The “no-frills” approach and environment Turbulent Skies? Not Really… Are European LCCs Doomed?

SWOT Analysis of Blue Air Ryanair and PSO Routes

Highlights in this Issue
p. 3 p. 5 p. 6 p. 7 p. 16

The Low Cost Carriers Analysis Newsletter

EDITORIAL
The Oil Price Shock and its Effects on the Low-cost Business Model

AIR SCOOP ANNOUNCEMENTS A Glimpse of Headlines News!
OIL FEARS OVER LCC MARKET! Irish airlines downgraded by bank Aer Lingus and Ryanair have been downgraded from ‘Buy’ to ‘Sell’ in a report from investment 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 Dortmund, saying the soaring cost of fuel is making it too costly. In a further sign of the crisis hitting the aviation industry because of sky-high oil prices, the budget carrier – the second biggest operator at Liverpool John Lennon Airport (JLA) – says it has begun a 90-day consultation 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 carriers 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

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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. According 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 problem 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, however, is rather limited since in the oil industry there are relatively few suppliers while many more customers, thus oil suppliers form an oligopoly-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, recently 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 hinted at it recently, European airlines use newer models of Boeing and Airbus planes, which burn 30 percent less fuel than models from the

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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 estimates, the price of fuel of a transatlantic flight has quadrupled 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 prices 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 competitive 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 introduce 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 unfortunately 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 prechecked 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 intervene in order to protect customers. Regarding the newly introduced measures and hidden charges, 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. 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 weight) 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, unless 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 following 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 Ryanair 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 passengers, although Ryanair follows the same policy. The customer 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 “hidden 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, Ryanair operated 8.7 weekly flights on a single route, whereas in 2008 this figure dropped to 6.3. The same is valid 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 lowered when decreasing the frequency of flights.

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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 demand 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 price difference between flying with a low-cost carrier and a traditional one may become lower as well. In essence, lowcost 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 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 bigger 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 people 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…

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 economic benefits including; the creation of direct and indirect employment in both the aviation and aerospace industries; 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 access 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 scientific 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

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 attitudes 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 focusing attention on greenhouse gas emissions from aviation 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 considerable social benefit by enabling an increasing proportion of the population to access the services offered by aviation and hence the benefits identified above.

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BIRD’S EYE VIEW
Rising fuel charges, emissions trading and other costs associated with the internalisation of the climate change implications of aviation all have the potential to significantly increase the price of tickets. In response many airlines within the low cost sector are responding to these issues by making savings through reducing the level of ‘customer service’ 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 generous passenger allowance coupled with charging for baggage by weight could significantly reduce unnecessary weight carried by aircraft as well as fuel costs and emissions. 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 industry. (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 improvements through its certification process, albeit that advances 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 implementation of many operational improvements. A key question in terms of the airlines will be which business model 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. Dr Janet Maughan is a Research Associate and Professor 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 sustainable development and the environmental capacity of air transport systems through research and knowledge transfer. 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 Airbus, Rolls Royce), airports, airlines and air traffic management organisations with policy makers and regulatory bodies to develop and transfer knowledge – this is known as the OMEGA project.

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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 dinosaurs and flash-in-the-pan startups. Merger mania and exorbitant fuel prices combined with FAA inspection debacles 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 manufacturing processes to develop the cleanest, most efficient planes we have ever seen. Low cost carriers have established a new benchmark for successful operating models, and even as a few have fallen victim to the oil-price crisis, LCCs have continued to proliferate and be profitable. Perhaps most poignantly, the EU and the US have finally established a comprehensive, sensible agreement governing 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 eliminate 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 established 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 intention 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 tentative 2010 rollout, will center on stickier points of contention, including still-restrictive US policy regarding foreign ownership of domestic airlines and unified EU-US emissions 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 destination regulation and second, through phase II, liberalize 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 represents 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 destinations, 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 table, 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 immediately. Once the LCCs make the necessary infrastructure investments, however, it won’t be long before they too become ardent competitors in the transatlantic market. Raphael Bejar is CEO of Airsavings, a group purchasing and ancillary services firm based in Paris, France. As founder and chief executive of a company that focuses on critical 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.

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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 skyrocketing oil prices. However, the Barcelona-based carrier stayed optimistic about the chance to reduce losses in the third and fourth quarters and to increase profits 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 process 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 impossible if the oil prices continue to grow. Germanwings 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 operated by both clickair and Germanwings. Thus, passengers 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 merges in the airline industry. Record oil prices and tough competition add to the overall pressure in the industry 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. SkyEurope has also reported a drop in passenger numbers as well as in load factor. Generally, the carrier’s performance was shattered significantly with the airline’s load factor fall to 70.7 percent, and the passengers flown decline by 4.7 percent. To maximize revenues 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 travellers 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.

