Low Cost Carrier Market

Drew Magill

Director
Future Market

Boeing
Commercial
Airplanes

April 2004
 Agenda

Global 1. LCC Model Is Sustainable

Perspectives

Business Model
2. LCC model driven by passenger needs
for better service, lower costs
Market
Enablers 3. …enabled by an environment of free
competition via open, liberalized markets
Long Term
Outlook

Preferred
Airplane

Summary
 Low Cost Carriers: Thirty Years
of Innovation

VIRGIN
EXPRESS
Eurobelgian
Airlines (EBA)

Go
VOZ
EZY 737-
Nok Air Takes 700s-
over 800s
Go
ASW Air Do
Thai Air Asia GO 737- Skymark
737-
300s GOL 300s Thai AirAsia
Pacific Blue CEB 737- BMA
DC9s 700s 737-
Pacific Blue
Freedom Air
Virgin Intl.
Express 757s AAT 300-
737- 500 EZY One-Two-Go
takes CQT
CQT Lion Air
over EBA DC9s
DC9s 800s 737-
jetBlue 700s Sky Asia
FRO Ted
SWA SWA RYR EBA 737 EZY WJI SWA RYR WJI CQT CQT
737- 737- Song
737- 737- -200/ 737- 737- 737- 737- CQT
CQT 737- 737-
737-
200 300 AAT 200 300 -300 300s 200 700s 800 717s717s 700s 700s
700s

1970’s 1980’s 1990’s 2000’s

 Low Cost Carriers In 2000
Flights Per Week: 28,640

Europe
Flights/week: 4,150
N. America
Miles/flight: 490
Flights/week: 23,800
Miles/flight: 540

Asia
Flights/week: 555
Miles/flight: 390

Oceania
Flights/week: 136
Miles/flight: 590
 Low Cost Carriers In 2003
Flights Per Week: 42,490 +50%

Europe
Flights/week: 10,060 +140%
N. America
Miles/flight: 520 +7%
Flights/week: 30,100 +27%
Miles/flight: 643 +18%

Asia
Flights/week: 990 +78%
Miles/flight: 470 +20%

Oceania
Flights/week: 1,340 +885%
Miles/flight: 700 +20%
Passengers Drive Airline Strategies
 Airlines Are Giving Passengers What
They Want – More Frequencies And
Nonstops

Index 1980=100 Air Travel

300 Growth

275

250
Frequency
Passengers 225 Growth
prefer more
nonstops and 200 Nonstop
more frequency
Markets
175
choices
150

125 Average
Airplane Size
100

75
1980 1985 1990 1995 2000 2003
 …And Lower Fares

Yield Trends

Real Yields (adjusted for inflation)

25

In real dollar 20
terms the price
of air travel
decreases over
time 15

10
1983 1987 1991 1995 1999 2002
 …Which Results In Fewer
Complaints And Increasing
Market Share
•Direct flights
Low Cost
Carrier
•Fewer delays

Short Haul
•Multiple
Carrier
frequencies

Global
•Lower and
Network
consistent
Carrier
pricing

0 0.2 0.4 0.6 0.8 1

•Note: US Market.
Europe / Asia model Passenger Complaints / 100,000
evolving.

Air Travel Consumer Report, January – December, 2003

 Agenda

Global
Perspectives

Business Model

Market
Characteristics

Long Term
Outlook

Preferred
Airplane

Summary
 Low Cost Carrier Business Model

Disciplined Stay with the plan

execution and Relentless pursuit to reduce cost/complexity
focus Hands on management
Instilled corporate culture

Significant Distribution
cost Product
differential Operational
− Utilization
− Point to Point
− Secondary Airports
− Demand stimulation: Europe/Asia
Low overhead
Brand Simple value proposition
awareness Consistently setting and meeting expectations
and presence
 Unit Cost Advantage Is Derived
From Many Factors

Unit costs
High Labor ($ / ASK)
Productivity
>>NOT “cheap” labor 35%
to
50%
High Airplane
Utilization
>>NOT “cheap” airplanes

