, for instance,

has become a reality, as people in the new European Sta-

tes in search of better paid work are able to move around

the continent without having to pay large sums of money

in order to do so.

The impact on regions has been most impressive. Relying

as they do on linking region to region and by-passing ex-

pensive big-city hubs, low-cost carriers have literally

transformed some of Europes backwaters (1).

Four years ago, only 200,000 travellers passed through

Charleroi in Belgium. The airport, known as Brussels

South Charleroi now processes more than 2 million pas-

sengers annually.

The region has benefited hugely: the airport itself accounts

directly for about 700 jobs, but more than 3,000 have

been created indirectly.

Low-cost carriers have changed the shape of aviation. It is,

in large measure, due to them that traffic levels recovered

after 11 September 2001. It seems clear that they will also

drive future growth.

Jean-Paul Soyer,

Eurocontrols Central

Route Charges Office

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BIRDS EYE VIEW


In Carcassonne, France, it is estimated that the 235,000

travellers who arrive there each year have created over

270m of extra economic activity.

Talinn in Estonia has had a dramatic transformation, as

has Katowice in Poland. Thanks to the low-cost carriers

that fly there, nearby Cracow has seen 50% growth in tou-rism since 2004: last year, it received three million visitors.

Property development has boomed and thousands of new

jobs created as a result.

Slovakias economic overhaul and flat tax system are often

credited for the countrys newly-won economic success.

But there could well be another reason. Slovakia stands

out from the rest of Europe as the one national market

where individual flows are most dominated by low-cost

carriers (in other countries, traditional carriers lead the

market: out of the top 10 total country-pair flows in Eu-rope, the low-cost carriers have the highest share only in

one - between Spain and the United Kingdom).

There is a clear connection between low-cost carriers des-

tinations and direct rises in local employment: more taxi

licences are issued; bus lines are opened; services in gene-

ral proliferate. There is parallel growth in tourism; a rise

in property investment and new businesses. Good, cheap

logistic connections encourage investment generally: it

makes sense for big companies to invest in an area where

land is inexpensive and labour plentiful.

Growth

The market share of low-cost carriers in Europe is clim-

bing steadily: it reached 16.3% of all European flights in

May 2006. According to an analysis recently conducted by

Eurocontrol, comparing the first six months of 2006 with

the same period in 2005, low-cost carriers market share

(2) rose from 12.9% to 15.3%.

There are now 15 low cost operators with more than 50

flights each day, compared with 13 only a year ago. Since

deregulation in 1997 in Europe, well over 40 companieshave carried over 100 million passengers each year.

The Single European Sky initiativeaims at enhancing

fairness putting players on the same footing in parti-

cular in the area of terminal charges. Currently, the situa-

tion in Europe is very opaque. The convergence towards

a common formula should increase transparency, allow

for comparison and ultimately focus competition on the

level of charges and not on semi-confidential local arran-

gements.

Some low-cost carriers are unhappy that this formula still

uses a weight factor. But on one hand, this formula is not

really a handicap, if one considers the average composition

of the fleets of these carriers. On the other hand, alterna-

tive proposals could well have worse effects. For example,

a charge based on passengers would increase the burden

on the airlines ability to achieve a high seat occupancy

rate, which is precisely the case with low-cost carriers.

ConcernEnvironmentalists are concerned about the rapid rise in

low-cost carrier growth, pointing out that aircraft emis-

sions are now the fastest rising source of greenhouse gases.

Cheap flights are appealing - but the environment might

have to pay the full price one day.

Eurocontrol is doing what it can to enable Air Traffic

management mitigate the effect of aviation on the envi-

ronment. Just to take one example, through effective use

of flow management, thousands of tonnes of fuel (3) are

saved annually. Other projects are underway and valuablework is being carried out with stakeholders to do eve-

rything possible to limit pollution through air transport

activity.

The Future

Low-cost carriers have around 20% of the worlds airline

market today and this figure may reach 40% by 2010.

In May 2006, Ryanair, Europes biggest low-cost operator,

said that it was on track to double passenger volumes and

profit by 2012.

There is doubtless still room for growth, especially in Eas-

tern Europe, where the low-cost market only really took

off following the inclusion of ten States into the European

Union in 2004. There are plenty of military airbases, now

unused, in the old Warsaw Pact countries which could be

developed by budget airlines.