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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 everyday life for the millions who until a few years ago had never flown before. The insatiable growth of low cost carriers 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 travel. 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. According to a Cranfield University forecast, the low-cost airlines 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 tourist destination until the 1990s, Romania recently began to reinvent itself as a diverse and unique European destination, boasting of stunning mountain scenery, historical cultural sites, beach resorts, and medieval towns. The country is currently enjoying its highest living standards 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 percent this year underpinned by healthy cash inflows from taxes on products and services, by constructions’ advance,

SWOT TEAM
plus a slight increase of industry and agriculture, as gauged 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 percent for 2010 and 2011 and 5.7 percent for 2012 and 2013. Tourism is a significant contributor to the Romania Economy. 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 people 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 arrived 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 busiest, 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, Bacau, 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 Barcelona and Paris), Arad (flights to Valencia, Verona, Barcelona, 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, Sibiu, 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 become 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 destinations in Europe from Bucharest (Aurel Vlaicu Airport),

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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 estimates, more than 1.2 million people left the country and this strong outward migration is likely to continue in the future, 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 company’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 founded in 2004 and it commenced operations with a fleet of 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, including 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 Bacau. 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, France, 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 Iordache. In August 2005, Blue Air obtained the certification from the Romanian Civil Aeronautic Authority to transport 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 AVANTAJ” 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 - departures also from Bacau, Turin - departures also from Bacau), 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 (Baneasa). The airline had 55 employees in the beginning, and in 2006, it had over 240. In 2005, it carried more than 240,000 passengers and a little more than 443,000 in 2006. The turnover exceeded 24,000,000 Euros in 2005 and 47,000,000 Euros in 2006. The Blue Air fleet which consisted initially 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 Ministry data. The Romanian market for low cost air services was becoming potentially vibrant, with a large population (2.4

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million in Bucharest and the surrounding suburbs), an inefficient and expensive flag carrier (TAROM) and forthcoming 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 opened 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 reservations with payment in 72 hours and started operating flights to Fiumicino, Rome’s main airport. It moved its Bacau-Rome Ciampino and Bucharest Baneasa- Rome Ciampino 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 Barcelona. Starting from May 1st 2007 a shuttle bus service between Brussels South Charleroi Airport - Lille and return was started. The number of low-cost airline operators was rising domestically. Besides the already present companies, Germanwings 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 facilities 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/flight 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. 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 October respectively. In August, Blue Air introduced the Corporate Package for corporate travellers. With the Corporate Package a company save up to 50% if it chose to buy the tickets in advance 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 Hungary 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 BaneasaBrussels route from Charleroi to National airport in Brussels 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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lowed a strategy of operating most of its flights on specific lucrative routes, only increasing and decreasing the frequency depending on the seasons. Blue Air became the low-cost leader in Romania, offering flights to 29 European 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 millioneuro 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 representatives stated that the new operators could only have a positive impact over the market. «Competition is not harming us as there’s room for everybody on the Romanian market. Competition is just bringing 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 commence 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 approximately 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, acquired through a lease agreement, later in 2008. During the last week of March, BlueAir, the largest lowcost operator on the Romanian market, introduced flights from Arad to Barcelona which made it four foreign destinations from Arad including the flights to Valencia, Verona 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 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 TAROM’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 establishment. «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 business 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 shareholder is Nicolae Petrov. Carpatair ended last year with turnover worth around 82 million euros. TAROM carried 1.9 million passengers last year, while Blue Air carried 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, although 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 Scandinavia 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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During April and May, Blue Air cancelled many flights on almost all the important routes important routes commencing at Bucharest to major cities like Berlin, Stuttgart, Bologna, 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 catching up! Blue Air operates on three other airports outside Bucharest in Romania, Bacau, Arad and Sibiu, and is also seeking 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 categories 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 aircrafts, two Boeing 737 series 300, with a capacity of 144 seats (registered under YR-BAA) and 136 seats respectively (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 (registered under YR-BAD) and 162 seats respectively (registered under YR-BAE). It has also placed an order for two B737800s 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 responsibility 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 school, 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 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 exception) 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 carriage 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 instalment 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 movement, 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 scheme 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 Centre or website, is automatically registered in the database destined for drawing the prize. Other notable services are: Cargo service, ticket reservations with payment deadline of 72 hours, online car rental service and hotel reservations.

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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 everrising 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 October 2007. For more information on the World Low Cost Airlines 2008, visit www.terrapinn.com

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DOWN TO EARTH

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Exclusive Analysis for Air Scoop
www.airlinebulletin.com

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. Michael O’Leary has described PSO routes as “extraordinarily 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 because 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 Arran 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. Perhaps, 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 recent 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 Arran 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 Ryanair’s press release, accepting the subsidies, CEO Michael O’Leary said “It is crazy for the Irish taxpayer to be subsidizing these regional routes to the tune of €45m or almost €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 unnecessary. This money could be better spent on our healthcare 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 prevented the carrier from adding an additional route from Alhegro Sardinia to the Italian mainland. This route, covered 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 communications 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 manage it (as it blatantly favors Alitalia), Ryanair’s hypocrisy is disturbing. This isn’t the first time that the airline has asked for public money to operate, and at the same time denounced programs or infrastructure projects funded with public money that the carrier deems excessive. Ryanair frequently receives subsidies from airports and local tourism 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 whatever expenses it deems unnecessary. Ryanair’s management may talk belligerently, but they aren’t stupid, and ultimately 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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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 employees 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 Italian 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 intervention. O’Leary is right about one thing, the subsidies used for PSO routes could be used for other, more pressing, 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, including the Dublin to Kerry route, are merely redundant and unnecessary. Will the route succeed? Ryanair will operate three daily flights on the DublinKerry 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 destination. 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 route. However, with fuel costs rising quickly, Ryanair’s costs will rise too, and this could impede the carrier’s profitability 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… http://www.airlinebulletin.com.

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.

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