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
The Low Cost Carriers Analysis Newsletter
EDITORIAL
The Oil Price Shock and its Effects on the Low-cost
Business Model
R
ecently, crude oil prices are on an unprecedented rise and
break all-time records almost day by day. Last June one barrel
of Brent crude oil was traded for around 70 dollars, while this
June the price of one barrel exceeded a historical threshold of 130
dollars. Airlines are seriously hit by the current oil price crisis, and
this is especially true for those that follow the low-cost model. Ac-
cording to the International Air Transport Association (IATA), every
dollar increase in the price of oil costs a cumulative $1.6 billion for
the airlines, globally. In this article we try to analyze how the present
situation may affect the business model of low-cost airlines.
High oil prices obviously have a direct impact on the expenses of the
LCCs but the demand side, their potential passengers, is also affected.
First, we discuss how the business model may change due to the rise
in oil prices, after that the effects on the demand will be analyzed.
Fuel accounts for a quarter of the budget of traditional airlines, but
it 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 influenced by the airlines (or
only to a very limited extent); therefore it has to be regarded as an
externally given condition. Those LCCs that have a large operating
fleet buy comparatively larger amounts of kerosene. This implies that
their buyer power against kerosene suppliers is slightly higher than
that of small LCCs with few airplanes. In this sense, the big players,
like Ryanair, easyJet, Air Berlin or Germanwings may be better suited
for negotiating more favorable price conditions. This option, howe-
ver, is rather limited since in the oil industry there are relatively few
suppliers 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 this
route. Lufthansa, for instance, hedged 83 % of its fuel requirement
till the end of 2008, while British Airways hedged 65% for the same
period. Even though Ryanair has traditionally rejected this policy, re-
cently it had to choose hedging, too. However, this strategy does not
imply a complete insurance against the steep rise of oil prices but it
definitely reduces business uncertainty and risk.
In general, European carriers (both traditional and low-cost) are better
equipped against the oil shock than their American partners, because
of two basic reasons. First, oil is priced in dollars, therefore European
airlines can benefit 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 and
Airbus planes, which burn 30 percent less fuel than models from the
Air Scoop - June 2008
AIR SCOOP ANNOUNCEMENTS
A 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 comes
on a day when the price of crude oil hit a new
record high of $139.89 a barrel in New York
trade, surpassing the previous high of $139.12
dollars 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-high
oil 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 German
airport.
Germanwings head sees higher ticket prices
due to rising oil prices
Thomas Winkelmann, the Head of Deutsche
Lufthansa AG’s budget airline, Germanwings,
reportedly expects passengers on low cost car-
riers will soon have to pay higher prices due to
rising oil prices. Winkelmann said in the future
there will be fewer special deals and average
ticket prices will rise to compensate for higher
fuel 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. The
service from Newquay in Cornwall to Glasgow
- launched in April - will stop in early August.
Flybe say they have not been carrying enough
passengers to make money thanks to the high
cost of aviation fuel
More on http://airscoop.blogspot.com
www.air-scoop.com
 BIRD’S EYE VIEW
1970s and 1980s, many of which are still in use by airlines
in the United States.
However, the outcome of the intra-European competition
is not going to be determined by the American carriers.
From the perspective of cost-reduction, one may rightly
claim that those air carriers will be able to survive the oil
shock that use newer, efficient aircrafts and are able to
hedge most of their fuel needs.
Nevertheless, those airlines that fly longer routes are more
exposed to the increase in oil prices. Especially those that
serve transatlantic routes are in danger. According to esti-
mates, the price of fuel of a transatlantic flight has quadru-
pled since 2000. It is not surprising at all therefore, that
the recently established Oasis Hong Kong, the world’s first
long-haul low-cost airline went bankrupt only after 18
months of operation. Some analysts claim that if oil pri-
ces remain higher than 100 dollars per barrel, the low-cost
model is impossible to apply to long-haul routes. This is a
serious warning for those European LCCs, like Aer Lingus,
that operate transatlantic flights.
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 significantly lower prices
than the traditional carriers. Therefore, in order to keep
fares low, more and more European low-cost carriers in-
troduce so-called hidden charges that are not included in
the 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. A
recent European Commission (EC) investigation revealed
that the practice of misleading prices or unfair contract
terms 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 poor
business 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. The
airline introduced baggage charges for checked-in baggage
in May 2006. The fee for the first bag for a one-way flight
since then has increased from 6 euro to 10 euro, while for
the second and third checked-in bag Ryanair charges an
additional 20 euro each. The company has also introduced
charges for those passengers who prefer to check-in at the
airport instead of checking-in online. The airport check-in
fee for a one-way flight is 5 euro. However, those who carry
an extra bag must check-in at the airport, this way they are
charged for both the bag and the airport check-in. Credit
card charges for booking a single flight has also increased
from 3 euro to 4 euro, while there are various additional
charges for “extra” services like priority boarding. The fee
for excess weight is also remarkably high, Ryanair charges
15 euro per each kilogram exceeding the 15 kilogram limit
of checked-in baggage.
2 Air Scoop - June 2008
To take an example, a passenger who books a return flight
and besides the hand luggage carries one extra bag which
weighs 17 kilograms each way (2 kilograms of excess wei-
ght) has to pay a total of 98 euro above the flight price
(10 euro each way for the checked-in baggage, 5 euro each
way for airport check-in, 4 euro each way is the credit card
charge and 30 euro each way for the excess weight)! These
extra charges sometimes may well exceed the total cost
of the return ticket, including taxes and charges. Taking
into account that Ryanair flies exclusively to regional and
secondary airports, the costs for the passenger can increase
even higher if the destination is relatively far from the
airport he or she flies to. From this perspective, flying with
Ryanair may not be as cheap as it seems at first sight, un-
less the passenger’s final 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 would
continue to rise until the airline would reach the aim of
half of all passengers checking-in online and carrying hand
luggage only. This policy, provided it becomes successful,
may substantially lower operating costs. First of all, baggage
handling expenses will decrease if less checked-in luggage
will be carried. Second, the aircraft will fly 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 increased
the 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 for
