Assessing the Long

Haul low cost business

model

Peter MorrisChief Economist

AirnethDen Haag, April 2010

Key Question

Outline

How did ‘short haul low cost’ gain traction? A look at the ‘Established Network model’ on

long haul Variety of long haul models Case Study:

Impact of new player on Long Haul – Oasis Key cost concerns Opportunities Summary

The golden rule is: There are no golden rulesG.B. Shaw

The Aviation Industry has seen…………..

Regulation and liberalisationRobust growth of 5%pa+ averageEconomic and other shocks - and

repeated recoveryConsolidation and rationalisationNew markets and changing

business models- generally unforeseen

An industry that both resists and accepts major change

Remember - One of the first ‘low cost long haul’ airlines is now an ‘incumbent’

And now adopting a strategy to defend its market- against other competitors, and any new‘start-up’ threats

How did ‘short haul low cost’ gain traction?

Why did ‘low cost’ grow?

Deregulation Convergence of previous business model on

short haul with ‘comfortable’ competition New entrants used:

New distribution outlets (internet) Higher asset utilisation (fleet, staff) Lower costs- airports, aircraft, distribution Ancillary revenues (add ons, specific charges, partnerships) Stimulate new traffic from lower faresSimplicity!

Response of incumbents was inhibited by: Legacy links, high costs, financial crisis, complexity

Why short haul?

Regional deregulation (US, Europe…) Commodity product - with significant price

elasticity Utilisation improvement from 8 → 12h per day

per aircraft Artificial pricing barriers by airlines Regional sales proposition acceptable and

trusted Many secondary destinations with poor service +

alternate airports Proven model (USA)

Why NOT long haul? Regulatory restrictions Price segmentation (3 class etc.) and business

customers key Higher entry costs (aircraft, set up, marketing

etc.) Connecting passengers Long haul aircraft utilisation Secondary airports of limited scope and

availability for large jets No market for ‘nowhere to nowhere’ routes Incumbents able to price low at the margin to

compete + connecting airlines More difficult to attract new revenues, and many

of the costs the same (e.g. aircraft, fuel)

Where does the cost advantage lie?

In Europe for short haul services

Low cost differentials have been maintained

Low cost airlines gain more profitability from lower revenues

A look at the ‘Established Network model’ on long haul

Key strengths of network airline model

Network connections provide feed in to/ from hubs

Product differentiation (Class of service) allows coverage of wide willingness to pay, and charge ‘marginal fares’ for the last travellers

Established brand has value Alliance relationships Travel agency network, corporates important Experience of international markets Critical mass…….

Some weaknesses?

Class fare differentials have grown to unrealistic levels (6-10X for premium vs. economy)

Large players too big and inflexible to react swiftly (e.g. fleet refurbishment takes years)

The network ‘guarantees’ have a high cost High growth markets create many new niches ‘Personal service’ often just cosmetic, and unable

to deal with detailed issues

Variety of new long haul models

Summary of the ‘low cost long haul’ entrants

Cover a widening spectrum Most are relatively new, and many are targeting

high growth markets (Asia, Middle East) Some are parented by incumbents, and proving a

useful market exploration tool as well (perhaps) as a warning to airline staff

Some are driven by the charter market seeking to diversify

Some have targeted ‘business class only’ markets (e.g. Maxjet, Eos, Silverjet)

Some have gone (e.g. Oasis, Maxjet, Eos, Silverjet)

Europe

Fleet: 168 A319’s and A320’s Longest routes include London to Luxor, Sharm

el Sheikh and Tel Aviv.

Fleet: 267 737-800’s Long routes include UK and Scandinavia to the

Canary Islands

Fleet: 35 737-800’s Longest routes include Copenhagen and Oslo to

Dubai, Scandinavia to the Canary Islands

Europe

Airberlin Vueling Airlines Jet2 Iceland Express Monarch Airlines Smartwings Thomson Airways Transavia Airlines TUIfly

North America Fleet: 352 737-700’s Routes: Transcontinental domestic services

Fleet: 118 A320’s Routes: Transcontinental domestic services

Fleet: 135 737NG’s, 1 leased Boeing 757-200 Routes: Canada to the Caribbean and the US

(including Hawaii). Transcontinental domestic services.

North America

Air Tran Air Transat Frontier Spirit Airlines Sunwing Airlines USA 3000 Airlines Virgin America

South America

Fleet: 94 737-700’s and -800s, 767’s Longer routes within Brazil & to the Caribbean

and neighbouring South American countries

Fleet: 24 A319’s, 2 A320’s Routes: Mexico to US, including Guadalajara to

Chicago

Middle East Fleet: 21 A320’s, plus 40 more on order Routes: Longest sectors to India, Kazakhstan,

Nepal, Sri Lanka and Ukraine. Subsidiaries in Morocco and Egypt. Will start

subsidiary in Jordan.

Fleet: 15 737-800’s, 38 more on order Routes: Longest sectors to India, Nepal, Russia

and Sri Lanka from Dubai

Fleet: 21 737-800’s Routes: Long and medium haul services from

various destinations in India to the UAE, Oman, Malaysia and Singapore.

