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Air Scoop March 2008

Air Scoop March 2008

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Air Scoop provides market analysis on the European Low-cost carriers market.
Air Scoop provides market analysis on the European Low-cost carriers market.

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Published by: airscoop on Oct 28, 2009
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EDITORIAL
Highlights in this Issue
Interview of Raphael Bejar (CEO of AirSavings)
p. 2
Ryanair is Paying for Being Unhedged
p. 3
French Government Support LCCs Challengers?
p. 5
SWOT Analysis of French Low Cost Carrier Market
p. 6
Comparing Airport Subsidies in Europe and the US
p. 13
Air Scoop - March 2008
www.air-scoop.com
The Low Cost Carriers Analysis Newsletter 
Oil Prices, High Loss... Bloodbath?
O
il, Loss and Blood… These words could be the motto of this month. According to easyJet, “the biggest danger facing the airline industry is the global oil price”. Same forecast forcompetitor Ryanair which expects another round of fuel surchargeincreases. Indeed, starting 1st of April 2008, the carrier will have nofuel hedged which means it remains unprotected from rising prices
(p. 3). Furthermore, Ryanair is now getting more prot from ancillary
revenues continuously increasing prices of add-ons and services (p.12). Therefore, some analysts believe that decline in passenger yields,fall in fares (by 4.4%) and rise in ancillary revenues (by 30%) alarm of the strategy failure.In our last issue, we analyzed the consequences of the slowdown of European LCCs Industry (Read Air Scoop February 2008). Some car-
riers are in great difculties, and among them we nd Vueling (Vueling 
reported a sharp widening in full-year net loss to €63.2 million ($93.7million), nearly six times worse than the €10.8 million loss posted in2006), SkyEurope (SkyEurope has been forced to sell two Boeing 737-700s before they were due for delivery, and admits it failed to comply
with nancial conditions attached to half of the 737-700s it has on
lease from GECAS.), but also CentralWings (CentralWings is close tobankruptcy with a loss a loss of 73 million zlotys in 2007 comparedwith 65 million in the previous year) and clickair (JPMorgan estima-
tes clickair Loss up to 100 million euros). These nancial difcultiescould nally lead to the famous “bloodbath” many times announced
by Michael O’Leary…French Connect 2008 will be take place this year in Courchevel the9th to 11th of April. Air Scoop is sponsor of this event, and will releasefor the French Connect a Special issue. French civil aviation market islargely dominated by Air France. The legacy carrier is backed by thegovernment, so it was a big surprise to notice the presence of a go-vernment representative at easyJet’s little ceremony to launch its newbase at Paris-Charles de Gaulle, France’s biggest airport (p. 5). For its10th SWOT, we have realized a SWOT on French Low-Cost Carriers
market (p. 6) with its own specicities, difculties and challenges. Fi
-nally, subsidies to LCCs is a big issue nowadays (The European Com-mission recently said it was investigating an agreement on Irish low-cost carrier Ryanair’s use of Slovakia’s Bratislava airport on suspicionit may contain illegal state aid), especially in France (The EuropeanCommission has launched a state aid probe into the use by Ryanair of Pau airport, and would in particular examine a contract with the Pau-Bearn Chamber of Commerce, which operates the airport, that setsout the conditions for Ryanair’s use of the transport facility). In orderto better understand airports subsidies, we have realized a comparisonbetween Europe and the US (p. 13).
 AIR SCOOP ANNOUNCEMENTSA Glimpse of Headlines News!
EU probes Bratislava Ryanair deal 
The European Commission says it has laun-ched a formal investigation into an agree-ment between Bratislava Airport and Ryanair.This follows a complaint which alleged that theairport offers Ryanair reduced airport charges
for existing destinations and new scheduled i
-ghts. The commission says the discounts couldbe up to 31% for existing destinations and 48%for new services.
EasyJet fears damage to airlines from rising oil price 
The biggest danger facing the airline industryis the global oil price, easyJet warned today,after it released strong passenger numbers.The no-frills carrier said the passenger load fac-
tor, or proportion of seats sold per ight, was
84.6% in February compared with 82.8% forthe same month last year. Passenger numbers,driven by the airline’s acquisition of more jets,rose by nearly a quarter to 3.2 million.
A revolution in the skies... a disaster for the  planet 
Cheap ights. More ights. Multiplying routes.
At the end of a week that has seen protestsagainst airport expansion, predictions of furtherairport chaos, and record oil prices, British tra-vellers are showing no sign of shaking off their
addiction to CO2-heavy cheap ights.
More on
http://airscoop.blogspot.com 
 
