Innovation & Cost Leadership, 15. November 2004 © 1 Innovation & Cost Leadership Wolfgang Kurth 15. November 2004

1Innovation & Cost Leadership, 15. November 2004 www.advolar.com ©

Innovation & Cost Leadership

Wolfgang Kurth15. November 2004


Trends In The Aviation Industry

Low-cost Carriers

Characteristics Of The Low-cost Business Strategy Of Airlines

Low-cost Business Strategies In Other Trades

Summary

Agenda


Business EnvironmentV

OLU

ME/G

DP

TIME

Africa

Asia

Middle East

Latin America

BEGINNINGSTAGE

TRANSITION RAPID GROWTHSTAGE

TRANSITION

U.S. andEurope

MATURESTAGE

GDP

Volume


Growth rates are declining ( GDP > Yield)Source: A. Sentance, Airline Business June 2000, R. Doganis, Airlines

International, May-June 2001)

US domestic market growth - 1980s vs 1990s

Avera

ge a

nnual gro

wth

(%

)

-4-3-2-10123456

1980s 1990s

Passenger trafficEconomy (GDP)

Real revenueReal yield

Growth Rates Are Declining


95

100

105

110

115

120

125

130

135

91 92 93 94 95 96 97 98 99 00 01

Index (

19

91

=1

00

)

Airline (Yield) Consumer (CPI)

Airline yields have not kept pace with inflation

Airline Prices vs Consumer Prices


5,0

6,0

7,0

8,0

9,0

10,0

11,0

12,0

13,0

70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00

Yie

ld (

cen

t/R

PK

)

Note: Yields on international scheduled services deflated by US consumer priceSource: ICAO, updated by BA estimates in Airline Business July 2001

Yield Trend

Real international yields - real decline

01 02 03


US airlines,. Source: The Airline Monitor in Air Transport World February 2002

57,00

59,00

61,00

63,00

65,00

67,00

69,00

71,00

73,00

90 92 94 96 98 00

Load

fact

or

in %

Utilisation Load factor (%)

8,1

8,4

8,7

9,0

9,3

9,6

9,9

10,1

10,4

Blo

ck h

ou

rs p

er

day (

ap

pro

x..)

Utilisation & Load Factor Trends

Utilisation & Load factor, US airlines


67,0

69,370,3

70,9 71,1

72,4

70,0

72,3

64,9

66,8

65,766,6 66,5

70,4

77,4

75,0

65,0

70,0

75,0

80,0

1995 1996 1997 1998 1999 2000 2001 2002F

Pass

enger

Load F

act

or

(%)

Actual Breakeven

Low prices and high costs mean carriers must fillmore seats to avoid losses

Breakeven Passenger Load Factor at Record Highs


Airline Cost Overview:Externally & Internally Driven Costs

11

15

12

12

55

AircraftleasingFuel

Groundservices

MaintenaceLandingcharges

Air trafficControl

60%

20

8

66

40%

PersonnelSales &Marketing

Inflight G & A

Externally driven items

Source: Roland Berger

External

Internal


Crew

Fuel

Maintenance

Ownership

Typical Airline Cost Split


Net reduction objective

Operations

Capital

Operations

Capital

Classic fleet Next Generation

Present value of costs per seat

Offset Higher Capital Cost with Lower Operating Cost


Aircraft (Sticker) pricesEstimate early 2002

0,30 0,29 0,280,32 0,31

0,34 0,34 0,32

0,00

0,10

0,20

0,30

0,40

737-800(184)

737-900X(205)

A321 (216) 757-200(217)

757-300(256)

767-300(324)

767-4ER(375)

A330-200(375)

Seat

pri

ve in

(m

) U

S$

0

100000

200000

300000

400000

500000

600000

MTO

W in

lb

s

Seat price MAX. TOW

Aircraft Prices


0,4

0,6

0,8

1

1,2

1,4

1,6

1,8

1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000

Airplane Price per Seat Yield per Pax Mile

Index

1994 Constant Dollars

Yield Per Passenger vs Price Per Seat


Dir

ect

Op

era

tin

g C

osts

(%

)

Price Increase (%)

