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Air Scoop Free issue (June 2008)

Air Scoop Free issue (June 2008)

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Air Scoop Free issue (June 2008)
Air Scoop Free issue (June 2008)

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EDITORIAL
Highlights in this Issue
The “no-frills” approach and environment
p. 3
Turbulent Skies? Not Really…
p. 5
Are European LCCs Doomed?
p. 6
SWOT Analysis of Blue Air
p. 7
Ryanair and PSO Routes
p. 16
Air Scoop - June 2008
www.air-scoop.com
The Low Cost Carriers Analysis Newsletter 
The Oil Price Shock and its Effects on the Low-costBusiness Model
R
ecently, crude oil prices are on an unprecedented rise andbreak all-time records almost day by day. Last June one barrelof Brent crude oil was traded for around 70 dollars, while this June the price of one barrel exceeded a historical threshold of 130dollars. Airlines are seriously hit by the current oil price crisis, andthis is especially true for those that follow the low-cost model. Ac-cording to the International Air Transport Association (IATA), everydollar increase in the price of oil costs a cumulative $1.6 billion forthe airlines, globally. In this article we try to analyze how the presentsituation may affect the business model of low-cost airlines.High oil prices obviously have a direct impact on the expenses of theLCCs but the demand side, their potential passengers, is also affected.First, we discuss how the business model may change due to the risein oil prices, after that the effects on the demand will be analyzed.Fuel accounts for a quarter of the budget of traditional airlines, butit takes a much more substantial share of LCCs budget. For instance,about 40% of Ryanair’s operating expenses are fuel costs. The pro-
blem is that the price of oil cannot be inuenced by the airlines (or
only to a very limited extent); therefore it has to be regarded as anexternally given condition. Those LCCs that have a large operating 
eet buy comparatively larger amounts of kerosene. This implies that
their buyer power against kerosene suppliers is slightly higher thanthat of small LCCs with few airplanes. In this sense, the big players,like Ryanair, easyJet, Air Berlin or Germanwings may be better suitedfor negotiating more favorable price conditions. This option, howe-ver, is rather limited since in the oil industry there are relatively fewsuppliers while many more customers, thus oil suppliers form an oli-gopoly-like market.A potential option, in order to offset the immediate effects of rising oil prices, is to hedge fuel needs. Traditional carriers have taken thisroute. Lufthansa, for instance, hedged 83 % of its fuel requirementtill the end of 2008, while British Airways hedged 65% for the sameperiod. Even though Ryanair has traditionally rejected this policy, re-cently it had to choose hedging, too. However, this strategy does notimply a complete insurance against the steep rise of oil prices but it
denitely reduces business uncertainty and risk.
In general, European carriers (both traditional and low-cost) are betterequipped against the oil shock than their American partners, becauseof two basic reasons. First, oil is priced in dollars, therefore European
airlines can benet from the strong euro and its appreciation against
the dollar. Second, as New York Times analyst, Caroline Brothers hin-ted at it recently, European airlines use newer models of Boeing andAirbus planes, which burn 30 percent less fuel than models from the
AIR SCOOP ANNOUNCEMENTSA Glimpse of Headlines News!
OIL FEARS OVER LCC MARKET! Irish airlines downgraded by bank 
Aer Lingus and Ryanair have been downgra-ded from ‘Buy’ to ‘Sell’ in a report from invest-ment bank Goldman Sachs. The report comeson a day when the price of crude oil hit a newrecord high of $139.89 a barrel in New Yorktrade, surpassing the previous high of $139.12dollars set on June 6th.
Easyjet’s German base may be closed 
EasyJet is considering closing its base at Dort-mund, saying the soaring cost of fuel is making it too costly. In a further sign of the crisis hit-ting the aviation industry because of sky-highoil prices, the budget carrier – the second big-gest operator at Liverpool John Lennon Airport(JLA) – says it has begun a 90-day consulta-tion with staff and crew based at the Germanairport.
Germanwings head sees higher ticket prices due to rising oil prices 
Thomas Winkelmann, the Head of DeutscheLufthansa AG’s budget airline, Germanwings,reportedly expects passengers on low cost car-riers will soon have to pay higher prices due torising oil prices. Winkelmann said in the futurethere will be fewer special deals and averageticket prices will rise to compensate for higherfuel costs.
Fuel cost rise force Flybe to drop Cornish route 
Budget airline Flybe have suspended one of their new routes due to rising fuel costs. Theservice from Newquay in Cornwall to Glasgow- launched in April - will stop in early August.Flybe say they have not been carrying enoughpassengers to make money thanks to the highcost of aviation fuelMore on
http://airscoop.blogspot.com 
 