excess weight is only 10 euro per kilogram. Nevertheless,
the airline introduced a measure in March 2008, which
triggered 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 fee
of 1 euro per minute (the same applies to Wizzair’s major
market, Poland), which is outrageous, given that the fee for
a local call on a fixed phone does not exceed 10 eurocents
in Hungary.
The above examples reveal that rising oil prices trigger
similar responses from low-cost carriers: they attempt to
introduce further cost reduction measures and raise “hid-
den charges”. Another trend is that although more routes
are being served but less frequently. Remaining at the two
airlines used as an example in this analysis, in 2006, Rya-
nair operated 8.7 weekly flights on a single route, whe-
reas in 2008 this figure dropped to 6.3. The same is va-
lid for Wizzair, the number of weekly flights on a single
route decreased from 5.2 to 4.5. The reason for this is quite
straightforward: first, it is easier to fill the planes on a less
frequently served route, and the higher load factor brings
higher revenues, second, operating expenses may be lowe-
red when decreasing the frequency of flights.
www.air-scoop.com
 BIRD’S EYE VIEW
All things considered, the changes in the business model
may affect passenger demand as well. First, high oil prices
pose a burden on people’s budget; therefore the overall de-
mand for travel may decrease. Moreover, passengers may
become more price sensitive, therefore the lowest fares
may be even more preferred. This may be a good piece of
news for LCCs. However, given the introduction of and
the increase in hidden charges in the LCC market, the pri-
ce difference between flying with a low-cost carrier and a
traditional one may become lower as well. In essence, low-
cost carriers might lose from their competitive advantage
over traditional carriers. One has to bear in mind that, as
it was discussed earlier, LCCs are more exposed to high
fuel prices than traditional carriers. A possible consequence
of this therefore may be that the average price of a flight
Could the “no-frills” approach emerge as the most environmentally sustainable model?
By Janet Maughan and Callum Thomas
Centre for Air Transport and the Environment,
Manchester Metropolitan University, UK
email j.a.maughan@mmu.ac.uk
Over the last 20-30 years, civil aviation has undergone very
significant change and enormous growth, both driving and
being driven by the Global economy and society and most
recently by the ‘low cost’ and ‘no frills’ revolution. Today,
demand for air transport remains strong and is growing.
This growth has brought about significant social and eco-
nomic benefits 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 and
the promotion of inward investment by enhancing regional
competitiveness; and enabling travel for leisure, education
and the maintenance of social and family networks in an
increasingly disparate society. The dramatic decline in the
cost of air travel has brought considerable social benefit by
enabling an increasing proportion of the population to ac-
cess the services offered by aviation and hence the benefits
identified above.
This growth has, however, come about at a cost, both
socially and environmentally, principally the disturbance
caused by aircraft noise and the implications of engine
emissions for Global Climate Change (GCC). In the UK
the Stern review, published in 2007 noted that the scien-
tific evidence of GCC is overwhelming, but provided
a positive assessment of the issues we face and the fact
that if we act internationally there is still time to avoid
the worst impacts. The review fundamentally proposes
a pro-growth strategy to tackling GCC and estimates the
3 Air Scoop - June 2008
offered by LCCs and traditional carriers may converge to
a certain extent.
In sum, it is rather difficult to tell what the future is going
to bring for the low-cost air carrier market both in terms
of the expected market demand and the business model of
low-cost airlines. A possible scenario is that smaller LCCs
will be driven out of the sector or will be acquired by big-
ger players. It is also possible that the low-cost model may
not 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 a
major and deep economic crisis affecting all sectors can
be expected then. This is definitely not what we want to
experience in the future…
cost to avoid the worst impacts to be around 1% of global
GDP each year. The implications of this for the aviation
industry are centred around many issues - carbon pricing,
for example, is likely to increase ticket prices and possibly
relate them more closely to distance flown. In addition,
technology, will play an important role with step changes
required –perhaps a return to hydrogen powered aircraft
and some thought must be given to biofuels (produced in
a sustainable manner) and whether they can provide more
than just a short term stop gap solution. Finally the role of
public engagement will be an integral factor, since as more
and more people become aware and educated about the
impact 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 general
public about climate change, environmental NGOs are fo-
cusing attention on greenhouse gas emissions from avia-
tion and seeking to characterise the low cost revolution as
encouraging ‘frivolous use’ of air transport (for example
for weekend breaks in other European cities). They argue
that air travel is too cheap, given its environmental impacts
and that price is promoting unsustainable growth of the
industry. But is the low cost sector the real culprit? The
dramatic decline in the cost of air travel has brought consi-
derable social benefit by enabling an increasing proportion
of the population to access the services offered by aviation
and hence the benefits identified above.
www.air-scoop.com
 BIRD’S EYE VIEW
Rising fuel charges, emissions trading and other costs asso-
ciated with the internalisation of the climate change im-
plications of aviation all have the potential to significantly
increase the price of tickets. In response many airlines wi-
thin the low cost sector are responding to these issues by
making savings through reducing the level of ‘customer ser-
vice’ provided to their passengers. The baggage allowance
on many airlines is often in excess of that required by the
travelling public and can lead people “overpacking”. This
has significant implications for fuel use and emissions. For
example, 20kgs. of hold baggage plus 5 kgs. hand baggage
for an aircraft with a capacity of 250 passengers represents
an additional weight impediment of 6250kgs. Informing
passengers of the climate change implications of over gene-
rous passenger allowance coupled with charging for bagga-
ge by weight could significantly reduce unnecessary weight
carried by aircraft as well as fuel costs and emissions.
Dr Janet Maughan is a Research Associate and Profes-
sor Callum Thomas is Chair of Sustainable Aviation at
the Centre for Air Transport and the Environment. This
group was established to address the challenges of sustai-
nable development and the environmental capacity of air
transport systems through research and knowledge trans-
fer. In addition to the work the centre does with bodies
such as ICAO, IATA and the European Commission, the
UK Government via the Higher Education Innovation
Fund awarded the University £5milliion sterling to bring
together leading universities such as Cambridge, Cranfield,
Sheffield and Reading to work with manufacturers (eg Air-
bus, Rolls Royce), airports, airlines and air traffic mana-
gement organisations with policy makers and regulatory
bodies to develop and transfer knowledge – this is known
as the OMEGA project.

