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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
The Low Cost Carriers Analysis Newsletter

EDITORIAL AIR SCOOP ANNOUNCEMENTS


Oil Prices, High Loss... Bloodbath? A Glimpse of Headlines News!

O
il, Loss and Blood… These words could be the motto of EU probes Bratislava Ryanair deal
this month. According to easyJet, “the biggest danger facing The European Commission says it has laun-
the airline industry is the global oil price”. Same forecast for ched a formal investigation into an agree-
competitor Ryanair which expects another round of fuel surcharge ment between Bratislava Airport and Ryanair.
increases. Indeed, starting 1st of April 2008, the carrier will have no This follows a complaint which alleged that the
fuel hedged which means it remains unprotected from rising prices airport offers Ryanair reduced airport charges
(p. 3). Furthermore, Ryanair is now getting more profit from ancillary for existing destinations and new scheduled fli-
revenues continuously increasing prices of add-ons and services (p. ghts. The commission says the discounts could
12). Therefore, some analysts believe that decline in passenger yields, be up to 31% for existing destinations and 48%
fall in fares (by 4.4%) and rise in ancillary revenues (by 30%) alarm of for new services.
the strategy failure.
In our last issue, we analyzed the consequences of the slowdown of EasyJet fears damage to airlines from rising
European LCCs Industry (Read Air Scoop February 2008). Some car- oil price
riers are in great difficulties, and among them we find Vueling (Vueling The biggest danger facing the airline industry
reported a sharp widening in full-year net loss to €63.2 million ($93.7 is the global oil price, easyJet warned today,
million), nearly six times worse than the €10.8 million loss posted in after it released strong passenger numbers.
2006), SkyEurope (SkyEurope has been forced to sell two Boeing 737- The no-frills carrier said the passenger load fac-
700s before they were due for delivery, and admits it failed to comply tor, or proportion of seats sold per flight, was
with financial conditions attached to half of the 737-700s it has on 84.6% in February compared with 82.8% for
lease from GECAS.), but also CentralWings (CentralWings is close to the same month last year. Passenger numbers,
bankruptcy with a loss a loss of 73 million zlotys in 2007 compared driven by the airline’s acquisition of more jets,
with 65 million in the previous year) and clickair (JPMorgan estima- rose by nearly a quarter to 3.2 million.
tes clickair Loss up to 100 million euros). These financial difficulties
could finally lead to the famous “bloodbath” many times announced A revolution in the skies... a disaster for the
by Michael O’Leary… planet
French Connect 2008 will be take place this year in Courchevel the Cheap flights. More flights. Multiplying routes.
9th to 11th of April. Air Scoop is sponsor of this event, and will release At the end of a week that has seen protests
for the French Connect a Special issue. French civil aviation market is against airport expansion, predictions of further
largely dominated by Air France. The legacy carrier is backed by the airport chaos, and record oil prices, British tra-
government, so it was a big surprise to notice the presence of a go- vellers are showing no sign of shaking off their
vernment representative at easyJet’s little ceremony to launch its new addiction to CO2-heavy cheap flights.
base at Paris-Charles de Gaulle, France’s biggest airport (p. 5). For its
10th SWOT, we have realized a SWOT on French Low-Cost Carriers
market (p. 6) with its own specificities, difficulties 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 suspicion
it may contain illegal state aid), especially in France (The European
Commission 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 sets
out the conditions for Ryanair’s use of the transport facility). In order
to better understand airports subsidies, we have realized a comparison
between Europe and the US (p. 13). More on http://airscoop.blogspot.com

Air Scoop - March 2008 www.air-scoop.com


BIRD’S EYE VIEW
Interview of Raphael Bejar
(CEO of AirSavings)
Raphael Bejar
(CEO of AirSavings)