BIRD’S EYE VIEW
Air Scoop - March 2008
www.air-scoop.com
2
Could you please present Airsavings to our readers? 
Airsavings is a 7 year-old company that started as a GroupBuying Service for LCCs and evolved into a leading playerin the supply of Ancillary Services to the airline indus-try. Airsavings leveraged its purchasing know-how withits IT capabilities in order to bring to the airlines bettermargins, better technology (with REAL Dynamic Packa-ging), higher speed to market (because an airline wantsto earn money in weeks, not in months), and more in-novation, because airlines want to enlarge their scope of activities when it comes to ancillary services. Airsavingshas also been acting as a kind of “think tank” with its cus-tomers, often taking the investments on its shoulder when
launching new ancillary services, which ultimately benet
the entire industry as a result.
How do you analyze current situation of ancillary reve- nues for European low-cost carriers? 
The development of ancillary revenues is an increasinglyimportant part of the European LCC model, which hasand will continue to evolve at a very high speed. Around
3 years ago, we created a team dedicated specically tothis emerging eld. And in these 3 years, we have migra
-ted from the single “micro-site” selling these services (the1.0 version), to Dynamic Packaging (version 2.0). Now,we have started running the 3.0 version, which is the Dy-namic Packaging associated with a Loyalty Scheme thathelps passengers buy more valuable services, and to getcompensated for doing so. This version is obviously anaccelerator of net income to the airline.
How do you evaluate the part of ancillary revenues in LCCs? 
Well, it is dependent on the type of airline. Many of themare still relying on the suppliers they have chosen fromyears ago; they still do not have the right margin or theright “dynamic packaging technology”. Notwithstanding,because of their deep-seated fear to break a model (whichdoesn’t work anyhow), these airlines are lacking in realancillary income. Then there is another type of carrier,who is willing to make money….and fast. This group isfar more pro-active, they are willing to outsource part of this activity (ancillary revenue creation) as they know it
is the shortest way to protability and to stay on the top
with more innovative services available to their custo-mers. Once you have implemented the big 3, i.e., insu-rance, hotels and car hire in a Dynamically Packaged way,
you have to nd other services. And this is very often
where we get brought into the picture.
How do you believe it will evolve? 
I believe ancillaries will eventually evolve into the Ama-zon model of purchasing. Amazon started by selling booksover the Internet. After seeing the sheer volume of traf-
c coming to the site, it started selling CDs, then DVDs,
MP3s and so on until the site become a marketplace for just about anything. Today, Amazon even sells fresh foodsin certain areas. This is what, I believe, could be the evo-lution for ancillary revenues in the airline industry. Anairline that captures more than 70 % of its sales throughthe internet has become, quite simply, an e-commercebusiness. And in doing so, the airline has to act in that ca-pacity as well, meaning it has to be creative, reactive, andready to test new products and services which will meetwith its customers’ needs.
By always looking for more ancillary revenues to com-  pensate ticket prices, there could be an imbalance.Could it be a danger for LCCs if they don’t manage this issue well enough? 
Hmm, as I said just above, their own clients will showthem if there is an imbalance. However, as long as theairline sells services which could satisfy their clients, whyshould the airline not to do it?
What could be the next generation of ancillary revenues  for the European LCCs? 
A service that will reward customer loyalty at every stepof the purchase path.Recently, the consumer watchdog group Holiday Which?released a report criticizing low-cost carriers for levying anincreasing number of charges on consumers and requi¬ring travelers to jump through numerous hoops to avoid anyadditional fees (read Air Scoop February 2008). By alwayslooking after “extra revenues”, could LCCs lose at mid-term some customers that mostly see “hidden charges”?Consumers have different choices…. They could go witha Legacy carrier where all the charges are hidden in theticket price. Or choose an LCC where they know whatthey are paying for. The key is transparency; then let theconsumer choose.
Raphael Bejar 
(CEO of 
AirSavings 
 )
Interview of Raphael Bejar(CEO of AirSavings)
 