0

1

2

3

4

5

6

0 5 10 15 20

300 Seater

150 Seater

DOC Sensitivity vs Price Increases


0,0 5,0 10,0 15,0 20,0 25,0

300 Seater

150 Seater

MAINTENANCEMATERIAL

MAINTENANCELABOUR

MTOW

FUEL

% Improvement Needed to Get a 1% Cash Cost Decrease


Today 1 year

3/4 years 10/15 years

Short term

Medium term

Long term

Very limited

Fair

Increased flexibility

Fair to uncertain

Very large uncertainty

Large flexibility

Today

Adaptability of the means and resources

Predictability of market and environment

Strategic planning

The Perspective of Time


Agenda


Low-cost Carriers



Summary


For what reason would you fly more often?

Today's Demand Is Triggered By Low Fares

11%11%

8%

41%

8%6%

17%

0%

10%

20%

30%

40%

50%

upgrades schedule safetyground

low fares more FFP´s

safetyboard

others

Source: IATA Online Survey 2003


Market Share Of LCCs

75

60

20

15

25

5

2000 2010

LCCs

Charter

Network Carriers

LCCs will have a market share of about 25% in Europe in 2010

Quelle: Mercer Management Consultants 2003


Impressive Growth Of LCCs Within Europe

PAX numbers of European LCCs

Source: Analystenreports, Unternehmensinformationen, Monitor Group Analysis

PAX(m)

Avg. growth p.a. 46 %

13 1724

3947

90

0

10

2030

40

50

60

7080

90

100

1999 2000 2001 2002 2003 2004E


Growth Generated By ‘New’ Passengers (Germany 2004)

59%

37%100%4%

0%

25%

50%

75%

100%

Newpassengers

Shift withinairlinemarket

No details Total

71%

15%

6%

8% 100%

0%

25%

50%

75%

100%

Otherwisewould not

havetravelled

Otherwiseby car

Otherwiseby rail

Others Total

Classification of low-cost passengers Classification of “new” passengers

Source: NFO Infratest, 2002; Monitor Group Analysis


LCC Routes 2001

Caption:

Ryanair

easyjet

Volareweb

bmi Baby

Hapag-Lloyd Express

Germanwings

Sterling

Skyeurope

jet2


LCC Routes 2002

Caption:

Ryanair

easyjet

Volareweb

bmi Baby

Hapag-Lloyd Express

Germanwings

Sterling

Skyeurope

jet2


LCC Routes 2003

Caption:

Ryanair

easyjet

Volareweb

bmi Baby

Hapag-Lloyd Express

Germanwings

Sterling

Skyeurope

jet2


LCC Routes 2004

Caption:

Ryanair

easyjet

Volareweb

bmi Baby

Hapag-Lloyd Express

Germanwings

Sterling

Skyeurope

jet2


Caption:

Ryanair

easyjet

Volareweb

bmi Baby

Hapag-Lloyd Express

Germanwings

Sterling

Skyeurope

jet2

LCC In Touristic Destinations Example: Spain 2002


Caption:

Ryanair

easyjet

Volareweb

bmi Baby

Hapag-Lloyd Express

Germanwings

Sterling

Skyeurope

jet2



Caption:

Ryanair

easyjet

Volareweb

bmi Baby

Hapag-Lloyd Express

Germanwings

Sterling

Skyeurope

jet2



Market Share Of LCCs In The European Union

Source: aviasolutions, May 2004


18 LCCs in Germany vs. 2 in 2002.

65 LCCs in Europe vs. 5 in 2000.

In 2003 German airports reported a

growth of low-cost passengers of

112% making a total of 14 million

passengers.

Consolidation has started;

remaining carriers have to grow to

cover marketes.

Increasing Competition Between LCCs

Norwegian


Positioning Of LCCs

Short-haul routes

Long-haul routes

Non-businesspassengers

Price-conscious business

passengers

Quality-conscious business

passengers

Network carrier

Regionalairlines

Charter

LCCs

Source: Mercer Management Consultants 2003


Agenda


Low-cost Carriers



Summary

Documents

Innovation & Cost Leadership, 15. November 2004 © 1 Innovation & Cost Leadership Wolfgang Kurth 15. November 2004