Could you please present Airsavings to our readers? rance, hotels and car hire in a Dynamically Packaged way,
Airsavings is a 7 year-old company that started as a Group you have to find other services. And this is very often
Buying Service for LCCs and evolved into a leading player where we get brought into the picture.
in the supply of Ancillary Services to the airline indus-
try. Airsavings leveraged its purchasing know-how with How do you believe it will evolve?
its IT capabilities in order to bring to the airlines better I believe ancillaries will eventually evolve into the Ama-
margins, better technology (with REAL Dynamic Packa- zon model of purchasing. Amazon started by selling books
ging), higher speed to market (because an airline wants over the Internet. After seeing the sheer volume of traf-
to earn money in weeks, not in months), and more in- fic coming to the site, it started selling CDs, then DVDs,
novation, because airlines want to enlarge their scope of MP3s and so on until the site become a marketplace for
activities when it comes to ancillary services. Airsavings just about anything. Today, Amazon even sells fresh foods
has also been acting as a kind of “think tank” with its cus- in certain areas. This is what, I believe, could be the evo-
tomers, often taking the investments on its shoulder when lution for ancillary revenues in the airline industry. An
launching new ancillary services, which ultimately benefit airline that captures more than 70 % of its sales through
the entire industry as a result. the internet has become, quite simply, an e-commerce
business. And in doing so, the airline has to act in that ca-
How do you analyze current situation of ancillary reve- pacity as well, meaning it has to be creative, reactive, and
nues for European low-cost carriers? ready to test new products and services which will meet
The development of ancillary revenues is an increasingly with its customers’ needs.
important part of the European LCC model, which has
and will continue to evolve at a very high speed. Around By always looking for more ancillary revenues to com-
3 years ago, we created a team dedicated specifically to pensate ticket prices, there could be an imbalance.
this emerging field. And in these 3 years, we have migra- Could it be a danger for LCCs if they don’t manage this
ted from the single “micro-site” selling these services (the issue well enough?
1.0 version), to Dynamic Packaging (version 2.0). Now, Hmm, as I said just above, their own clients will show
we have started running the 3.0 version, which is the Dy- them if there is an imbalance. However, as long as the
namic Packaging associated with a Loyalty Scheme that airline sells services which could satisfy their clients, why
helps passengers buy more valuable services, and to get should the airline not to do it?
compensated for doing so. This version is obviously an
accelerator of net income to the airline. What could be the next generation of ancillary revenues
for the European LCCs?
How do you evaluate the part of ancillary revenues in A service that will reward customer loyalty at every step
LCCs? of the purchase path.
Well, it is dependent on the type of airline. Many of them
are still relying on the suppliers they have chosen from Recently, the consumer watchdog group Holiday Which?
years ago; they still do not have the right margin or the released a report criticizing low-cost carriers for levying an
right “dynamic packaging technology”. Notwithstanding, increasing number of charges on consumers and requi¬ring
because of their deep-seated fear to break a model (which travelers to jump through numerous hoops to avoid any
doesn’t work anyhow), these airlines are lacking in real additional fees (read Air Scoop February 2008). By always
ancillary income. Then there is another type of carrier, looking after “extra revenues”, could LCCs lose at mid-
who is willing to make money….and fast. This group is term some customers that mostly see “hidden charges”?
far more pro-active, they are willing to outsource part of Consumers have different choices…. They could go with
this activity (ancillary revenue creation) as they know it a Legacy carrier where all the charges are hidden in the
is the shortest way to profitability and to stay on the top ticket price. Or choose an LCC where they know what
with more innovative services available to their custo- they are paying for. The key is transparency; then let the
mers. Once you have implemented the big 3, i.e., insu- consumer choose.

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BIRD’S EYE VIEW
What is your opinion on the analysis of ABN Amro, ges, and genuine ancillaries. But we are in a free market
co-authored by Andrew Lobbenberg, published in July situation; passengers have become much more educated
2007? In the report, ABN argues that ancillary revenues about air travel in recent years and know where they could
can be divided into ‘genuine’ ancillaries and ‘hidden be misleaded. In this era of Web 2.0 and social media and
fares’. It says: ‘Genuine ancillaries are those that earn recommendation sites playing a bigger role in the exchange
revenue from offering the customer a useful service or of consumer information, there is no doubt that these “to-
product related to air travel, and hidden fare increases ols” will help towards sanctioning such behaviors.
are new charges introduced for something which was
previously free.

Yes , I rather agree with this report. It is true that some


airlines have been creating confusion between extra char-

Ryanair is Paying for Being Unhedged


After the long-awaited third-quarter profit announce- than 30 percent of the carrier’s costs which means that
ment, Ryanair shares drooped by 15 percent, or 55 cents, every additional 1 Euro will result in an extra €15 million.
and stood at 3.05 Euros which indicated the largest fall With oil now hitting $100 per barrel, the Irish low-cost is
since January 2004. Additionally, Ryanair reported that its risking to spend extra $35 a barrel. However, Ryanair stays
profits could fall as much as 50% by March 2009. The car- confident about the oil market and is intending to hedge
rier said it expected to be affected by a general downturn in case prices fall below $80 per barrel.
in the industry caused by low demand, high fuel prices
and weak European economy. O’Leary is probably sure about the positive outcome of
the recession as he is committed to buying 100 additional
Regardless these very loud alarm bells, analysts still advise aircraft which will basically double the fleet. He seems to
to ‘buy’ rather than to ‘sell’. On the one hand, they seem be more inspired by the 21 percent increase in passenger
to be confident about the entire business model and see numbers than the 27 percent fall in profits. Whilst the
Ryanair as the best positioned LCC in the market which competitors are becoming more modest about growth
has repeatedly beaten its own gloomy forecasts. What plans, Ryanair is planning to open new routes and add
might disappoint stakeholders is that Ryanair is now get- new bases going on with its excessive expansion. Howe-
ting more profit from ancillary revenues continuously ver, given the future major slowdown which has been
increasing prices of add-ons and services. Some analysts predicted by O’Leary himself and raised fees for various
believe that decline in passenger yields, fall in fares (by services, Ryanair might indeed struggle to fill its seats. If
4.4%) and rise in ancillary revenues (by 30%) alarm of the only a ‘perfect storm’ of the recession does not remove all
strategy failure. On the other hand, it is not only real pro- the competitors.
fits and financial results that influence the stock exchange
but some good PR moves as well. Commenting on the
financial situation in the third quarter and in the coming
fiscal year, Michael O’Leary said that not only was he not
disappointed with losses but welcomed a recession in the
industry which would hopefully sweep the weaker rivals
away. Following this positive comment, Ryanair shares
recovered and finally closed down 11 cents only, or 2.9
percent.

