Air Scoop May 2006
Transcript of Air Scoop May 2006
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Highlights in this IssueAir Berlin IPO: Raising Funds before the Battle p.2
Future expansion of Ryanair and easyJet in Europe p.3
Bloodbath in Central Europe p.7
The LCCs Rush to Poland p.8
First Central European Aviation Forum in Poland p.9
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The Low Cost Carriers Analysis NewsletterAIR SCOOP ANNOUNCEMENTS
Low cost carriers on
Estonian TV
EDITORIAL
Air Scoop Team offers you a special newsletter focused on
Low Cost Carriers in Central Europe.
Central Europe market is seen by many LCCs as the next Eldorado
for further routes expansion. Headlines news regularly announces
new routes and bases opening in this area. Recent airlines confer-
ences and pressure on governments are signs of this interest. After
western market, Central Europe market is the natural expansion to-wards East.
In this emerging market, regional LCCs have appeared within last
years by structuring their local networks. First arrived on main air-
ports, generally located near big cities and capitals, these LCCs have
taken a serious advantage in terms of slots and passengers catch-
ments. Most profitable routes are then already occupied.
However, most of these local LCCs remain small in size. Islanders
arrival on the market, and especially Ryanair, is really dreaded. The
main advantage ofRyanaircomes from its important size and finan-
cial power. This weight will be decisive to offer the lowest prices on
routes and to conquer them.
IATAhas estimated that Poland and Czech Republic will be among
the worlds fastest growing airline markets over the next four years.
With nearly 40 million people, Poland is central Europes biggest
market. Located as a central crossroads, this country is one of the
most, if not the most, competitive battlefield.
Rumours about a settlement of a Ryanairs hub in Wroclaw, and the
possible choice of Rzeszow as a technical service centre, point out
the interest of the LCC European leader for the country.
The battle is in Poland, and Poland will become a two-player with
Wizz taking half and Ryanair taking the other half. Everyone else
will be knocked out has recently declared Joszef Varadi, CEO ofWizz Air.
The market is however extremely priced sensitive which curb the
projects of many, includingeasyJet. Even ifRyanairis seen as the
main danger for main local carriers, such as Sky Europeor Wizz Air,
the game wont be as easy as on the western market for the Irish
airline
FR & U2: New
bases in Greece?
Cyber-cafes in
LCCs?
Air Berlin: Taking away
free meals or preparing
long haul flights?
Nikki and longhaul
flights?
IN THE AIR Latest Rumours...
Check Air Scoop
Website for more
details on rumors...
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BIRDS EYE VIEW
Air Scoop - May 2006 www.air-scoop.com
Air Berlin IPO: Raising
Funds for the Battle
Germans second biggest airline, Air
Berlin, will be introduced on theFrankfurt stock exchange in May
2006. More than 50% of the com-
panys shares will be brought to the
market. This could be the second
most important stock market intro-
duction in 2006 in Germany.
Air Berlinaims to collect 700 to 900
million euros, in order to strengthen
its number three position among
LCCs in Europe, behind Ryanair
and easyJet, and to finance its ex-
pansion plans to Northern and Eas-
tern Europe.
Joachim Hunold, the companys
CEO, made this announcement at
the ITB (International Tourism
Show) in Berlin, in March. He also
announced an increase of capital by
130 million euros. Hunold, who is
running the airline since 1991, was
thinking for several years to intro-
duce his company on the stock mar-
ket. At the beginning of 2006, he
changed it into a PLC (public limi-
ted company), a British legal form of
company limited by shares.
Air Berlin is the first German LCCto be introduced on the share mar-
ket. Shareholders are expected to be
institutional investors, but also pri-
vate individuals, among others the
companys customers.
Air Berlinis Germanys fast-growing
low-cost airline. First focused on
charter flights, it began a few years
ago to develop regular low-cost fli-
ghts. In 2005, it carried 13,5 million
passengers (+ 12,5% relatively to2004) to 55 destinations, and made
a turnover of 1,22 million euros (+
17%). The company owns 52 planes,
and has ordered 60 more. It deve-
loped strong partnerships with the
Austrian airline Niki and with the
plane-leaser Germania. Hunold said
he does not oppose to other par-
tnerships or buyings. The hard com-
petition in the german sky already
led to partnerships between some
other carriers, like DBA and LTU,
or Germanwingsand Condor.