Asia/Pacific Fleet: 2 A340-300’s, 9 A330-300’s. 22 more A330’s

and 15 A350’s on order. Routes: Kuala Lumpur to Australia, France, Iran and

the United Kingdom. Indonesia AirAsia and Thai AirAsia operate many

routes within Asia, longer sectors include Bangkok to Delhi.

Fleet: 9 A330-200’s. 10 787-8s on order. Routes: Australia to Japan, Vietnam, Indonesia,

Malaysia and Hawaii. Singapore to China, Thailand and Vietnam.

Fleet: 5 777-300ERs, 8 more on Option. Routes: Brisbane, Melbourne and Sydney to Los

Angeles. Sydney to Abu Dhabi.

Fleet: 52 737-700/800’s. Will acquire 2 A330-200’s Routes: Australia to Indonesia, Thailand, Papua New

Guinea and the South Pacific Islands

Asia/Pacific

Tiger Airways Jeju Air Jin Air Lion Air Cebu Pacific Air

Ceased operations Fleet: 3 767’s Routes to Jakarta and Sydney + Charter & non scheduled

flights to Japan and Vietnam

Fleet: 4 747-400’s Routes from Hong Kong to London, Gatwick and Vancouver Future to service more long-haul destinations including

Sydney, Melbourne, San Francisco and Manchester

Fleet: 767’s, 737-800’s and 757s + 2 - 787s delivery in 2010/2011

Routes operate like traditional charter carrier with seasonal routes and destinations

Fleet: 767-300ERs and 757s Routes linking the US and Canada with the UK as well as

Canada with Paris

Fleet: 737-800’s and -900ER’s, 757’s and 767’s Routes: UK to North America, North Africa and Europe

Case Study:Impact of new player on Long Haul - Oasis

Immediate journey at a premium on major carriers

Fare Comparison LON- HKG Feb 2008

Oasis

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

GB

P

Economy- LON Economy-HKG

Source: ASCEND review of company websites and best internet agents

Booking in Feb 2008 for Feb 2008

Oasis desperate to attract premium revenue

Fare Comparison LON- HKG Feb 2008

Oasis

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

GB

P

Business-LON Business-HKG

Source: ASCEND review of company websites and best internet agents

Booking in Feb 2008 for Feb 2008

More convergence for a future journey

Fare Comparison LON- HKG April 2008

Oasis

0

100

200

300

400

500

600

700

800

900

1,000

GB

P

Economy- LON Economy-HKG

Booking in Feb 2008 for April 2008

HKG fares higher in April- Oasis going leaves only connections such as QA and TG

Fare Comparison LON- HKG April 2008

Oasis

0

500

1,000

1,500

2,000

2,500

3,000

3,500

GB

P

Business-LON Business-HKG

Booking in Feb 2008 for April 2008

How did Oasis affect the market?

Probably added 20% to passenger traffic (100,000 passengers) with additional stimulation due to competition

Did not get traction in the premium market despite a good value product (timing, airports, flyer corporate loyalty)

Achieved good load factors in economy

2006 2007

BA+CX+VS+N

Z

1.416m 1.453m

Oasis n/a 0.207m

Total n/a 1.660m

Economy fares

-3%

Premium fares

+9.7%

Fare changes Jan- June 2007 vs 2006Sources, UKCAA, IATA

Key cost concerns

Step jump in fuel price has changed economics of the industry

Fuel costs rose significantly- some regions helped by hedging, others impacted by long sector distances or poor fleet efficiencyN. American labour costs fell dramatically

Source: IATA

Fuel costs and labour proved key cost issues

Opportunities

Global aviation trends by route area

Source : Ascend analysis and OAG from BACK Aviation

Prospective Airline Startups by Region February 2008

0

10

20

30

40

50

60

70

Africa Asia/Pacific Central/SouthAmerica

Europe Middle East North America Russia/CIS

Definite Firm Tentative

Asia Pacific still clearly in the expansion stage……

Source: ASCEND

Asia Pacific and Middle East half of potential world startups

Can Long Haul, Low Cost succeed?

It has more challenges than for LCC short haul More competition Ticket and travel product more complex Fewer defensible ’new wave’ attributes

The ‘linked’ new entrants look set to succeed lone participants have a challenge to reach

critical mass Fuel price (and taxes) are increasingly raising

real cost of long haul trips, with no end in sight Emirates could soon be offering the ultimate

‘long haul low cost’ with 750 seat A380’s

In Summary

‘The reasonable man accepts the world as he finds it. The unreasonable man tries to change the world to his point of view.Therefore all progress depends on the unreasonable man’G.B.Shaw : Man and Superman

‘If the chariot ahead has overturned, let the chariot behind beware’

Jia-Yi , Han Dynasty

The information contained in our databases and used in this presentation has been assembled from many sources, and whilst the utmost care has been taken to ensure accuracy, the information is supplied on the understanding that no legal liability whatsoever shall attach to Ascend, the Airclaims Group Limited, its subsidiaries, their officers, or employees in respect of any error or omission that may have occurred.

For further information:

Email: peter.morris@ascendworldwide.com