Anyway, the most promising scenarios still see a big drop


in Ryanair’s profits in the coming year. Starting 1 April
2008 the carrier will have no fuel hedged which means
it remains unprotected from rising prices. Having hedged
fuel until the end of March 2008 Ryanair locked its price
at around $65 per barrel. Fuel expenses constitute more

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EVENTS
BIRD’S EYE VIEW

French Connect 2008


April 9 to 11 in Courchevel

Air Scoop is proud to be part of the 5th French Connect in Courchevel.

For the 5th consecutive year, CEOs of French airports and European low cost airlines will gather for 3 days of debates
and networking.
French Connect, the only professional forum dedicated to low cost air traffic development in France, will take place in
Courchevel, French Alps from 9th to 11th April 2008. Created in 2004 to respond to the specific needs of French airports,
French Connect has become, in just a few years, a must-attend meeting and debating forum for French airports and low
cost airlines.
For 3 days, decision-makers will gather from over 20 low cost airlines and 50 French airports together with representa-
tives from regional, national and European political institutions. French Connect 2008 is hosted by Grenoble-Isère and
Chambéry-Savoie Airports, two airports managed by VINCI Airports and Keolis Airports on behalf of the Conseils Gé-
néraux (County Councils) of Isère and Savoie. Innovation and dynamism are the key words for next year’s event, which
will be an exceptional opportunity to understand the issues of low cost air traffic development in France.

To have more informations about last edition of French Connect in La Baule, read the full coverage in Air Scoop May
2007.
For more information on French Connect 2008, visit www.frenchconnect.net

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BIRD’S EYE VIEW
Why Does the French Government Support Air France’s Low-Fare Challengers?

What a weird situation! On February 7th, easyJet had or- Ryanair, which Irish salary conditions allow to pay better
ganized a little ceremony next to the Eiffel Tower, in Paris, wages. By supporting EasyJet, is the French government
to launch its new base at Paris-Charles de Gaulle, France’s also supporting that kind of social dumping? New tensions
biggest airport. The airline already launched 6 new routes about this topic between the state and the airline are pre-
from there, in addition to 11 already existing. But Charles de dictable...
Gaulle is also the historic fief of national leader Air France, Finally, French authorities will have to pay attention to
which mother company, Air France-KLM, is owned at 17.8 the development of LCCs in France because it makes it
pc by the French state. So, it was really weird to see Luc easier for the French to leave their country... and to spend
Chatel, the French Secretary of State for Consumers affairs their holiday money abroad. In Great Britain, a budget
and Tourism, attending the ceremony and clearly suppor- hotel chain accused LCCs of « killing British tourism »,
ting Air France’s British challenger... and the government of being conniving - there is no VAT
on international ticket sales. According to the hotel chain,
Of course, in France, purchasing power is currently the inward tourism spending decreased by 16% between 1995
biggest public concern. And a very recent report by the and 2002, whereas spending abroad by British tourists in-
economist Jacques Attali suggests to create a low-cost ter- creased by nearly 50 %! And all because of LCCs!
minal at CDG and to develop low-cost air transport in
France, only representing 17 pc of the total traffic, versus Could the same phenomenon happen in France? France is
34 pc in Europe. From that point of view, officially welco- one of the biggest touristic markets in the world, and tou-
ming a low fare airline is nothing less than logical! « I consi- rism represents about 7 pc of its GNP. French people parti-
der the development of LCCs in France as a good thing for cipate to this strong economic market, as they very mostly
both consumers and tourism, Mr. Chatel said. The part of travel inside their own country. Furthermore, they do not
low-cost is insufficient in France. » travel a lot by plane: a 2007 study shows that only 5 pc of
But still, several elements make this support incoherent. French people used the plane for their latest short break
First, Andy Harrison’s aim is clearly to challenge the natio- (week-end or less than one week), and only 2 pc used a
nal leader, well-known for its fierce hostility against foreign LCC. Even a strong LCC development may not radically
LCCs. « We consider ourselves as the best French alter- lower French inward tourism. But it may encourage more
native to Air France », Harrison said. The airline has now and more people, which had not necessarily the budget to
two bases in France - Orly and Charles de Gaulle - and fly, to look abroad instead of staying in their country.
will very soon open a third one in Lyon. It plans to invest The Secretary of State Luc Chatel prefers to consider the
€600m in the four next years. In 2011, it expects to carry new foreign tourists EasyJet could bring to France : « The
in France 12 million passengers (6 million in 2007) to 80 development of low cost will allow us either to attract
destinations. Some of its new routes from CDG (to Marra- new customers, or to attract customers who will, by redu-
kech, Porto and Krakow) are directly challenging those of cing their transportation budget, spend more in accommo-
Transavia, the Air France-KLM LCC branch. By operating dation and purchasing in France », he said.
inward flights (Paris-Nice, Paris-Toulouse...), EasyJet also
directly challenges the French railway company, the state-
owned SNCF.