Air Berlins ambition is not only
to challenge the German leaderLufthansa, but also to compete on
the european level. Air Berlinis fo-
cused on international routes rather
than internal ones. Two of its plat-
forms are located abroad, in Mallor-
ca and London, from where internal
routes are operated in Spain and the
United Kingdom.
In 2005, Air Berlin lost 115, 9 mil-
lions euros. According to the mana-
gement, this was caused by severalelements like important kerosene
prices, the rise of the dollar, the
switch to IFRS standards, and ex-
ceptional taxes. However, in 2006,
the company is expected by its ad-
visors, Commerzbankand Morgan
Stanley, to make a profit of 51 mil-
lion euros, and of 80 million in the
following years.
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The 2006 Worlds Low Cost Airlines Congress ADVERTISEMENT
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BIRDS EYE VIEW
Future expansions of Ryanair and EasyJet in Europe
Expansion of Islander LCCs, Ryanairand easyJet(that we will call Islanders), has been in three phases till now.
1. In the first one, these low cost carriers opened routes inside their local and regional area, mainly in Ireland and in theUnited Kingdom.
2. Then during phase 2, the Islanders opened longer routes to and from continental airports. West Europe was a totallynew market with no major competitors yet. Legacy airlines had difficulties to counter this new airline business model, so
Ryanairand easyJetwere quickly able to open new bases and routes on the continent.
3. Facing saturation of slots and airports capacities, Islanders had to find new attractive destinations towards East, North
and South Europe. This led them to Scandinavia, Central Europe and northern Africa. We are currently in this thirdphase.
What about the next step?
LCCs business models imply to always open new routes and densify in order to maintain the growth. Central Europe
represents an important market for LCCs future, and is also a necessary stop before eastern countries market (Belarus,
Ukraine, Russia). But entering these new markets will be a much harder task for Islanders as they will face stronger
resistance of local LCCs, already deserving the area. In Central Europe, Islanders will face organised airlines such as Air
Baltic, Wizzair, Sky Europeor Estonian Airlines, which we will call Centralers. Even if these companies havedifferent business plans and strategies (as we will see later), they are strong on their lands due to their networking. As we
know, the first to set routes has better chances to win the market.
On the Western european market, Islanders could justify secondary airports because prices were cheaper there andcompetitors were mostly legacy airlines, more expansive. This approach is no longer possible in Central Europe with
local LCCs offering low prices from and to main airports. Slots are already taken by these airlines, and routes have been
tested and approved.
Two opposing blocks
Islanders didnt face much resistance till now. Therefore, their expansion appeared quite easy and their growth was
important. However, Centralers had sufficient time to observe and copy Islanders models and strategies. Taken indivi-
dually, Centralers are still not strong enough to maintain their position, but as a block, they appear sufficiently strong to
contain the absolutely necessary Islanders eastern expansion. Facing Islanders, here are some of their main Centralers
competitors:
Air Scoop Special
Central Europe Analysis
ISLANDERS
CENTRALERS
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Air Baltic
With around 20 airports each deserving at least 10 routes, Air Baltichas a networking strategy. Through a variety of
alliances, Air Balticoffers a wide range of destinations. Partnership with Spanairopens routes to Spain, Blu1gives access
to Finland market, and AtlasJet, with one route Riga Izmir, leads travellers to Turkey. The business model ofAir Bal-
ticis to link eastern cities (St Petersburg, Moscow, Minsk, Kiev, Dnepropetrovsk, Odessa, Baku, Tbilisi) to Westerns
(Helsinki, Stockholm, Oslo, Copenhagen, Hamburg, Dusseldorf, Berlin, Vienna, Munich, Milan, Barcelona, Paris, Brussels,
London, Manchester, Dublin). Air Baltictransports its passengers to main business cities, with important catchmentsareas.
Tallinn, Riga and Vilnius are located between these two blocks and connect both eastern and western cities. They play a
hub and access point role.
Warsaw and Budapest are also located between these two blocks. Currently only three routes are deserved from these
airports, but further openings should logically occur there in a near future.
Air Balticstart to include its LCC strategy once Ryanairreally threathened its own market. Even ifAir Balticlost some
market shares in Riga, its PAX rises thanks to Ryanairarrival. Air Baltichas adapted its strategy to a mix model: LCC
and legacy in the same flights, like others in the area such as Estonian Airfor instance.