The IPCC Report Aviation and the Global Environment

(Cambridge University Press (1999).) notes that in flight
entertainment and catering facilities contribute 5-10% of
annual greenhouse gas emissions from the air transport in-
dustry. (A Transatlantic B747 carries with it about 5 tonnes
of catering.) Here too, changing passenger expectations
could generate significant environmental and economic
benefits. Where weight savings translate into financial
benefit it becomes easier to see where savings may be
made.

At a global level, ICAO is promoting technical improve-

ments through its certification process, albeit that advan-
ces in technology are largely driven by airport controls and
market forces. IATA’s vision is for carbon neutral growth
by 2020 and carbon free aviation within 50 years. This will
require a massive investment in technology and the im-
plementation of many operational improvements. A key
question in terms of the airlines will be which business mo-
del is able to work with, and respond to these regulatory,
technological and operational challenges. In the context
of increasing environmental constraints upon society and
upon the aviation industry in particular, while the concept
of ‘low cost’ air travel may become a thing of the past, the
no frills / high load factor business model, could emerge as
the more sustainable option for future airline growth.

4 Air Scoop - June 2008 www.air-scoop.com

 DOWN TO EARTH
Turbulent Skies? Not Really…
By Rapahel Bejar
CEO, Airsavings SA
email: rbejar@airsavings.net
It seems like a tumultuous time for air travel. If all you
read is the American press, it might appear that the airline
industry is an intractable, untenable muddle of dying di-
nosaurs and flash-in-the-pan startups. Merger mania and
exorbitant fuel prices combined with FAA inspection de-
bacles and deteriorating US airport infrastructure portray
an industry that is indeed in flux.
This is, of course, only one side of the story; there are many
bright spots highlighting the industry both in the US and
on the Continent. New aircraft construction is entering a
renaissance, with both American stalwart Boeing and EU
powerhouse Airbus utilizing new materials and global ma-
nufacturing processes to develop the cleanest, most effi-
cient planes we have ever seen. Low cost carriers have
established a new benchmark for successful operating mo-
dels, and even as a few have fallen victim to the oil-price
crisis, LCCs have continued to proliferate and be profita-
ble. Perhaps most poignantly, the EU and the US have fi-
nally established a comprehensive, sensible agreement go-
verning transatlantic routes and city service with the Open
Skies Agreement.
Though it has garnered precious little attention in the
mainstream press, the Open Skies Agreement is perhaps
the single most important industry-government action
since American deregulation in the 1970s. By allowing any
carrier access to all points within any EU member country
and all points within the US, without restriction, the OSA
has done more to encourage healthy competition and eli-
minate the stranglehold legacies have had on the lucrative
transatlantic market than any accord preceding it. With
the agreement in place, low cost carriers are finally free to
apply their effective business model to long-haul, well esta-
blished routes and compete directly with the major legacy
airlines. Since phase one was initiated at the end of March,
a handful of high profile LCCs have announced their inten-
tion to begin transatlantic service, including Ryanair.
There are shortcomings to the agreement, to be sure. Phase
two negotiations, which begin this week ahead of a tenta-
tive 2010 rollout, will center on stickier points of conten-
tion, including still-restrictive US policy regarding foreign
ownership of domestic airlines and unified EU-US emis-
sions standards. There is no guarantee that these points
will meet with swift resolution, though phase II’s provisions
have already demonstrated the potential to spawn a new
wave of consolidations (as evidenced by British Airway’s
courtship of Iberia ). Despite these challenges, however,
the main objective of the OSA is to first, ease route and
5 Air Scoop - June 2008
destination regulation and second, through phase II, libera-
lize investment rules, both of which will serve to expand
opportunities for airlines on either side of the Atlantic.
Perhaps most importantly, the Open Skies Agreement will
allow European low cost carriers unprecedented access to
the potentially lucrative US low cost market. Americans
have consistently demonstrated their price sensitivity; it
can be argued that US consumers’ demand for ever-lower
fares (facilitated by the rise of internet booking and price
comparison websites) has contributed to the deteriorating
position of US Legacy carriers. But for LCCs- particularly
European LCCs, who have shown a knack for executing
their unique business model effectively and profitably- the
segment of American transatlantic travelers that would be
amenable to unbundled services and reasonable pricing re-
presents an untapped reservoir. The OSA in its first phase
has generated a way for LCCs to gain market share against
established giants in a real, meaningful way.
Some LCCs, such as Zoom, have had limited transatlantic
success flying to Canada and other North American desti-
nations, and Asian LCCs have begun exploring long-haul
routes, primarily between Southeast Asia and Australia
and India. But with all US destinations now on the ta-
ble, and with all-economy aircraft becoming available, it is
no surprise that the European LCC stars (like Ryanair and
easyJet) are quickly announcing their intention to launch
no-frills service across the Atlantic.
During the first phase of the OSA, legacies will be in the
best position to exploit the newfound competition on
transatlantic routes. By operating more flights, they can
create new economies of scale particular to the route and
pass savings along to passengers. By expanding existing
partnerships and alliances, legacies are primed to increase
airport presences and favorable schedules almost imme-
diately. Once the LCCs make the necessary infrastructure
investments, however, it won’t be long before they too be-
come ardent competitors in the transatlantic market.
Raphael Bejar is CEO of Airsavings, a group purchasing
and ancillary services firm based in Paris, France. As foun-
der and chief executive of a company that focuses on cri-
tical operational aspects of low cost and mid-sized carriers
on three continents, and with his 15 years of experience in
airline finance with European giants Credit Foncier and Jet
Finance, Mr. Bejar is uniquely positioned to comment on
emerging trends affecting the airline industry.
www.air-scoop.com
 DOWN TO EARTH
Are European LCCs Doomed?
It seems that the “perfect storm” predicted by O’Leary
is about to bring first casualties. Vueling, SkyEurope,
Germanwings and clickair are facing tough times.
Vueling has already announced 32.4 million euros of
pre-tax losses for the first quarter caused by skyrocke-
ting oil prices. However, the Barcelona-based carrier
stayed optimistic about the chance to reduce losses
in the third and fourth quarters and to increase pro-
fits in the year 2009. What stays behind the desired
success is a so-called «capacity-optimization process»
launched by Vueling during the quarter. The process
includes the reduction of fleet by 3 aircraft. If the pro-
cess goes further on, the Spanish LCC risks ending
up as a seasonal airline operating a limited number of
aircraft.
For many LCCs, gaining profit this year will be im-