Another ambiguity is linked to the social status of easyJet’s


employees. In 2007, there was a struggle between the air-
line and the French state concerning the country in which
employees had their employment contract: Great Britain,
where social charges are lower, or France. Even if a No-
vember 2006 executive order forces foreign airlines which
employees are based and live in France to pay French so-
cial charges, LCCs always tend to prefer foreign working
conditions, generally more attractive.
The problem is that high that some companies, as Brus-
sels Airlines, even think of « outsourcing » their pilots to
countries with better tax conditions : in fact, many pilots
leave Brussels Airlines in Brussels to work in Charleroi for

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BIRD’S EYE VIEW
SWOT Analysis of French Low Cost Carrier Market SWOT TEAM

Introduction most romantic capital in the world.

The phenomenon of low cost carriers has completely The major asset of France is its beautiful terrain. It is made
changed the face of the airline industry in Europe and has up of majestic mountains, fertile plains, rolling hills, green
been instrumental in creating new markets, jobs and busi- forests, lakes and rivers, canyons and an endless coastline.
ness opportunities. Its innovative low cost-low fare model It has the Atlantic Ocean to the west, the North Sea to
revolutionised air travel by bringing this ‘premium mode the north, and the Mediterranean Sea to the southeast. It
of travel’ within the reach of the low and middle income shares boundaries with Belgium and Luxembourg to the
travellers. There are number of players in this industry northeast; Germany, Switzerland and Italy to the east; and
(about 50) representing almost every region and country Spain and Andorra to the southwest. In the northwest,
of this continent with Ryanair leading the way, followed France is separated from England by the English Channel.
closely by easyJet and Air Berlin. Today, after Russia and Ukraine, France is the third-largest
But surprisingly, in this great revolution, France has remai- country in Europe and the largest in Western Europe.
ned a mute spectator as opposed to lesser developed coun- It is a producer of cars, aerospace products, and other ma-
tries and new EU members like Hungary, Poland, Bulgaria nufactured goods. It is also a major producer of chemical
and Romania. It does not have an original home-grown products. Fashion, textiles and tourism also play a signi-
low cost carrier in spite of being the birth place of Airbus ficant role. It has the highest proportion of forested land
and Concorde. in the European Union with a strong emphasis on agri-
According to national airports association - UAF, in 2006, culture. It is the largest agricultural producer in Western
low cost carriers (LCCs) in France carried a total of 18 M Europe and one of the world’s leading exporters of farm
passengers - two-thirds of them to regional destinations, products.
i.e. airports other than Paris. Though this represents an im-
pressive growth of 24.5% over the previous year, the mar- The Travel and Tourism industry of France
ket share of LCCs in France is only 13.2% - the lowest in France remains the largest travel and tourism market in the
Europe. It is also surprising to note that none of the LCCs world in terms of the number of incoming tourists, with
in France belong to French companies. more than 75 million arrivals in 2006, considerably ahead
It is this unique state of the LCC market in France - a of second-ranked Spain. France ranks 4th in the world in
technologically advanced and progressive nation – that terms of spend on international travel, and in recent years
needs to be understood and analysed. the market has grown steadily. French airports have repor-
ted strong traffic figures for 2006, with low cost passenger
The Economy of France numbers growing by 20%. Overall there was growth in
France is an economic powerhouse, a global trendsetter passenger numbers of 4.5%, to give total passenger figures
and a land of everlasting beauty. Although the French po- of 146 million.
pulation accounts for only 1% of the world’s total, its GNP Most of this growth was a result of a 6% increase in inter-
represents 4% of the global GNP. France is the sixth largest national passenger numbers, with more than 64% coming
economy in the world in USD exchange-rate terms with a from outside France. The Paris airports took the lion’s
GDP of €1.87 trillion (1.87×€1012; 2006 data). According share of traffic, with over 80 million passengers, followed
to World Bank and IMF figures, it is the sixth largest in a long way behind by Nice airport, with around 10 mil-
terms of purchasing power parity and the third largest in lion passengers. Regional airports saw a growth of 4.8%,
Europe after Germany and United Kingdom. reaching 54 million passengers, and accounting for 22% of
The US Census Bureau put the population of France at all passenger traffic in France. Most of this growth was
60.9 million in 2006. The population is forecast to grow made up by the increase in low-cost airline traffic, which
slightly to 62.5 million by 2016. The proportion of the grew by nearly 20% to 12 million passengers. Notably high
population aged 60-69 is forecast to increase, while the increases occurred at La Rochelle, Bergerac, Pau, Nantes,
proportion of the population aged below 50 is forecast to and Carcassonne.
decline.
France’s five largest cities are Paris, Marseille, Lyon, Tou- Traditionally French people have been spending their holi-
louse and Nice. Paris, the capital and France’s largest city days within France but now outbound trips are increasing
and main manufacturing centre, is home to about one- and are forecast to grow in the coming years. The French
sixth of the population. Paris is more than 2,000 years old. traditionally favour long touring holidays over the summer
Today, Paris is the bon vivant of European cities and the and have one of the highest holiday entitlements in the