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Wizz Air
Like most of LCCs, Wizzairhas developed its own model specificities. When classical LCCs offer point to point des-
tinations, Wizzairhas started few routes with connecting flights. For instance, passengers from Copenhagen/Malm can
flight to Sofia going through Budapest. This line is a typical example of inter-european cities connections and networking
strategy ofWizzair. Warsaw is Wizzairs another hub offering to Kaunas (Latvia) passengers flights to western and nor-thern Europe destinations (London, Paris, Dortmund, Stockholm).
Wizzairhas taken from both networking and densification strategies. All destinations south of Budapest, such as Barce-
lona, Roma, Athens, Split, Sofia, dont have more than two routes. This networking strategy is a necessary step to allow
further expansion in this southern area. By occupying airports in major cities (Milan, Split), and in capitals (Ljubljana,
Zagreb), Wizzairanticipates airports saturation and affirms its presence, absolutely necessary in order to get more slots
and then develop the densification phase.
Routes above Budapest (included) are far more numerous. Organized around three major hubs (Budapest, Warsaw and
Katowice), Wizzaircovers both regional routes in Central Europe, and main European western airports. Wizzaircant
be seen just as a local LCC any longer, and must be considered as a global Europe provider.
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Sky Europe
Like Air Baltic, Sky Europe has few cities
acting as main hubs as they are historical
centers of expansion of the carrier. Almost
all routes deserved by Sky Europeare fromand to these hubs, and not between cities
outside Central Europe area. With a star
development around Poland, Czech Repu-
blic, Slovakia and Hungary, Sky Europehas
become a major local actor, deserving main
western cities routes.
Salzburg and Innsbruck are currently two
emerging hubs with routes linking cities in-
side western block (Amsterdam, Paris, Bar-
celona and Manchester). Located in Austria,
these two airports are not linked to historicalhubs (except Salzburg to Warsaw) contrary
to other western destinations. By developing
these autonomous hubs and by expanding
new routes and flights numbers, Sky Europe
directly competes with Islanders on their
market. A next move could be the develo-
pment of current airports (Cologne/Bonn;
Stuttgart) or the settlement of new ones in
Germany deserving more European cities
and competing against Ryanair, easyJetand
Air Berlin.
What are the different options left to Islanders?
Partnerships with local LCCs.
One strategic option for LCCs could be to signed partnerships with local carriers. These partnerships would mainly be
focused on slots allocations. For instance, a proximity already exists between Ryanairand SkyEurope; a partnership or
even a take over would give Ryanairan access to these markets.
Centralers partners would also receive slots allocations in western countries which would boost their expansion. On
the other hand, Islanders dont have signed yet any major agreement with another carrier, and they dont have enough
cash to buy them.
Densifications of current routes.easyJethas chosen a densification strategy by linking its bases to many others with few flights per day. Because of the
densification rhythm slowing down, easyJetis now in a sensitive position as it needs to open new airports. The recent
routes opening in Morocco, Croatia or Poland are significant of the current situation. easyJetnow faces some consequen-
ces of its early strategic choices: the lack of available mail airports and slots.
With priority put on networking strategy, Ryanaircan still raise number of its flights on many routes. Anyway, this op-
tion is not viable on long term, especially because the airline will still face the lack of slots and air traffic saturation.
New routes to specific airports with important catchments area.
Islanders look for airports with low fees and important catchments area. These airports will be located outside main ci-
ties where airports are already taken by local LCCs. They can also be in secondary cities not yet deserved by Centralers.
In any case, this option will surely lead to a strong competition between Islanders and Centralers.
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Bloodbath once more but in Central Europe
Due to Central Europe market deregulation and Ryanairs arrival, Centralers (LCCs from Cen-
tral Europe) will soon begin their consolidation process. Many predicts a new Bloodbath
The industrys facing big consolidationand from central Europe, only one will survive, the one
with the lowest cost base and the one that can become a European and not just a Central European
airline declared Jozsef Varadi, CEO ofWizz Air.
The Scandinavian market
Could Ryanairand easyJetmaintain and develop their current business by targeting Scandinavian market? Scandinavia
still doesnt have strong regional routes networks. SAShas developed its strategy around two main hubs, Stockholm and
Copenhagen, leaving many routes free. But many other LCCs are already on main hubs (Copenhagen, Stockholm, Hel-
sinki) and competition is already strong. Furthermore, even if Nordics travel a lot, is it a sufficient market in terms of
passengers?