possible if the oil prices continue to grow. Ger-
manwings reported a decline in passenger numbers.
First quarter losses resulted in the quasi-merging of
Germanwings and clickair, which have developed a
partnership program aiming at increasing the number
of accessible flights online. That is, passengers will be
able to book selected flights between Germany and
Spain using either airline’s website. Browsing through
the website, passengers will be shown flights opera-
ted by both clickair and Germanwings. Thus, passen-
gers looking for flights from Spain to Germany can
choose between destination options served by either
the German LCC or the Spanish LCC. The cross-sale
agreement is seen as an effective marketing tool. The
agreement also marks the first step towards real mer-
ges in the airline industry. Record oil prices and tough
competition add to the overall pressure in the indus-
try and prompt airlines to take effective measures not
to leave the market. Merging is just one of the ways to
offset the crisis. Germany’s Lufthansa, for example, is
said to be in talks with TUI Travel about Lufthansa’s
Germanwings merger with TUIfly. Clickair in turn
holds negotiations with Vueling with a view to form
a united company.
6 Air Scoop - June 2008
SkyEurope has also reported a drop in passenger num-
bers as well as in load factor. Generally, the carrier’s
performance was shattered significantly with the air-
line’s load factor fall to 70.7 percent, and the passen-
gers flown decline by 4.7 percent. To maximize reve-
nues from flights, the Bratislava-based carrier started
to cut non-profitable destinations which resulted in
lower passenger numbers. Nevertheless, the results
for the first half show that SkyEurope is the only LCC
which had a reduction in costs amidst high fuel prices.
However, the overall revenue growth turned to be
much lower than the expected one.
Assumingly, the only way to stay profitable is to raise
ticket prices, which basically undermines the entire
LCC’s model. Once fuel prices reach $150 per barrel,
LCC will be forced to pass fuel costs to passengers
whereas travellers are getting ready to change their
holiday plans if ticket prices rise. On the other hand,
long-haul airlines affected by fuel prices might like
to use low-cost airports and terminals to reduce their
own costs which will bring additional pressure to the
LCC market. Anyway, LCCs are undoubtedly are
under attack and have to act. According to a study
by Sabre Airline Solutions the most successful LCCS
are so-called hybrid airlines which implement certain
practices of legacy airlines to attract business travel-
lers and to remain competitive by gaining profits from
full-service elements. Yet LCCs have very limited
choice in dealing with major operation losses which
makes experts envisage the end of the low-cost era.
www.air-scoop.com
 BIRD’S EYE VIEW
SWOT Analysis of Blue Air
Introduction
According to a report presented by Deloitte, air transport
will continue to be an essential influence on the tourism
industry. Airlines and airports will become part of eve-
ryday life for the millions who until a few years ago had
never flown before. The insatiable growth of low cost car-
riers will continue to open new markets and the long-haul
aircraft will provide new supply to far flung destinations.
Research projections show an expected transition from the
extremely volatile swings in demand of the last four years
to a period of stable growth globally. Research indicates
that by 2010, more than 2.3 billion passengers worldwide
would use the world’s airlines for business and leisure tra-
vel. Routes in Central and Eastern Europe are expected to
grow at a faster pace than in Western Europe.
However, whilst the above indicators paint a picture of
stable growth, the airline industry in 2008 continues to
be haunted by economy slowdown, rising fuel prices,
lower consumer demand, increasing infrastructural costs
and consolidation (mergers or bankruptcies). There are
approximately 50 low-cost carriers in Europe, with new
ones emerging and old ones dying regularly. The European
LCC industry seems to be slowing down. We can expect
some major overhaul in the LCC segment amongst its
players, especially in Europe where LCCs are experiencing
unprecedented challenges. With new market creation that
is reaching saturation and strong reaction from network
carriers and charter airlines alike, what can be expected is
a wave of consolidation among the LCCs, either through
acquisition or the market exit of many start-ups. Accor-
ding to a Cranfield University forecast, the low-cost airli-
nes sector in 2015 will be dominated by 2 or 3 large carriers
carrying up to 80 million passengers approximately, flying
250 air¬crafts, along with a few niche players.
The Romanian Airline Market: Romania became the
member of the European Union (7th largest country) in
2007. Its capital, Bucharest (with 2.6 million people in the
metropolitan area), is one of the largest financial centres
in the region. Romania is located in between Central and
Eastern Europe. Regarded as a relatively backward tou-
rist destination until the 1990s, Romania recently began
to reinvent itself as a diverse and unique European desti-
nation, boasting of stunning mountain scenery, historical
cultural sites, beach resorts, and medieval towns.
The country is currently enjoying its highest living stan-
dards since Communist times, with foreign investment on
the rise, making it one of the fastest growing economies in
Europe. Romania’s economic growth could exceed 7 per-
cent this year underpinned by healthy cash inflows from
taxes on products and services, by constructions’ advance,
7 Air Scoop - June 2008
SWOT TEAM
plus a slight increase of industry and agriculture, as gau-
ged by Banca Comerciala Romana (BCR), the country’s
top lender by assets. The National Forecast Commission
(CNP) estimates GDP to be 6.1 percent in 2009, 5.8 per-
cent for 2010 and 2011 and 5.7 percent for 2012 and 2013.
Tourism is a significant contributor to the Romania Econo-
my. Domestic and international tourism generates about
6% of gross domestic product (GDP) and 0.8 million jobs.
Tourists’ number in Romania went up 8.2 percent in the
first two months of the year against the same period in the
previous one, according to a press release issued by the
National Statistics Institute (INS). About 824,000 peo-
ple visited Romania from January 1 to February 28, out
of which 79.1 percent Romanian tourists and 20.9 percent
foreign tourists. As many as 1,119,100 foreign tourists ar-
rived to Romania in the first two months of the year, 59.8
percent more than in the same period in the previous year.
Most of them came from Europe (95.9 percent).
Romania has 17 civilian airports, out of which currently 10
are served by scheduled international flights. Bucharest’s
Henri Coanda (Otopeni) Airport is the largest and bu-
siest, but its Aurel Vlaicu Airport also fields some flights,
and there is also direct service to Timisoara, Cluj-Napoca,
Oradea, Satu Mare, Sibiu (Transylvania), Constanta, Ba-
cau, Iasi, Suceava, Targu-Mures and Baia Mare.
Other smaller international airports are located in Bacau
(with low cost flights to major cities in Italy, plus Barce-
lona and Paris), Arad (flights to Valencia, Verona, Barce-
lona, Stuttgart, Milan), Sibiu (flights to Vienna, Munich
and Stuttgart), Iasi (flights to Vienna), Constanta (various
seasonal flights) and Targu-Mures (one daily flight from
Budapest).
There are three important Romanian airlines:
1. TAROM , the Romanian flag carrier, based in Bucharest
Otopeni
2. Carpatair, based in Timisoara, connects this city with