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BIRD’S EYE VIEW
world. However, an increasing trend for shorter more fre- Until recently, French airports were publicly owned, with
quent breaks is emerging. Like many countries, the most the state delegating their management to the regional
popular type of outbound holiday for French people is a Chambers of Commerce and Industry (CCI). This system
beach holiday. However, both touring and city holidays is changing rapidly at the instigation of the CCIs, paving
are popular, as they enjoy learning about different cultures the way for privatization of regional airports. Nice was
and discovering new places. privatized at the end of 2007. Lyon, Marseille, and even
Transport System of France: The transportation system in Toulouse are working towards the same objective, which
France is very extensive and varied with connections to will doubtless lead to an increasingly competitive atmos-
every part of the globe. It has a system of large navigable phere among major regional airports. The only alternative
rivers that criss-cross the country and a well developed for regional airports to combat competition is to attract
water transport system. Several sea routes link France with low cost airlines.
other countries. But it is dominated within Europe by its
high speed, efficient and affordable SNCF, the French na- The aim of these regional airports is to be as different as
tional railroad company, (TGV and regional trains) that possible from one another. Because of the preponderance
connects about 1400 cities throughout the continent. This of traffic that comes through Paris, the major regional air-
is also aided by the metro rail and trams in Paris which ports serve only 3 to 6 million passengers each per year,
is the country’s main bus and rail hub, with services to/ with only Nice reaching the 10 million passenger level.
from every part of Europe. Eurostar speeds you through
the Channel Tunnel, one of Europe’s biggest infrastructure Typical features of French Travel: The top four outbound
projects to date, between England and France. The Chan- destinations for the French traveller are: Spain, UK, Italy
nel also has high-speed shuttle trains that whisk cars and and Morocco. The four most popular types of holidays are:
coaches from England to France. sun and sand, touring holidays, city breaks and countryside
holiday. The travelling season is between April and August.
Several international airlines along with Air France, the The French norm is an annual five week holiday usually
country’s national carrier, link Paris with every part of the taken between July and August but is now being divided
globe. Bordeaux, Lyon, Marseille, Nice, Strasbourg and throughout the year due to the growing importance of
Toulouse are other cities with direct international air links. short breaks in recent years. Most French have preferred
Most urban centres are linked by domestic airlines, but to spend considerable amount of their holidays in France
flying is expensive. Buses are used extensively for short- itself, though that is also gradually changing.
distance travel within regions, especially in rural areas. The most important source market is Paris and the sur-
The most popular low cost carriers in France are Ryanair rounding region of Ile de France with ten million inhabi-
and Easyjet. Hoewever their passengers are mostly inward tants, producing the biggest number of outbound travel-
bound. In 2006, the market share of low cost carriers was lers and having the highest income in France. South-East
13% though initially the LCC market share grew rapidly in France (Rhône-Alpes) comes in the second place, followed
2001 & 2002 by 85%. But this situation is gradually chan- by Brittany and Normandy. But price is one of the most
ging. important factors influencing the French traveller’s choice
The substantial market share of railways in the French do- of destination. The importance of the transportation cost
mestic travel market (over 80% in 2004), has had a very has increased markedly with the advent of low-cost airli-
dissuasive effect on low cost carriers. easyJet dropped its nes, which have created a whole new market for low-cost
service to Marseille after two years of operations, as it short break holidays. French travel patterns increasingly
could not compete with SNCF’s promotional price of 19 seem to include individually researched destinations and
Euros. The Paris-Marseille line, a 600-mile stretch, can be tours rather than the traditional ‘package tours’. This in-
covered by train in less than three and a half hours. Also dustry is witnessing the emergence of a breed of consu-
the LCCs have not been made very welcome by either mers that demands more personalised travel opportuni-
the aviation industry in France or by the Government. But ties fitted to their particular lifestyles and values. France’s
lately the picture has been changing. smaller cities are enjoying a boom as short-break holiday
French Airports: Airports in France are in a unique situa- destinations thanks to the explosion of routes by low-cost
tion because of the market dominance of Aéroports de carrier and new direct Eurostar services.
Paris (ADP), the Paris Airport Authority. It has 14 airports French online travel market: Online penetration of the
under its purview and controlled 60% of all passenger traf- French travel market has been steadily evolving, and has
fic in 2006. ADP went public in the spring of 2006, and not been explosive, partly due to the absence of home-
the other major regional airports are following the same grown low-cost carriers. Internet usage in France has ri-
trend. sen to 48% of the population. Travel products are the 2nd
most popular items purchased online with approximately