Network Distribution Product OperationalOverhead Low

carriers Direct sales design Airport Cost
No CRS Seat density charges Carrier
No One class Crew costs
commission No catering Aircraft
No FFP utilization
Single Fleet
 High Airplane Utilization And Crew
Productivity Is Essential

More Flights

On-time,
Reliable
Service

Fewer Aircraft
/ Other Assets
Needed
Internal Business Culture Drives High
Productivity
 Agenda

Global
Perspectives

Business Model

Market
Enablers

Long Term
Outlook

Preferred
Airplane

Summary
Key Low Cost Market Characteristics

• Ability to compete: open

liberalized/liberalizing markets

• 30% to 35% lower fares /

lower cost opportunity

• Sizeable and balanced traffic flows

• Underserved markets
 LCC Are At Different Stages Of Maturity

80%
Early Deregulation Australia
Numerous Opportunities
70%
SE Asia
60%

Growth Rate ('03)

50%
Liberalization
40% Continues
Europe
30%

20%

10% Head to Head

NE Asia N America
0%
0% 5% 10% 15% 20% 25% 30%
Market Penetration
 Air Travel Markets Have Unique
Characteristics
North America
• U.S. Deregulation 1978
• Canadian deregulation
complete in 1988
• 1/6 population density of
Europe
• U.S. & Canadian
population centers are on
opposite sides of the
continent
• Majority of Canadian
population lives within 100
miles of the U.S. border
• Airspace and airports
relatively open
• Rail is a minor competitor;
autos compete for short
distances
• No loyalty to flag carriers
(just $ and ff miles)
• Very little charter
• Price transparency
Europe
• Deregulation staged: 1997
• 20% population & 24% GDP in
7% of territory
• Congested airspace and
airports
• High speed subsidized rail
is a direct competitor
Rail is a minor competitor;
autos compete for short
distances
• Lingering loyalty to national
carriers: link to culture
• Vertically-integrated charter
• Prices becoming transparent
• Single currency adopted
• More leisure time
Asia Pacific
• Various stages of regulated
markets and government.
ownership/influence.
• Large geographic dispersion
of population centers
• Significant portion of travel
requires flying
• Underutilized regional
Airports
• Except for Japan, less
competition from other
transportation modes
• Mixed loyalty at most
national carriers
• Very little charter
• Closely held pricing,
generally
• Generally low but rising
average income levels in
many countries
 North American Low Cost Carriers

Southwest North America

supplies two- Southwest
thirds of
available AirTran

seats in North
ATA
America LCC
market WestJet

jetBlue

Frontier

Spirit

0 1,000,000 2,000,000 3,000,000

Scheduled Available Seats per Week

Aug-03 OAG
 Air Travel Markets Have Unique
Characteristics

North
UnitedAmerica
States Europe Asia Pacific
• •Deregulation
U.S. Deregulation
1978 1978 • Deregulation staged: 1997 • Various stages of regulated
• Canadian deregulation markets and government.
complete in 1988 ownership/influence.
• 1/6 population density of • 20% population & 24% GDP in • Large geographic dispersion
•Europe
1/6 population density of 7% of territory of population centers
Europe centers are on
• Population • Congested airspace and • Significant portion of travel
•opposite
U.S. & Canadian
coasts airports requires flying
population
• Airspace andcenters
airportsare on
• High speed subsidized rail
opposite sides
relatively open of the
is a direct competitor • Underutilized regional
continent
• Rail is a minor competitor; Rail is a minor competitor; Airports
•autos
Majority of Canadian
compete for short autos compete for short
population lives within 100
distances distances
miles of the U.S. border • Except for Japan, less
competition from other
• •No loyalty and
Airspace to flag carriers
airports • Lingering loyalty to national transportation modes
(just $ and open
relatively ff miles) carriers: link to culture
• Mixed loyalty at most
• •Very
Rail little chartercompetitor;
is a minor • Vertically-integrated charter national carriers
autostransparency
• Price compete for short • Prices becoming transparent • Very little charter
distances • Single currency adopted • Closely held pricing,
• No loyalty to flag carriers • More leisure time generally
(just $ and ff miles) • Generally low but rising
• Very little charter average income levels in
• Price transparency many countries
 There Are Two Major Competitors
In Europe