eight Italian and three German destinations, and also has
collector/distributor flights to the following Romanian
airports: Cluj-Napoca, Bucharest, Constanta, Oradea, Si-
biu, Iasi, Suceava, Satu Mare and Bacau
3. Blue Air, the only Romanian low-cost airline, based in
Bucharest Baneasa
Romanian LCC Market: In recent times Romania has be-
come increasingly attractive for low cost carriers. Blue Air
is Romania’s first home grown low-cost carrier which was
created in 2004 and is based in Bucharest and is a strong
competitor to Wizz Air. Blue Air is serving various desti-
nations in Europe from Bucharest (Aurel Vlaicu Airport),
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 BIRD’S EYE VIEW
Arad, Targu Mures and Bacau airports. Hungarian budget
airline, Wizz Air, introduced direct flights from London
Luton to Bucharest in January 2007. After Romania joined
the EU, the main low-cost air operators present on the
local market - WizzAir, Blue Air, SkyEurope and MyAir
- registered a significant growth of more than 50 percent
in the passenger traffic, whereas regular airliners saw an
increase of just 10-20 percent.
According to the summer schedule of 2007, currently 12
countries and 57 routes are served by low-cost carriers
from Romania. The geographical distribution of the final
destinations shows a very one-sided nature: 72 % of the
routes lead to Italy or Spain and only 16 of them lead to
other countries. There is also a strong presence of Italian
LCCs in Romania. However, their presence in the country
is not a coincidence, but may be explained by another
substantial factor.
Since its accession into the EU, there has been a huge
flow of outward (labour) migration from Romania. The
main destinations of these migrants were Spain and Italy,
because of already established cultu¬ral ties and perhaps
because Spanish and Italian languages are easy to learn for
Romanian native speakers. According to unofficial estima-
tes, more than 1.2 million people left the country and this
strong outward migration is likely to continue in the fu-
ture, too. In essence, the migrants pose a constant, strong
demand for air travel, and this may be the reason why
one can observe the absolute dominance of Mediterranean
routes offered by LCCs in Romania.
In this sense, it is not surprising at all that Wizz Air
con¬siders the country as its most important business
oppor¬tunity after Poland. A substantial part of the com-
pany’s business strategy is to build on the market niche of
mi¬grant workers and their demand for flights between
the home and host countries. This is the reason why Wizz
Air’s network is concentrated between Polish cities and
the UK and Nordic countries, as most Polish migrants are
working in this region. Following the same strategy, Wizz
Air has already established a strong presence in Romania as
well posing a great challenge to the local player, Blue Air.
Several others like Ryanair, easyJet, Wind Jet, AlpiEagles
are also operating flights in Romania.
Overview of Blue Air
History: Blue Air Transport Aerian is the first low-cost and
charter-flight company in Romania. The objective of the
company is to provide affordable and quality services as an
alternative to the existing land transportation means. Blue
Air as its airline is called is Romania’s first home-grown
low cost airline based in Bucharest. The airline was foun-
ded in 2004 and it commenced operations with a fleet of
8 Air Scoop - June 2008
three B737s (with a seat configuration of 144, 136 and 123)
from capital city Bucharest’s second airport, Aurel Vlaicu
(formerly Baneasa). The carrier served 14 destinations, in-
cluding one non-stop flight from Transylvanian city Arad
to Spain’s Valencia. The carrier supplements its income
by offering charter services to holiday groups. The main
hubs of Blue Air are airports in Bucharest, Arad and Ba-
cau. Its main competitors were Wizz Air, My Air and Sky
Europe.
Their first destinations from Bucharest were Timisoara,
Milan, Barcelona and Lyon. In 2006, the number increased
to 18 destinations in Italy, Spain, Germany, Belgium, Fran-
ce, Turkey and Portugal. Some of the flights also, start
from the Romanian cities of Bacau, Arad and Cluj-Napoca.
The main shareholder of Blue Air is businessman Nelu Ior-
dache. In August 2005, Blue Air obtained the certification
from the Romanian Civil Aeronautic Authority to trans-
port cargo on its flights. In September, the airlines started a
scheme by which a passenger could purchase plane tickets
and pay for it in 3 instalments using “CardFinans AVAN-
TAJ” at the Aurel Vlaicu (formerly Baneasa) airport. It
also introduces sale of its air tickets at some Romanian
Post offices.
By the end of 2006, Blue Air was operating flights from
Bucharest to Italy (Bologna, Milan Bergamo, Rome - de-
partures also from Bacau, Turin - departures also from Ba-
cau), and, to Verona - departures also from Arad, Spain
(Barcelona, Madrid, Malaga, Valencia - departures also
from Arad and Cluj Napoca), Germany (Cologne Bonn),
Belgium (Brussels South Charleroi), France (Lyon, Paris
Beauvais), Turkey (Istanbul) and within Romania (Cluj
Napoca). Commencing from the summer of 2006, Blue
Air provided, its own ground and ramp handling services
for passengers on Aurel Vlaicu International Airport (Ba-
neasa).
The airline had 55 employees in the beginning, and in 2006,
it had over 240. In 2005, it carried more than 240,000 pas-
sengers and a little more than 443,000 in 2006. The turno-
ver exceeded 24,000,000 Euros in 2005 and 47,000,000
Euros in 2006. The Blue Air fleet which consisted initial-
ly of only 3 aircrafts, acquired one more B737 (with seat
configuration of 167), making it 4 by the end of 2006.
In 2007, they expected the turnover to become 80,000,000
Euros, and to carry over 800,000 passengers. In 2006, their
total load factor was 77% and fleet number to increase by
one. Till 2006, Blue Air was operating in a less intensive
competitive market as Romania was not a member of the
EU (the open skies policy did not apply). But that was
about to change. The company’s net income amounted to
around 105,000 euros in 2006, according to Finance Mi-
nistry data.
The Romanian market for low cost air services was be-
coming potentially vibrant, with a large population (2.4
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 BIRD’S EYE VIEW
million in Bucharest and the surrounding suburbs), an
inefficient and expensive flag carrier (TAROM) and forth-
coming accession to the European Union in January 2007.
The Romanian appetite for travel was increasing with the
economy showing signs of dynamic growth after years of
underperformance.
The Year 2007: On January 1st 2007, Romania and Bulgaria
became members of the European Union thus opening up
their skies to airline companies from other EU member
countries. This meant increased demand and competition
for air travel.
During the first couple of months of 2007, Blue Air ope-
ned an agency in Rome, and introduced a direct flight to
Lisbon, the only such flight from Lisbon to Romania.
As of March 1st, 2007, the Blue Air Company would start
operating flights to Greece, to Thessaloniki and Athens.
The airline also introduced a new service - ticket reser-
vations with payment in 72 hours and started operating
flights to Fiumicino, Rome’s main airport. It moved its Ba-
cau-Rome Ciampino and Bucharest Baneasa- Rome Ciam-
pino routes to Rome’s Fiumicino airport on March 25. It
had also leased an ex-Blue Panorama Airlines (BV/Rome
Fiumicino) B737-400 for meeting the requirements of the
new routes. Starting with the summer schedule passengers