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BIRD’S EYE VIEW
21% of French Internet users purchasing travel via the web, There are several factors contributing to this unique situa-
and a third of these living in Paris. 47% of online reserva- tion which will be presented later in the SWOT. But two
tions are made at most one month prior to departure. This major reasons which need to be highlighted are Air France
means that 53% still book in advance, and these are either and TGV. This has been aptly expressed in the words
for taking advantage of early booking offers, for example of Paul Sies, Commercial Director of Virgin Express who
low-cost airline deals, or for booking with an operator or stated, «We’re not even speaking about nationalism here
going direct. The type of holiday booked also has an effect because privately owned airlines like Air Lib and Aeris are
on when the booking is made. It is dependent on the cost allowed to go down. The French government manifestly
and the length of time spent on a holiday. A touring holi- protects its national carrier Air France and its heavily sub-
day to a country would be booked in advance than a city sidized prestige project TGV. There is no room for consu-
break holiday to a nearby city. mer choice.»
But the situation is improving for the low cost airlines.
French Aviation Industry The regional airports which are not under the control of
France had made a global impact on the aviation indus- the ADP are being privatized. They are now willing to
try from the first flight of Clement Ader in 1900 to the adapt to the needs of low cost airlines and are going all out
construction of the Concorde. It is one of the leading to woo them. The advent of low cost carriers in France has
countries in civil aviation. It has built a strong reputa- also contributed in a major way in increasing job and bu-
tion in aircraft technology by building the Airbus and the siness opportunities, opened up new tourist destinations
Concorde. Besides its engineering accomplishments, France and ‘second home’ markets for other European countries
is a country where exports and imports have also played (especially UK).
a major role in its economic progress and this has been But the fear is that the legal hurdles between the LCCs
facilitated to a great deal by its aviation industry. Another and the French Government regarding payment of subsi-
important factor that makes France such a strong player dies to them by airports, could make the airlines withdraw
in the aviation sector is the fact that it is one of the main operations from these airports. The subsidies are not
tourist destinations of the world. Over 70 million people usually provided in cash. The airports provide the carrier
visit France every year and most of them travel by air. with a standard service package at reduced price, which
Two later developments which have impacted this in- include the lower landing fees, cheaper ground handling
dustry are low cost carriers and the volatile fuel prices. and mainte¬nance. This form of support is logically illegal
Low-cost airlines are definitely bringing more travellers and contra¬dicts the EU Competition Law. The future is
to the industry that is further developing the interest in therefore uncertain.
the aviation sector. The increasing fuel price and intense
competition has made it imperative for airline companies French airport association, UAF, reported recently that,
to replace old aircraft types with new more fuel-efficient airports in France recorded a 4.9% increase in passenger
aircraft. The aviation industry in turn is making a huge traffic in 2007, which was attributed mainly to low-cost
impact on the French economy since it generates avenues carriers and international operations. Meanwhile, low-cost
for employment. carriers operating at French airports reported a 20% in-
Air France is the country’s main scheduled airline. It pos- crease in passenger traffic to reach 23 million. The most
sesses an extensive network around the world and has popular low cost carriers include Ryanair (out of Paris’
played an important part in projecting Paris as a major hub Orly airport) and Easyjet (out of Bâle-Mulhouse, Orly,
for the whole world and connecting it to more than 200 Marseille and Paris CDG airports).
locations around the world. easyJet is currently France’s
second largest airline with a 6% market share. Air France Current status of French airline industry
currently controls 55% of the market. Ryanair is the third The following major events have occurred in 2007-2008
prominent airline in the market. which could make or break the low cost airline industry in
France in the coming years:
The Low Cost Airline Industry in France  The launch of Transavia.com, a low cost subsidiary of
There has been record number of airline bankruptcies in Air France-KLM
France. Many low cost carriers have come and gone wi-  Privatisation of regional airports like Nice Airport
thout a trace, thus proving the limitations of this concept,  Increase in operations on the shorter routes by the
in France where the market structure is different from TGV at low prices
that of other advanced countries of Europe. There is not  Opening of the first low cost facility called Marseille
a single home-grown independent low cost carrier to this Provence 2(MP2) catering exclusively to Low Cost airli-
date. nes

8 Air Scoop - March 2008 www.air-scoop.com


BIRD’S EYE VIEW
 Ryanair plans to set up its first base at MP2
 easyJet sets up a second base at Charles de Gaulle in
Feb. 2008
 easyJet plans to set up a third base in April 2008 at Conclusion
Lyon which offers low cost facilities French airline market has been on the sidelines of the low
 French Online Travel Market Projected to Near 10 cost carrier revolution. But it is now apparent that they
Billion EUROs in 2008 cannot afford to remain so any longer. Low cost carriers
 Access to new regions in France through LCCs has are growing stronger and are here to stay. But there could
increased the purchase of second homes by other Euro- be a shift in the basic model of the airlines in order to
peans match the rather unique travel needs of the French pas-
 Launch of a new low-cost, high-frills French airline senger.
L’Avion across the Atlantic i.e. between Paris Orly and In France, a hybrid low cost model of business and lei-
Newark, New Jersey using a single leased Boeing 757-200, sure which offers transport from regionally close airports,
which is fitted with 90 business-class seats a minimal of two-class seating, allocated seats, one-way
fares, online advan¬ce seat selection, transparent pricing
through website, frequent flyer programmes, self ser¬vice
check-in, customer care in the event of disruption etc.
could succeed. Air Berlin is one such airline which if based
in France has a fair chance to attract both the business
and leisure traveller who seeks comfort and flexibility at
a reasonable price.
LCCs have definitely ushered in strong growth in reve-
nues to the airports and tourism to the respective regions.
But increased taxes and cancellation of subsidies could
threaten its continuance due to higher passenger fares
and lesser profits for the airline. In the long term the low
cost model should evolve to become a more practical and
relevant business model that adapts to the emerging pe-
riods of environmental taxes, rising fuel costs, economic
slowdown and consolidation.