Eastern market
Eastern market is probably the logical market development target of Islanders strategy: coming from west and moving
to east. But Centralers block the access to this market and develop meanwhile their own network to eastern main ci-
ties (see above with Air Baltic). One option could be to open routes from western bases. But these flights will become
middle/long haul, and no frills model will be difficult to maintain.
Northern Africa
Some LCCs are already offering routes to northern Africa, such as Air Berlin(Morocco, Tunisia, Egypt), or easyJetand
Ryanairin Morocco. It is clear that these markets offer many advantages: sunny destinations, cheap vacations packages,European silver age settlement
Routes still have to be created there, but how many? There arent that many interesting airports available, penetration
of Internet for ticket booking is weak, destinations are outside the European Union which implies rigorous passports
checking, rapid 25 minutes turnovers are difficult to hold
Due to their strategic choices, Ryanairand easyJetare not in the same position in front of Centralers. Both will need
to adapt their model and find original solutions in order to maintain their development.
By choosing a densification strategy, easyJethas fewer options than its rival. It appears difficult for the airline to open
sufficient new routes to Central countries as local competitors are already there. In addition, a densification strategy im-
plies more slots allocations which could soon be impossible due to traffic saturation.Ryanairstrategic choices make them more solid. Often first to open routes, Ryanairhas a precious anteriority which
will be helpful to accelerate a densification strategy. However, the model applied till now will be difficult to replicate to
Central Europe market. Local LCCs fly from main airports to main airports offering cheap tickets. Then, passengers wont
really be attracted by secondary airports, far from their cities and business centres, except if prices are a lot cheaper than
local LCCs. But can Ryanairafford it?
ANALYST PORTHOLE
Sector experts agree with Mr Varadi and affirm the market is overcrowded. For them, it will be either Sky Europeor
Wizz Airwhich should remain, alongside with Ryanair.
Even though, we agree the number of LCCs will reduce, our global analysis is a bit different from this. We believe the
Central market has its own specificities, and therefore will not react like Western Europe market. Some Centralers have
developed their own routes without competition from other local LCCs. As long as they open and densify new routes
unchallenged, they will develop themselves.We definitely agree with Mr Varadi about the size of the carriers. The main risk during the 3 to 5 years to come would be
to remain a regional carrier. Sooner or later, bigger LCCs, Ryanairfirst, will attack their network offering lowest prices
thanks to their size.
Jozsef Varadi
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The Rush to Poland
Poland is in good position to become
a regional centre for airline transport,
as its market is bigger than its neigh-
bours, Czech and Hungary, and itsgrowth rate is about 25% each year.
In fact, in 2005, arriving and depar-
ting from Poland airports increased
by 31%! In May 2004, Polish govern-
ment signed the open skies agree-
ment which opened the market to
competition. Airports network in
Poland is composed of one central
airport (Warsaw Okecie), one main
regional airport (Krakow Balice) and
about 50 smaller regional airports.
According to Civil Aviation Office
(the highest ranking Polish civil
aviation authority), CentralWings,
a subsidiary ofLOT(Polands natio-
nal airline), is still the second budget
airline in Poland. CentralWingshad
to face recent offensive manoeuvres
of Islanders, especially from Rya-
nair which declared that by 2007
they will have more passengers than
LOT.
Like other LCCs (Air Baltic, Esto-
nian Air...), CentralWings quickly
counter-attacked by setting a new
long term strategy which will inclu-de the development of sells by tradi-
tional means and through Internet,
and by avoiding routes duplication
with LOT. Furthermore, an IPO
will probably be conducted within
a year.
European LCCs leader Ryanair
started to flight to Poland market
in March 2005. Last year, the airline
transported 3% of all passengers and8% of LCC passengers in this mar-
ket. Ryanairhas announced its ob-
jectives: to set 3 bases in Poland wi-
thin 2011. To support this strategy,
Ryanair has started an impressive
campaign against Polish government
to break up the centralised control
of airports and to open a second
airport in Warsaw in Modlin. Indeed,
Warsaw Okecie airport is expected
to reach its capacity limits by 2010.
There are projects to build a second
airport for passengers and cargos,
either in Modlin or in Mszczonow.
Ryanairuses Rzeszow argument to
add pressure on the Polish govern-ment. Rzeszow is considered as the
leading candidate for Ryanairtech-
nical service centre which will cost
about 84 million dollars. Most mu-
nicipalities that own and manage re-
gional airports lack necessary funds
to develop these airports. Ryanair
project is considered as an impor-
tant opportunity to drag funds in
the area. Motivated, Rzeszow has
already offered about 30 hectares ofland by the local airport with pos-
sibilities of serving the interconti-
nental flights. Final decision will be
taken with its partner Singapore
Technologies Aerospace (St Aero).