However, there could be constraints in the future if Europe

follows in the United States footsteps. Low-cost carriers

there are beginning to lose their labour cost advantage. At

the end of 2005, network carriers had 27% higher labourcosts than low-cost carriers. That is a daunting amount -

but it is a lot less than their 77% disadvantage in 2000.

It has been stated that the single largest driver of labour

costs in the future will be growth. Low-cost expansion

will probably slow significantly in the next five years as

new opportunities become more limited. As this growth

slows, labour costs will continue to rise at the low-cost

carriers, in all likelihood reducing the advantage they once

enjoyed.

Conclusion

All the same, the changes made by low-cost carriers on

the air transport market will probably prove to be per-

manent: the days of premium prices are over. As IATA,

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Strategies to Respond to Rising Fuel Costs

LCCs must adapt themselves in order to survive the rising

fuel costs. The result is often a mixture of secured and unse-

cured fuel contingent (fuel price backup, hedging) and a

new approach of fuel consumption, privileging direct flight

routes, lightening aircraft weight, adjusting flight altitude,

and also in the choice of engine types less consuming.

The following diagram displays strategies of LCCs to res-

pond to rising fuel costs.

the International Air Transport Association, has decla-

red, all airlines are lower cost now. The network carriers

have adapted their business models to follow the low-cost

carriers as far as they can.

This has been of real benefit to passengers who now havemore choices and better prices.

by Jean-Paul Soyer, Head of Billings and Customer Rela-

tions, Eurocontrols Central Route Charges Office

Notes

1. 25% of low-cost carriers operations are carried

out at airports with less than 50 arrivals per day

2. in the Eurocontrol Statistical Reference Area

3. in 2005, the unnecessary consumption of roughly

350,000 tonnes of fuel, or almost 1.1 million tonnes of car-bon dioxide, were avoided thanks to air traffic flow mana-

gement

The MOLs Word of the Month

I will leave some time in the next couple of years; I wouldnt tie myself down to 2008.

It will be some time after Ryanair has established world domination, then it will be time to go.Michael OLeary

4

WORD OF THE MONTH


15/15

BIRDS EYE VIEW

Air Scoopis a Registered Trademark ofGlobal Wings Publications.

Subscription to Air Scoop: 290 euros for 1 year (12 issues)

Copyright 2006 - Unauthorized distribution or reproduction is forbidden.

http://www.air-scoop.com ; http://airscoop.blogspot.com (free portal news)

Constant blog coverage for easyJet

BLOGS TREND

Eurocontrol

Low-Cost Carrier Market

Update (May 2006)

The number of low-cost carriers has fallen

by 2 to 50, operating out of 22 States in

Europe.

They operated 16.3% of all flights in May

2006.

Finland, Poland, Denmark and Latvia mar-

ket shares have jumped by more than 5 %,

while others like Greece, Hungary and the

Balkan countries have lost market shares.

Ten of the top 25 low-cost country-pair

flows involve the United Kingdom. Slova-

kia is the national market where individual

flows are most dominated by the low-cost.However, the biggest markets remain do-

minated by traditional carriers: out of the

top 10 total country-pair flows in Europe,

the low-cost carriers have the highest share

in only one.

Low-cost share is increasing in only 3 of the

10 major country pair flows in Europe.

Ryanairstill had the main blog activity, but

easyJetwith an important coverage overtook

its competitor at the end of the month.

The most important peak was due to the

British Prime Ministerwhen he took a fli-

ght back home from Italy with Ryanair. This

event provided an important buzz activity

around it. A second peak occurred during the

third week when the Irish airline announced

it would launch home and car insurance to its

customers.

easyJethad no real peak in June, but a cons-

tant blog activity which implies a regular cor-

porate communication. Among others, easyJethas won an award for its website, awaited for Turkish approval to serve

Istanbul, launched investigations on ammunition carried in a hand luggage onto one of its aircraft

Air Berlinhad a low blog coverage this month with only one main peak around the 20th of June. This corresponds to the

nomination of the German airline as the best low-cost carrier in Europe.

Change in market share in percentage points,

Jan-May 2006 vs Jan-May 2005

Source : http://www.eurocontrol.int/statfor

Air Scoop July 2006

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