Air Scoop is proud to be Media partner of the Airline Payment Summit 2008, and offers 3 months subscription to Air-
line Payment Summit 2008 delegates.

As airline yields come under downward pressure, Airline Payment Summit (APS) will examine leading-edge low-cost
payment solutions within the landscape of traditional forms of payments such as credit cards.

Delegates will not only hear about how to drive-down costs through the use of, innovative, non traditional payment
methods, but also how to increase revenues with new payment options for the customer. A must attend for airline and
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9 Air Scoop - March 2008 www.air-scoop.com


BIRD’S EYE VIEW
SWOT of French Airline Market

10 Air Scoop - March 2008 www.air-scoop.com


BIRD’S EYE VIEW

11 Air Scoop - March 2008 www.air-scoop.com


BIRD’S EYE VIEW
How Ryanair Achieves Ancillary Revenue Zen in a World
Where Airline Profits Might Become Zero

IdeaWorks offers an excerpt from its recently released for the first piece when paid in advance at the website,
147-page Ancillary Revenue Guide which doubles to €18 when paid at the airport.
• An exclusive relationship with Hertz contributed to year
Ryanair likely leads all other low cost airlines in total an- car hire revenue of nearly €23 million for fiscal year 2007.
cillary revenue. The carrier recently announced revenue Ryanair - The Godfather of Ancillary Revenue was re-
from sources such as car-hire commissions, checked-bag- leased today as a 10-page Industry Analysis, and is an
gage charges, and priority boarding, increased by 30% excerpt from the 147-page Ancillary Revenue Guide by
(compared to 2006) to €111 million for the quarter ended IdeaWorks.
December 31, 2007. The airline says it is on target to ge-
nerate 20% of total revenue from ancillary sources within More information is available at the website:
the next three years. www.IdeaWorksCompany.com.

Ryanair’s net margin of 21% is a remarkable achievement


in an industry, which according to an International Air
Transport Association forecast, averaged an operating
margin of 5.6% for 2007. The secret to Ryanair’s robust
profit can be partially attributed to its ancillary revenue
expertise. How does Ryanair achieve these industry-lea-
ding results? Here is a sampling of observations from the
analysis:
• Ryanair’s aggressive a la carte pricing strategy includes a
€4 airport fee for passengers that don’t plan ahead and use
the website for check-in.
• Fees are also charged for checked baggage and start at €9

EVENTS

World Low Cost Airlines 2008


September 23 to 24 in London

Air Scoop is proud to be media partner of the World Low Cost Airlines 2008.

Plans are starting to take shape for the World Low Cost Airlines Congress 2008.
Earlier this year over 650 of you joined us in London for an action packed two days. To remind yourself of the day (or to
see what you missed!) we have put together a short video of the highlights. To see it simply visit our homepage. (You’ll
need to have flash installed on your computer.)

Don’t miss out on next year’s event.

To have more informations about last edition of the World Low Cost Airlines, read the full coverage in Air Scoop Oc-
tober 2007.
For more information on the World Low Cost Airlines 2008, visit www.terrapinn.com