would also be able to travel from Cluj Napoca to Bar-
celona. Starting from May 1st 2007 a shuttle bus service
between Brussels South Charleroi Airport - Lille and re-
turn was started.
The number of low-cost airline operators was rising do-
mestically. Besides the already present companies, Ger-
manwings entered the market on March 25, by introducing
a Bucharest-Kohl route, whilst Spanish airline company
Click Air launched a Bucharest (Otopeni) – Barcelona (El
Prat) direct flight in May.
On account of the maintenance works that took place at
the International Airport Aurel Vlaicu (Baneasa) between
May and August 2007, Blue Air operated flights from the
International Airport Henri Coanda (Otopeni) during that
period.
Starting from June 1, 2007, Blue Air introduced new faci-
lities for its passengers. The passengers could change the
route (for destinations within the same country) and the
name written on the ticket at least 3 hours before take-off.
They would be able to make these changes through one
of the 6 Blue Air Call Centers, at the Blue Air ticketing
points and in the airports where the company operated.
Name changes could be made against a fee of 35 EUR/
flight segment. Route changes (for destinations within the
same country) could be made against a fee of 35 EUR/fli-
ght segment, plus a possible difference between the tariff
paid for the initial ticket and the tariff available at the time
of the change. These changes are allowed for all the tariff
classes except for Promo and OnlyTaxes categories.
9 Air Scoop - June 2008
Later Blue Air opened 2 new ticketing agencies, one in the
International Airport Valencia (Manises), at the Arrivals
Terminal, and one in Bucharest at the Phoenicia Hotel.
In June 2007, the contract for the fifth aircraft was also
signed. Blue Air would purchase a new airplane, type
Boeing 737 series 400, with a capacity of 162 passengers,
which would be delivered in November 2007. Whether
this order was ‘too late too little’ only time would tell! On
19th June, Blue Air celebrated its achievement of carrying
1 million passengers. Blue Air had by then issued 1,245,000
bookings.
In July the airline announced two new routes to Stuttgart
from Arad and Bucharest and to London Stansted from
Bucharest starting in the months of September and Octo-
ber respectively.
In August, Blue Air introduced the Corporate Package for
corporate travellers. With the Corporate Package a com-
pany save up to 50% if it chose to buy the tickets in ad-
vance to any Blue Air destination or could benefit from
special prices for instalment payments.
In September 2007, British budget carrier easyJet launched
flights to Romania, flying from Baneasa Airport to Milan’s
Malpensa; flights to London Gatwick and Madrid Barajas
followed in October. The airline said it hoped to carry
255,000 people in its first year of operations.
In September Blue Air had negotiations with Greek air
carrier Aegean Airlines so that the latter could acquire a
stake in the former. According to Nelu Iordache, founder
and owner of the company, the price asked for Blue Air
topped 30 million euros. However, talks with the Greek
company were halted and the company’s representatives
stated they were still considering floatation on the stock
market. Similar talks had been held with Wizz Air of Hun-
gary and failed. Maybe it might become ‘third time lucky’
in 2008. All it needed is a new business partner.
In December, the airline had moved its Bucharest Baneasa-
Brussels route from Charleroi to National airport in Brus-
sels last month.
In 2007, the company went beyond initial forecast of the
80 million Euros turnover, by registering a first-time profit
of above one million Euros and succeeded again in doubling
sales. «We believe last year’s profit ranges between one and
two million euros,» said Gheorghe Racaru, the company’s
manager. He also specified that during the winter period
the firm had registered additional costs of between 70,000
and 90,000 euros because of the bad weather conditions
that caused flight delays.
Throughout its 3 years of its operations, Blue Air has fol-
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 BIRD’S EYE VIEW
lowed a strategy of operating most of its flights on specific
lucrative routes, only increasing and decreasing the fre-
quency depending on the seasons. Blue Air became the
low-cost leader in Romania, offering flights to 29 Euro-
pean destinations of 7 capitals and 22 cities operating with
a fleet of 5 aircrafts. The Romanian market was certainly
growing quickly, with approximately 1.73m passengers
served in 2007 and Blue Air enjoyed a 33% market share
of the budget flight market.
Current status: The operator has budgeted 120 million-
euro turnover for 2008, with figures for 2007 being around
95 million Euros. It has anticipated that its growth pace
will slow down to 30% from the 100% level that it had
registered in the past three years. The reason for this low
growth target has been due to the entry of strong low cost
players in 2007 like Wizz Air, Germanwings ad easyJet.
Adding to this was the entry of Europe’s biggest low-cost
carrier, Ryanair this year. However, Blue Air representati-
ves stated that the new operators could only have a posi-
tive impact over the market.
«Competition is not harming us as there’s room for every-
body on the Romanian market. Competition is just brin-
ging passengers better and more diversified products,» said
the company’s representatives. «For 2008, we project an
average occupancy rate of 83%, similar to last year’s level,»
the company’s representatives also said. By yearend, Blue
Air will reach 100 weekly flights, from 80 at the moment,
with the new destinations including Berlin and Larnaka.
Blue Air announced on January 17 that it would commen-
ce flights from Bucharest to Berlin Schönefeld Airport.
In February, the Boeing Company announced an order
from Blue Air Transport Aerian, for two B737-800s and
purchase rights for two more. The aircraft will join the
Blue Air’s all-Boeing fleet to provide extra capacity in a
fast-growing market. The order is valued at approxima-
tely USD150 million at list prices.
«We have doubled our passenger traffic every year since
starting our operations. Looking toward the future, the
Next-Generation 737-800 is the most capable airplane on
the market with a proven and impressive track record.
It is the right airplane for our forecasted growth in this
region,» said Gheorghe Racaru, General Manager of Blue
Air. Blue Air will commence operating a B737-800, acqui-
red through a lease agreement, later in 2008.
During the last week of March, BlueAir, the largest low-
cost operator on the Romanian market, introduced flights
from Arad to Barcelona which made it four foreign desti-
nations from Arad including the flights to Valencia, Vero-
na and Stuttgart. BlueAir had also been operating its only
domestic route, Bucharest-Arad, since the beginning of
this month. «We’ve had 400-450 passengers a week since
10 Air Scoop - June 2008
the introduction of the domestic flight on March 12, and
expect to have 24,000 passengers on this route by the end
of 2008,» said Catalin Ilie, deputy general manager of Blue
Air. Arad is also the airport where the biggest low-cost
airline in Europe, Ryanair, began operating flights in April.
The company entered the Romanian market with flights
from two less costing airports in Arad and Constanta. In
April, Ryanair launched flights from Arad in Transylvania
to Milan and from the coastal city of Constanta to Pisa.
In April, Blue Air the low-cost airlin reached 50% of TA-
ROM’s revenues on the Romanian market within three