Recently, Michael OLeary decla-
red about this issue: All were as-
king the government to do is to stop
screwing around at the airports and
just deregulate the bloody things.
Inaugural Air Transport Conference For Central and Southeast Europe
Air Scoopis proud to be partner of the Inaugural Air Transport Conference For Central and Southeast Europeorga-
nised by EastEuro Link Air Transport. Under the auspices of Ministry of Transport, Posts and Telecommunications of
the Slovak Republic, this conference will be held in Bratislava, Slovak Republic, the 26th of May.
Other LCCs are quite active too.
EasyJet also plans to build a base
in Poland in a big airport, like in
Gdansk or in Poznan, to add new
routes after Warsaw and Krakow.
The final decision should be taken
in June. Their goal is to raise by 15%
the number of their passengers in
2006.
Wizz Airhas already 3 facilities im-
plemented and plans to create a na-
tionwide network of airline bases.
Norvegianrecently set its first basein Warsaw deserving 5 European
cities (Spain, south of France and
Oslo). Sign of this change, its web-
site is now translated in Polish.Source: Wikimedia Commons
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DOWN TO EARTH
i
Ryanairs ChecknGo Finally
IntroducedAlthough online check-in system has alrea-
dy been introduced on some European rou-
tes, security staff at Dublin airport refused
to accept passengers with ChecknGotic-
kets (Air Scoop April 2006). After some
easyJet Shares Sinking
easyJet shares have reached their
lowest point for the last 6 months.
Shares in easyJet increased sharply
in January as speculation swirled
about the motive behind FL Groups
stake in the carrier. But when hopes
for a bid faded, shares sunk. The
sale came as a blow for easyJetin-
vestors, who had been hoping for a
takeover bid from FL Group.
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First Central European Aviation Forum
in Poland: A Strong Signal
The first Central European Aviation Forumoccurred the
11th and 12th of April in Warsaw.
LCCs issues were fully covered by many speakers from
different European LCCs like Michael OLeary, CEO
of Ryanair, who talked about how its company has in-
fluenced and will influence the Aviation Map of the new
Enlarged Europe. Other managers, such as Jozsef Varadi,
Chairman and CEO ofWizz Air, Christian Mandl, CEO
ofSky Europeor Grzegorz Polaniecki, Acting President
ofCentralwingswere there too to present their company
strategy and perspectives.
Many LCC topics were discussed during this forum such
as How to Make an Airport Attractive to LCCs and Yet
Still Make Money?, Will well established West EuropeanLCCs speed up their expansion on CEE markets?, Some
traditional airlines respond to LCCs invasion with their
own LCCs: is this the right strategy?, Regional govern-
ments financial support for airports and LCCs coming to
those airports: is it in line with fare competition?
During the forum, Rzeszow has been analysed as a case
study of development of regional airports. It is interestingto note that Rzeszow is currently under the spotlights as it
is considered as the leading candidate for Ryanairtechnical
service centre.
Another Air transport conference for Central and Southeast
Europe will be hold in Bratislava the 26th of May: Inaugu-
ral Air Transport Conference For Central and Southeast
Europe. Both traditional and low cost airlines will be pre-
sent at this major regional event. Rebuilding European
competitiveness in the field of Air Transport will be the
central topic of this forthcoming international conference.
Air Scoopis proud to be partner of this conference whichwe will cover from the LCC market perspectives.
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Ryanair & easyJet: Still Leading Blogshere
Ryanairstill leads the discussions over the blogos-
phere. Two important peaks occurred mid-April.
The first one, around the 12th, corresponds to thebomb alert in Ryanairs aircraft from Paris to Du-
blin. The second, around the 18th, is due to the
emergency plane landing following an engine failu-
re on Ryanairs flight.
easyJet trend gets higher at the beginning of the
month when FL Group sold easyJet stakes. The
peak around the 20th is due to the scalded grand-
mother story.
Air Berlin trend remains stable over the months.
The IPO development is mainly followed by spe-
cialized blogs.
BLOGS TREND
UPS AND DOWNS
negociations, the SIPTU (Services, Industrial, Professio-
nal and Technical Union) finally agreed to stop blocking
the service. Ryanair now waits for the Department of
transports approval to introduce this online check-in sys-
tem on all of their Irish routes.