12 Air Scoop - March 2008 www.air-scoop.com


BIRD’S EYE VIEW
Exclusive Analysis for Air Scoop

www.airlinebulletin.com

Comparing Airport Subsidies in Europe and the US

Specific airports in both Europe and the US are able to of- can also work with carriers to develop infrastructure that
fer subsidies to carriers that start new service, though the meets their needs. If an airline commits to expanding ser-
types of subsidies vary. However, unlike in Europe, many vice at a given airport, the airport board could finance the
of the largest LCCs in the US don’t receive significant construction of a new terminal, allowing airlines to start
benefits from airport subsidies, even though US airports service while paying off the construction costs through
have more flexibility in the types of subsidies they can future fees.
offer. This is often because most US LCCs serve routes
already served by legacy carriers from larger airports, lea- US Airports typically offer subsidies to foster business
ving little reason for these large airports to offer incentives development, and less for tourism development, as seen
to lure LCCs, whereas in Europe, small airports that are in Europe. Airports will often identify routes that they
typically bypassed have found success in using subsidies would like to see served, and offer airlines subsidies for
to lure LCCs. In the US, since Southwest and many other serving those routes. These routes are often of some stra-
LCCs are increasingly focused on serving primary airports tegic importance to the region’s economy, such as routes
(with some notable exceptions), some secondary airports, to China, Japan, and Europe or to major business centers
especially those distant from city centers, find that sub- in the US. Many airports also offer subsidies for airlines
sidies are more effective for luring legacy carriers to of- that fly routes nonstop where passengers are currently
fer regional jet service. While new regional jet flights will required to take a connecting flight. Other airports offer
bring additional passengers to a small airport, they pale general subsidies for new airlines to add flights and/or for
in comparison to the large number that an LCC could existing airlines to add flights to any new destinations un-
deliver. served from the airport, regardless of their perceived im-
portance by the airport authority. Subsidies are typically
In Europe, airport subsidies have become an enormous offered in the form of landing fee waivers, terminal rent
issue, especially as so many small airports across Europe cuts, and matching advertising funds to help market the
have offered Ryanair subsidies. However, as LCCs expand, new flights. However, in most cases, airlines don’t get a
subsidies could become less commonplace since of the free ride, and are responsible for some fees.
value of potential traffic at larger airports could outweigh
the need for subsidies to lure LCCs to start service. But while Southwest considers subsidies in its expansion
decisions, they are not necessarily a precondition to arri-
To keep this article simple, I’ll use the example of ving in a new market, and even attractive subsidy packa-
Southwest in the US. However, some other US LCCs, in- ges do not guarantee new service. One example of this is
cluding JetBlue, Frontier, and AirTran gain different bene- Southwest’s service from the Dallas, Texas area. In 2005,
fits from subsidies, since their smaller jets allow them to after starting a codeshare agreement with ATA Airlines,
serve smaller airports with different subsidy offerings. the Dallas-Fort Worth Airport tried to lure Southwest
to its facility with a significant subsidy package including
Most US Airports are public entities, regulated by elected free terminal rent for a year and up to $22 million USD
boards that allocate funds. These airports are allowed to in incentives (as part of a program being offered to any
offer subsidies, but only if the subsidies are made availa- carrier new to the airport). But, Southwest declined this
ble to any carrier that qualifies for a specific subsidy pro- offer, preferring to expand at other facilities that could
gram. Airports are prohibited from enacting fee-reduction better help the carrier meet its goal of attracting more
deals with specific carriers. In most cases, airports can- business travelers, and thus higher yields.
not discriminate against legacy carriers in favor of LCCs,
though they can structure their subsidy programs such Ryanair has proven to be extremely reliable in garnering
that LCCs are more likely to qualify. However, airports traffic, making it a valuable carrier for airports. As a car-

13 Air Scoop - March 2008 www.air-scoop.com


BIRD’S EYE VIEW
rier that has focused its expansion on smaller airports ports, on the other hand, could be harmed if costs at larger
across Europe, Ryanair has been able to secure subsidies airports were reduced. As a result, these airports will need
from a variety of these airports eager to attract the carrier. to use other selling points, such as their high punctuality
Many smaller airports, in association with local tourism rates, to lure LCCs and passengers. By compelling airports
boards, back subsidies for LCCs in order to lure visitors to to reduce their costs, it will reduce the distortion subsi-
a region. Of European LCCs, Ryanair has benefited most dies can cause, and enable passengers to more easily fly to
from these because the company’s route structure purpo- the airports they want to access.
sely avoids larger airports. But sometimes, in the pursuit
of Ryanair, these airports go too far in providing subsidies.
Ryanair’s biggest subsidy controversy to date has been the Update : The European Commission says it has launched
aid it was given by Charleroi airport south of Brussels. a formal investigation into an agreement between Bratis-
The airport used EU money to help lure Ryanair to the lava Airport and Ryanair…
facility and create a base there by cutting a specific deal
with Ryanair to reduce the carrier’s terminal rents and lan-
ding fees. Ryanair was eventually forced to repay some Remarks, questions… Join Sam by email (samsellers@
of the subsidy money because the EU ruled the subsidy gmail.com) or on his website to comment this article…
violated antitrust laws. The EU’s ruling on this matter has http://www.airlinebulletin.com.
limited the ways airports can use subsidies to attract car-
riers. The EU ruled in its Ryanair decision that discounts
on landing fees and terminal rents for specific carriers at
publicly owned airports are unacceptable, but some mar-
keting assistance from airports is acceptable. Assistance
that helps LCCs use airports for rates that are less than the
market rate is considered anti-competitive behavior and
isn’t tolerated by the Commission.

The differing subsidy arrangements of LCCs in the US


and in Europe point to a similar problem: the degree to
which airports have control over luring airlines to serve
their facilities. Ultimately, what both public and private Sam Sellers provides analysis and commentary on the
airport owners must realize is that with the rise in LCCs airline industry at his website, www.airlinebulletin.com,
across the world, airports can no longer be works of art, and is the author of Take Control of Booking a Cheap
venues for displaying the grandeur of a city. Instead, they Airline Ticket, an ebook for travelers in the United States
must provide basic terminal services, including check-in who are interested in purchasing cheap airline tickets.
desks, security, retailers, and seating. Airports don’t need
to have wide-open spaces that are unutilized, and at many
facilities, they don’t need air bridges or unused runways. It
simply adds too much to their costs. Subsidies are a tem-
porary solution; a way to lure LCCs to higher-cost or out-
of the way airports, but ultimately, higher-cost airports
must find ways to bring their costs down. They must re-
duce the size of terminals and other facilities and provide
only what is necessary, because increasingly, passengers
only want to pay for that. Public airport authorities have
wasted too much of the public funds, particularly in the
United States, on frivolous projects that were not warran-
ted by the traffic levels at a given airport, or on projects
that racked up massive cost overruns, which ultimately
must be paid back by passengers. Out-of-the-way air-

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14 Air Scoop - March 2008 www.air-scoop.com

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