years, which it achieved through its many Spain and Italy
routes, placing it on the top in the market since its esta-
blishment. «Flights to Italy have generated around 36% of
revenues so far, while those in Spain around 20%,» said
Gheorghe Racaru, the manager of Blue Air, whose busi-
ness reached 95.7 million euros last year.
Blue Air, a company held by businessman Nelu Iordache,
has therefore become the largest private airline held by
Romanians, leaving behind Carpatair, whose main share-
holder is Nicolae Petrov. Carpatair ended last year with
turnover worth around 82 million euros. TAROM car-
ried 1.9 million passengers last year, while Blue Air car-
ried 900,000 people. A large number of Italian companies
operate in Romania, including many in Timisoara, a city
in the west of the country 60 km from Arad.
Blue Air intends to maintain its leading position, althou-
gh other players such as Wizz Air and Italy’s MyAir are
vying for precisely the same spot. Wizz Air concluded last
year with business worth around 30 million Euros and an
estimated traffic of 415,000 passengers, close to MyAir’s
420,000.
The number of airports in Italy amounts to seven and the
number of weekly flights to destinations in this country
has reached about 40% of the total. «We are still looking
to boost the flight frequency to Spain and Italy, where
we are tempted by 1 or 2 more destinations. The minimal
occupancy rate that makes a flight to Italy profitable is
72-75%, while in Spain’s case, to which flights take about
three hours, we need a minimum occupancy rate of about
80%,» Racaru explained, adding that no other country had
such a high potential at present.
Besides the existing routes to France and Germany, they
are also looking at countries like Switzerland or Scandina-
via for future destinations, as well as to the SE European
region, to countries such as Ukraine, Croatia, Slovenia and
Macedonia as stated by Blue Air’s manager. In April Blue
Air announced a new destination departing from Cologne
Bonn to Sibiu (Hermannstadt) starting from June 18th.
It also was starting from the 1st of June 2008, a second
domestic route, Bucharest - Sibiu - Bucharest. Blue Air
was going to offer the only direct connection ‘Brussels –
Constanta’ from 29th of July 2008.
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 BIRD’S EYE VIEW
During April and May, Blue Air cancelled many flights on
almost all the important routes important routes commen-
cing at Bucharest to major cities like Berlin, Stuttgart, Bo-
logna, Paris, Madrid, Milan, Cologne, Verona and Valencia
between April 1st & 25th and again between May 7th &
12th. Earlier in February it had cancelled but rescheduled
some flights, but this time there was no rescheduling of
flights. There was no concrete reason stated. But it seemed
that the high fuel costs and increasing competition was cat-
ching up!
Blue Air operates on three other airports outside Bucha-
rest in Romania, Bacau, Arad and Sibiu, and is also see-
king entrance on the Northwestern airports (Satu Mare,
Baia Mare, and Oradea). Despite rapidly rising passenger
numbers, 2008 may not be an unqualified success for all
airlines. Wizz Air CEO Jozsef Varadi has warned that the
increase in fuel costs caused by rising oil prices would put
the squeeze on less competitive firms.
Issue
The main challenge facing Blue Air is to overcome the
combined onslaught of many factors this year like rising
fuel costs, increasing competition and reduced consumer
spending.
Business Model
The low-cost concept perfectly fits the conditions existing
in Romania, where prices of tickets are still high and no
complete network of connections with the big European
cities is offered. The aim of the Blue Air Company is to
transform air transport into a service accessible for all ca-
tegories of passengers. The objective of our company is to
provide affordable and quality services as an alternative to
the existing land transportation means.
At present, the Blue Air Fleet consists of five modern air-
crafts, two Boeing 737 series 300, with a capacity of 144
seats (registered under YR-BAA) and 136 seats respecti-
vely (registered under YR-BAC), a Boeing 737 -500 aircraft
with a capacity of 123 seats (registered under YR-BAB) and
two Boeing 737- 400 with a capacity of 167 seats (registe-
red under YR-BAD) and 162 seats respectively (registered
under YR-BAE). It has also placed an order for two B737-
800s with Boeing this year. The shortest flight on Blue Air
is 00:10 hours from Bucharest to Bacau.
During 2007, Blue Air also got involved in social respon-
sibility programs with the Cristian Chivu Football for
Children Association, Baneasa Airport, and the Federation
of Airport Unions in Romania, with a project for giving
awards to talented young Romanians. The project sent to
Disneyland 54 Romanian children with top results in scho-
ol, athletics, or sports.
Some of the few important features of its business model
are explained below:
Booking Tickets: Blue Air offers three modes for booking
11 Air Scoop - June 2008
tickets namely: online, call centres and agents. It offers 12
categories of tariff or ticket fares for which changes in name
and destination is permitted (Promo category is an excep-
tion) at certain rates and with some constraints. It does not
issue any ticket but only a confirmation number at all its
booking centres. Pre-assigned seating is not provided.
Baggage: Each passenger has the right to maximum two
checked-in baggage having a total weight of maximum 25
kilos and the sizes of maximum 100x 80x30cm, the carria-
ge thereof being included into the price of the ticket. The
checked-in baggage in excess of 25 kilos shall be charged
with EUROS 6 per kilo. A passenger is also entitled to have
only one carry-on baggage which should not exceed 7 kilos
and size of 55 cm x 40 cm x 20 cm. In addition, one can also
carry take a laptop, the size of which should not exceed 55
cm x 40 cm x 20 cm. The total weight of (checked-in and
carry-on) baggage should not exceed 32 kilos.
Blue Air Corporate: Under Corporate Package a company
could save up to 50% if it chose to buy advance tickets or
it could have negotiated prices on plane tickets under ins-
talment payment. This package of flexible tickets entails
allows the customer to have an account opened at Blue
Air, a personal sales consultant and a lot of freedom of
movement. Besides having the freedom of time and mo-
vement, plane tickets could be disposed of in any other
manner deemed suitable by the customer. For example, it
could keep them for business meetings, or use them when
in search of new clients, or offer them to employees for
training travels or as a reward trip.
Customer Loyalty Program: BLUE AIR has launched the
loyalty programme «MY BLUE AIR» in which a customer
could open an account and BLUE AIR would repay him/
her with points for every flight with them. The points will
offer discounts to the tickets and, if gathered could win
them even free tickets.
Also, the competition «Get off from the Blue Air plane
straight into a Brand New Logan» is another monthly sche-
me used by the airline to repay its customers’ loyalty with a
brand new car, a Dacia Logan which can be won in a lucky
draw. Any person buying a plane ticket from one of the
sales agencies in the country or abroad, from any agency
working with Blue Air, by means of the Blue Air Call Cen-
tre or website, is automatically registered in the database
destined for drawing the prize.
Other notable services are: Cargo service, ticket reserva-
tions with payment deadline of 72 hours, online car rental
service and hotel reservations.
www.air-scoop.com
 BIRD’S EYE VIEW