BIRD’S EYE VIEW
Air Scoop - March 2008
www.air-scoop.com
3
After the long-awaited third-quarter prot announce
-ment, Ryanair shares drooped by 15 percent, or 55 cents,and stood at 3.05 Euros which indicated the largest fallsince January 2004. Additionally, Ryanair reported that its
prots could fall as much as 50% by March 2009. The car
-rier said it expected to be affected by a general downturnin the industry caused by low demand, high fuel pricesand weak European economy.Regardless these very loud alarm bells, analysts still adviseto ‘buy’ rather than to ‘sell’. On the one hand, they seem
to be condent about the entire business model and see
Ryanair as the best positioned LCC in the market whichhas repeatedly beaten its own gloomy forecasts. Whatmight disappoint stakeholders is that Ryanair is now get-
ting more prot from ancillary revenues continuously
increasing prices of add-ons and services. Some analystsbelieve that decline in passenger yields, fall in fares (by4.4%) and rise in ancillary revenues (by 30%) alarm of thestrategy failure. On the other hand, it is not only real pro-
ts and nancial results that inuence the stock exchange
but some good PR moves as well. Commenting on the
nancial situation in the third quarter and in the coming scal year, Michael O’Leary said that not only was he not
disappointed with losses but welcomed a recession in theindustry which would hopefully sweep the weaker rivalsaway. Following this positive comment, Ryanair shares
recovered and nally closed down 11 cents only, or 2.9
percent.Anyway, the most promising scenarios still see a big drop
in Ryanair’s prots in the coming year. Starting 1 April
2008 the carrier will have no fuel hedged which meansit remains unprotected from rising prices. Having hedgedfuel until the end of March 2008 Ryanair locked its priceat around $65 per barrel. Fuel expenses constitute morethan 30 percent of the carrier’s costs which means thatevery additional 1 Euro will result in an extra €15 million.With oil now hitting $100 per barrel, the Irish low-cost isrisking to spend extra $35 a barrel. However, Ryanair stays
condent about the oil market and is intending to hedge
in case prices fall below $80 per barrel.O’Leary is probably sure about the positive outcome of the recession as he is committed to buying 100 additional
aircraft which will basically double the eet. He seems to
be more inspired by the 21 percent increase in passenger
numbers than the 27 percent fall in prots. Whilst the
competitors are becoming more modest about growthplans, Ryanair is planning to open new routes and addnew bases going on with its excessive expansion. Howe-ver, given the future major slowdown which has beenpredicted by O’Leary himself and raised fees for various
services, Ryanair might indeed struggle to ll its seats. If 
only a ‘perfect storm’ of the recession does not remove allthe competitors.
Ryanair is Paying for Being Unhedged
What is your opinion on the analysis of ABN Amro,co-authored by Andrew Lobbenberg, published in July 2007? In the report, ABN argues that ancillary revenues can be divided into ‘genuine’ ancillaries and ‘hidden  fares’. It says: ‘Genuine ancillaries are those that earn revenue from offering the customer a useful service or  product related to air travel, and hidden fare increases are new charges introduced for something which was  previously free.
Yes , I rather agree with this report. It is true that someairlines have been creating confusion between extra char-ges, and genuine ancillaries. But we are in a free marketsituation; passengers have become much more educatedabout air travel in recent years and know where they couldbe misleaded. In this era of Web 2.0 and social media andrecommendation sites playing a bigger role in the exchangeof consumer information, there is no doubt that these “to-ols” will help towards sanctioning such behaviors.

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