BIRD’S EYE VIEW
Air Scoop - June 2008
www.air-scoop.com
2
1970s and 1980s, many of which are still in use by airlinesin the United States.However, the outcome of the intra-European competitionis not going to be determined by the American carriers.From the perspective of cost-reduction, one may rightlyclaim that those air carriers will be able to survive the oil
shock that use newer, efcient aircrafts and are able to
hedge most of their fuel needs.
Nevertheless, those airlines that y longer routes are more
exposed to the increase in oil prices. Especially those thatserve transatlantic routes are in danger. According to esti-
mates, the price of fuel of a transatlantic ight has quadru
-pled since 2000. It is not surprising at all therefore, that
the recently established Oasis Hong Kong, the world’s rst
long-haul low-cost airline went bankrupt only after 18months of operation. Some analysts claim that if oil pri-ces remain higher than 100 dollars per barrel, the low-costmodel is impossible to apply to long-haul routes. This is aserious warning for those European LCCs, like Aer Lingus,
that operate transatlantic ights.
If costs keep rising, another option is to raise the revenues.Regarding LCCs, this is a sensitive issue, as their competi-
tive edge is provided by offering signicantly lower prices
than the traditional carriers. Therefore, in order to keepfares low, more and more European low-cost carriers in-troduce so-called hidden charges that are not included inthe fare price.The techniques of this are various and practically unlimited(this may involve for instance the raise of handling charges,credit card charges and baggage charges), but unfortuna-tely many of them seem to be deceptive to passengers. Arecent European Commission (EC) investigation revealedthat the practice of misleading prices or unfair contractterms such as missing or wrong language versions, or pre-checked boxes for optional services were found on half of the checked websites of European airlines. If this poorbusiness practice continues, then the EC will have to inter-vene in order to protect customers.Regarding the newly introduced measures and hidden char-ges, Ryanair is one of the most creative of all LCCs. Theairline introduced baggage charges for checked-in baggage
in May 2006. The fee for the rst bag for a one-way ight
since then has increased from 6 euro to 10 euro, while forthe second and third checked-in bag Ryanair charges anadditional 20 euro each. The company has also introducedcharges for those passengers who prefer to check-in at theairport instead of checking-in online. The airport check-in
fee for a one-way ight is 5 euro. However, those who carry
an extra bag must check-in at the airport, this way they arecharged for both the bag and the airport check-in. Credit
card charges for booking a single ight has also increased
from 3 euro to 4 euro, while there are various additionalcharges for “extra” services like priority boarding. The feefor excess weight is also remarkably high, Ryanair charges15 euro per each kilogram exceeding the 15 kilogram limitof checked-in baggage.
To take an example, a passenger who books a return ight
and besides the hand luggage carries one extra bag whichweighs 17 kilograms each way (2 kilograms of excess wei-
ght) has to pay a total of 98 euro above the ight price
(10 euro each way for the checked-in baggage, 5 euro eachway for airport check-in, 4 euro each way is the credit cardcharge and 30 euro each way for the excess weight)! Theseextra charges sometimes may well exceed the total costof the return ticket, including taxes and charges. Taking 
into account that Ryanair ies exclusively to regional and
secondary airports, the costs for the passenger can increaseeven higher if the destination is relatively far from the
airport he or she ies to. From this perspective, ying withRyanair may not be as cheap as it seems at rst sight, un
-
less the passenger’s nal destination is near the airport and
he carries a hand luggage only (maximum 10 kilograms),thereby can choose the on-line check-in, which is free of charges.As a spokesperson of Ryanair revealed, charges wouldcontinue to rise until the airline would reach the aim of half of all passengers checking-in online and carrying handluggage only. This policy, provided it becomes successful,may substantially lower operating costs. First of all, baggagehandling expenses will decrease if less checked-in luggage
will be carried. Second, the aircraft will y with a lower
total weight, thus fuel can also be saved.The other ultra-low cost airline, Wizzair has been fol-lowing suit. The Hungarian LCC has recently increasedthe fee for checked-in luggage from 3 euro to 7.5 euro.However, Wizzair is somehow more generous than Rya-nair as the weight limit is 20 kilograms and the charge forexcess weight is only 10 euro per kilogram. Nevertheless,the airline introduced a measure in March 2008, whichtriggered widespread protests among Hungarian passen-gers, although Ryanair follows the same policy. The custo-mer service number of Wizzair now can be called for a feeof 1 euro per minute (the same applies to Wizzair’s majormarket, Poland), which is outrageous, given that the fee for
a local call on a xed phone does not exceed 10 eurocents
in Hungary.The above examples reveal that rising oil prices triggersimilar responses from low-cost carriers: they attempt tointroduce further cost reduction measures and raise “hid-den charges”. Another trend is that although more routesare being served but less frequently. Remaining at the twoairlines used as an example in this analysis, in 2006, Rya-
nair operated 8.7 weekly ights on a single route, whe
-
reas in 2008 this gure dropped to 6.3. The same is va
-
lid for Wizzair, the number of weekly ights on a single
route decreased from 5.2 to 4.5. The reason for this is quite
straightforward: rst, it is easier to ll the planes on a less
frequently served route, and the higher load factor bringshigher revenues, second, operating expenses may be lowe-
red when decreasing the frequency of ights.
 