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

 BIRD’S EYE VIEW

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

 BIRD’S EYE VIEW
Conclusion
Blue Air can definitely survive these difficult times if it is
able to find a strategic regional partner to avoid being run
over by the strong competitors surrounding it and the ever-
rising fuel prices. Growth and rapid expansion need large
funding for which any dynamic company would eventually
go to the capital markets. But the current volatility in the
stock markets does not bode well for such a move. There is
immense scope for the airline to become a strong regional
airline providing both charter and low cost flights.
The increasing competition coupled with rising operating
costs could mean that small players may find it extremely
difficult to keep their prices low and therefore need to
adapt new strategies to survive in the long term. There is
no doubt that the current volatile economic environment
will definitely test the mettle of many airlines to survive
and sustain. The end result could only be the ‘survival of
the strongest’.

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

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

 DOWN TO EARTH

15 Air Scoop - June 2008 www.air-scoop.com

 BIRD’S EYE VIEW
Ryanair and PSO Routes
Recently, Ryanair was awarded the PSO (Public Service
Obligation) route from Dublin to Kerry. The route, to be
flown three times daily on Ryanair’s 189-seat aircraft, will
dramatically increase the number of seats flown between
the two cities. However, this announcement contradicts
earlier assertions by the airline against PSO routes. Mi-
chael O’Leary has described PSO routes as “extraordina-
rily excessive and wasteful.” Ryanair takes over the PSO
contract from competitor Aer Arran, which would have
made a large sum of money (up to €3 million per year)
on the route.
Aer Arran has been able to stay in business in part be-
cause it has studiously avoided competing directly with
Ryanair. But with Ryanair aggressively pursuing profitable
routes that Aer Arran operates, that carrier may have to
work harder to stay out of Ryanair’s way. Since Aer Ar-
ran and Ryanair operate under two very different business
models, both should be able to coexist without significant
conflict, so Ryanair’s latest move is a bit of a mystery. Pe-
rhaps, given high fuel costs, Ryanair desires to focus more
on shorter routes, where there is more overlap between
the two carriers.
O’Leary seems bent on destroying the competition, even
if Aer Arran marginally competes with Ryanair. In a re-
cent Belfast Telegraph article, O’Leary was quoted as
saying “The most likely one to go bust at $200 a barrel
is Aer Arann”. While O’Leary has been known to make
disparaging comments about competitors in the past, in
an attempt to scare away passengers and investors, he has
been especially forthright in specifically naming Aer Ar-
ran as a carrier that could go under. It appears that Ryanair
desires to dominate Ireland, even if it means crushing its
smallest competitors.
Background on Ryanair and PSO
While Ryanair takes advantage of Ireland’s PSO program,
the airline has been extremely critical of that program, as
well as similar PSO programs in other countries. In Rya-
nair’s press release, accepting the subsidies, CEO Michael
O’Leary said “It is crazy for the Irish taxpayer to be subsi-
dizing these regional routes to the tune of €45m or almost
16 Air Scoop - June 2008
Exclusive Analysis for Air Scoop
www.airlinebulletin.com
€100 per passenger. Given the improvements to national
motorways and the increased frequency of rail services to
the regions, these subsidies are unjustified and totally un-
necessary. This money could be better spent on our heal-
thcare service or education system. Just think how many
additional school classrooms, Special Needs Assistants or
how many hospital beds could be funded by this €45m?”
In Italy, Ryanair has criticized the PSO program, as it pre-
vented the carrier from adding an additional route from
Alhegro Sardinia to the Italian mainland. This route, cove-
red by the Italian PSO program, gave Alitalia a monopoly,
and an opportunity to charge significantly higher fares
than what Ryanair would have. In response to the Alitalia
decision, Peter Sherrard, Ryanair’s head of communica-
tions said, “We are calling on the European Commission
to reach a speedy conclusion to its investigation. Italian
consumers are being forced to pay fares 4 times higher
than last year to fly between mainland Italy and Sardinia
because the Italian authorities have systematically abused
the PSO rules to protect high fare Italian airlines and block
low fares and competition.”
While the EU should rule the Italian PSO program illegal,
at least given the way the government has chosen to ma-
nage it (as it blatantly favors Alitalia), Ryanair’s hypocrisy
is disturbing. This isn’t the first time that the airline has as-
ked for public money to operate, and at the same time de-
nounced programs or infrastructure projects funded with
public money that the carrier deems excessive. Ryanair
frequently receives subsidies from airports and local tou-
rism authorities (typically public money) when starting a
new route, in order to help with marketing expenses, and
to guarantee revenue during the first few months while
the route gains traffic.
Ryanair is a business, and like any business, its goals are to
cut costs and increase profits. Ryanair will take whatever
public handouts it deems profitable, and criticize whate-
ver expenses it deems unnecessary. Ryanair’s management
may talk belligerently, but they aren’t stupid, and ultima-
tely their goal isn’t to eliminate PSO programs, but rather
to steer them towards the carriers´ needs. In the Ryanair
press release quoted earlier concerning its award of the
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 BIRD’S EYE VIEW
Dublin-Kerry route, O’Leary said “If unjustified subsidies
are available, then Ryanair is right to apply for and win
them. We have reduced the subsidy on the Kerry route
by over 40% from €9m to just over €5m, saving the Irish
tax payer almost €4m.”
Ryanair’s management doesn’t care about consistency of
opinion, or even public policy in general. The company
cares about the bottom line, and the extreme moves that
the carrier has taken, such as its rash of ancillary charges,
and bizarre workplace requirements that prevent em-
ployees from charging their phones at work, demonstrate
that management is focused on making as much money
as possible. Unlike politicians, business executives aren’t
held to the same standard of accountability. While this
has drawbacks for consumers, it’s a reality in the world
we live in, and Ryanair’s management routinely exploits
the media’s lack of desire to do fact checking as a way of
changing its position on issues whenever it’s advantageous
for the company, while still maintaining its image.
Adverse Effects of PSO Programs
Unfortunately, PSO programs across Europe distort the
market. By offering subsidies to operate certain routes,
PSO programs reward carriers that have close connections
to government; one of Ryanair’s key complaints against
Alitalia’s involvement in Italy’s PSO program. (The Ita-
lian government is a major shareholder of the carrier). As
governments try to deregulate the airline business, the
operation of PSO routes creates another stumbling block
for low-cost carriers that operate without government in-
tervention. O’Leary is right about one thing, the subsidies
used for PSO routes could be used for other, more pres-
sing, needs.
Moreover, PSO programs encourage the propagation of
air routes that are environmentally unsustainable. Most
PSO routes are for very short flights, less than an hour and
a half in length, where, in most cases, passengers can take
busses or trains. Even though these forms of transport
take longer, both are more environmentally friendly than
air travel. While some PSO routes are critical lifelines to
individuals on isolated islands, many PSO routes, inclu-
ding the Dublin to Kerry route, are merely redundant and
unnecessary.
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17 Air Scoop - June 2008
Will the route succeed?
Ryanair will operate three daily flights on the Dublin-
Kerry route, substantially increasing the number of seats
available. The flights will be very short, and Ryanair will
be able to use an aircraft to do quick turns, allowing the
carrier to increase aircraft utilization. Since Ryanair already
has operations at Dublin and Kerry, the marginal costs of
starting this route will be rather low, and at a time when
the airline is desperately trying to conserve cash, this will
be more advantageous than a longer route to a new des-
tination. While the load factors will likely be lower than
the Ryanair system-wide average, the carrier has proven
successful at generating traffic where there currently is
very little. With Ryanair’s success at generating ancillary
revenues, they should be able to make money on the rou-
te. However, with fuel costs rising quickly, Ryanair’s costs
will rise too, and this could impede the carrier’s profitabi-
lity on the route. While Ryanair believes that it can make
money here, it remains to be seen whether the carrier
can remain true to its word and profitably operate with a
reduced subsidy.
Remarks, questions… Join Sam by email (samsellers@
gmail.com) or on his website to comment this article…
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Sam Sellers provides analysis and commentary on the
airline industry at his website, www.airlinebulletin.com,
and is the author of Take Control of Booking a Cheap
Airline Ticket, an ebook for travelers in the United States
who are interested in purchasing cheap airline tickets.
www.air-scoop.com