Ryanair and Ryanair

easyJet have
accelerated
growth using easyJet

acquisitions
and large Air One
numbers of
airplanes Europe
DBA

Ryanair has
the largest BMIBaby
market
presence Virgin Express
with 20%
more 0 100,000 200,000 300,000 400,000 500,000
available
seats Scheduled Available Seats per Week

Aug-03 OAG
The European Arena Is Crowded With
Low Cost Entrants

lite
Wizz Air
SmartWings AIR POLONIA
 Low Cost Carriers Have Differing
Market Strategies

Pure Low Cost

Carriers Optional
• Year round business:
traffic hot meals,
Business
• Independent lounges,
Branding
travelers papers
• Balanced Branded
directional flows meals
• Grow the market Main
• Single airplane Cost Airports
type Low-Fares
High-Frequency

Hybrid Models
• Mix of business
and leisure
• A la carte
services
• Compete in
some charter amenities
markets
 Air Travel Markets Have Unique
Characteristics
North America
• U.S. Deregulation 1978
• Canadian deregulation
complete in 1988
• 1/6 population density of
Europe
• U.S. & Canadian
population centers are on
opposite sides of the
continent
• Majority of Canadian
population lives within 100
miles of the U.S. border
• Airspace and airports
relatively open
• Rail is a minor competitor;
autos compete for short
distances
• No loyalty to flag carriers
(just $ and ff miles)
• Very little charter
• Price transparency
Europe
• Deregulation staged: 1997
• 20% population & 24% GDP in
7% of territory
• Congested airspace and
airports
• High speed subsidized rail
is a direct competitor
Rail is a minor competitor;
autos compete for short
distances
• Lingering loyalty to national
carriers: link to culture
• Vertically-integrated charter
• Prices becoming transparent
• Single currency adopted
• More leisure time
Asia Pacific
• Various stages of regulated
markets and government.
ownership/influence.
• Large geographic dispersion
of population centers
• Significant portion of travel
requires flying
• Underutilized regional
Airports
• Except for Japan, less
competition from other
transportation modes
• Mixed loyalty at most
national carriers
• Very little charter
• Closely held pricing,
generally
• Generally low but rising
average income levels in
many countries
 In 2003, There Were Few Competitors

Virgin Blue Virgin Blue

and AirAsia
have
recently Cebu Pacific
expanded
to regional
operations AirAsia * Asia and Australia/NZ
Air Do

Skymark

0 50,000 100,000 150,000 200,000

Scheduled Available Seats per Week

Aug-03 OAG * Estimated

Many New LCCs Are Emerging In Asia

Thai AirAsia

Tiger Airways
Tony Fernandes
Chief Executive Officer, AirAsia

“Our aim is to fly to every

airport in Malaysia that can
handle a Boeing 737
aircraft.”
Brett Godfrey
Chief Executive Officer, Virgin Blue

"And they’ve come

because they’ve wanted to
work in a company that’s a
little bit different."
 737 - Airplane Of Choice For LCC Market

Global
Perspectives

Business Model

Market
Characteristics

Long Term
Outlook

Preferred
Airplane

Summary
Low Cost Carriers Will Account
For A Significant Portion Of
Delivery Demand

Smaller regional jets

Single-aisle

Twin-aisle
747 and larger

$1.9T
Dollars

24,300
Units
 Low Cost Carriers Will Account
For A Significant Portion Of
Delivery Demand

Smaller regional jets

Single-aisle
Single-aisle LCC
Twin-aisle
747 and larger

7%
Of Addressable
Delivery Dollars

10%
Of $1.9T
Addressable Dollars
Units
24,300
Units
 Low Cost Carriers Are Here To Stay

LCC Model Is
Sustainable

LCC growth
driven by
passenger
preference for
better service
(more non stops,
more freq) AND
lower costs

LCC emergence
is enabled by free
competition in an
open, liberalizing
environment