BIRD’S EYE VIEW
Air Scoop - June 2008
www.air-scoop.com
3
By
Janet Maughan 
and
Callum Thomas 
 Centre for Air Transport and the Environment,Manchester Metropolitan University, UKemail j.a.maughan@mmu.ac.uk
Could the “no-frills” approach emerge as the most environmentally sustainable model?
Over the last 20-30 years, civil aviation has undergone very
signicant change and enormous growth, both driving and
being driven by the Global economy and society and mostrecently by the ‘low cost’ and ‘no frills’ revolution. Today,demand for air transport remains strong and is growing.
This growth has brought about signicant social and eco
-
nomic benets including; the creation of direct and indi
-rect employment in both the aviation and aerospace indus-tries; the facilitation of trade with the rest of the world andthe promotion of inward investment by enhancing regionalcompetitiveness; and enabling travel for leisure, educationand the maintenance of social and family networks in anincreasingly disparate society. The dramatic decline in the
cost of air travel has brought considerable social benet by
enabling an increasing proportion of the population to ac-
cess the services offered by aviation and hence the benetsidentied above.
This growth has, however, come about at a cost, bothsocially and environmentally, principally the disturbancecaused by aircraft noise and the implications of engineemissions for Global Climate Change (GCC). In the UKthe Stern review, published in 2007 noted that the scien-
tic evidence of GCC is overwhelming, but provided
a positive assessment of the issues we face and the factthat if we act internationally there is still time to avoidthe worst impacts. The review fundamentally proposesa pro-growth strategy to tackling GCC and estimates thecost to avoid the worst impacts to be around 1% of globalGDP each year. The implications of this for the aviationindustry are centred around many issues - carbon pricing,for example, is likely to increase ticket prices and possibly
relate them more closely to distance own. In addition,
technology, will play an important role with step changesrequired –perhaps a return to hydrogen powered aircraftand some thought must be given to biofuels (produced ina sustainable manner) and whether they can provide morethan just a short term stop gap solution. Finally the role of public engagement will be an integral factor, since as moreand more people become aware and educated about theimpact of climate change – there may be a change in attitu-des to aviation with a knock on impact upon demand.In the context of increasing concern amongst the generalpublic about climate change, environmental NGOs are fo-cusing attention on greenhouse gas emissions from avia-tion and seeking to characterise the low cost revolution asencouraging ‘frivolous use’ of air transport (for examplefor weekend breaks in other European cities). They arguethat air travel is too cheap, given its environmental impactsand that price is promoting unsustainable growth of theindustry. But is the low cost sector the real culprit? Thedramatic decline in the cost of air travel has brought consi-
derable social benet by enabling an increasing proportion
of the population to access the services offered by aviation
and hence the benets identied above.
All things considered, the changes in the business modelmay affect passenger demand as well. First, high oil pricespose a burden on people’s budget; therefore the overall de-mand for travel may decrease. Moreover, passengers maybecome more price sensitive, therefore the lowest faresmay be even more preferred. This may be a good piece of news for LCCs. However, given the introduction of andthe increase in hidden charges in the LCC market, the pri-
ce difference between ying with a low-cost carrier and a
traditional one may become lower as well. In essence, low-cost carriers might lose from their competitive advantageover traditional carriers. One has to bear in mind that, asit was discussed earlier, LCCs are more exposed to highfuel prices than traditional carriers. A possible consequence
of this therefore may be that the average price of a ight
offered by LCCs and traditional carriers may converge toa certain extent.
In sum, it is rather difcult to tell what the future is going 
to bring for the low-cost air carrier market both in termsof the expected market demand and the business model of low-cost airlines. A possible scenario is that smaller LCCswill be driven out of the sector or will be acquired by big-ger players. It is also possible that the low-cost model maynot be sustainable at all above a certain level of fuel price.However, if oil prices keep skyrocketing, in that case peo-ple will be least concerned with the fate of airlines as amajor and deep economic crisis affecting all sectors can
be expected then. This is denitely not what we want to
experience in the future…

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