air scoop december 2007

8/14/2019 Air Scoop December 2007

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EDITORIAL

Highlights in this IssueBattle for Subsidies: LCCs in the Storm p. 2

Analysis of the Bulgarian LLCC Market p. 3

SWOT of Germanwings p. 5

Which Perspectives for Air Berlin? p. 14

LCC Websites Under Investigation p. 17

Air Scoop - December 2007 www.air-scoop.com

The Low Cost Carriers Analysis Newsletter

Subsidies, Investigation and Consolidation!

In their Business Model, Low-Cost Carriers need to get the lowest

cost at all cost. We know well ancillary revenues and hidden

fares increases (Air Scoop October 2007), but we are less aware

of subsidies received by LCCs. In our last issue, we analyzed the

relationship between carriers and French airports, uncomfortable

with these subsidies (Air Scoop November 2007). Subsidies from

airports or local authorities are in the center of LCCs business,

especially Ryanair. The Irish carrier usually wont pay more than 5

Euros, up to 10 Euros some times, to land in an airport; therefore it

has set up a system to get some money back without being caught

by local or European competitive authorities. The whole system is

unstable as currently under investigation of the European Commis-

sion. Conclusions of these investigations could have a direct impact

on LCCs activities and financial results (p. 2). From one investiga-

tion to another, carriers websites are also under the spotlights as

they are accused of misleading customers. Airlines have to change

the way prices, as well as terms and conditions, are displayed ontheir websites. Even if the risk is very low, if airlines fail to comply

with the EU directive, they could face fines or the closure of their

sites. As websites are now the primary way passengers in Europe

book tickets, such a closure would affect carriers dramatically (p.

17).

Germany has known an unprecedented consolidation of his air-

line market. Air Berlin, the third European LCC, has absorbed its

competitors DBA, LTUand Condorto become a strong challenger

for Lufthansa. However, some experts expressed skepticism about

this new acquisition, pointing out the fact that integrating these

three companies in a few years is a tough operation. The stockmarket reacted cautiously to the announcement of the deal: the

Air Berlinshare lost 5% the following day, and remains quite low

since then. In November, the share was weaker than its 12 Euros

issuing price in 2006 (p. 14). To face Air Berlin, Germanwings

stands alongside with Lufthansa, its legacy mother. What are the

strengths and weakness of the carrier? What are the main opportu-

nities to seize or the biggest threats to fear? To find out, we realized

a complete SWOT of the carrier (p. 5).

AIR SCOOP ANNOUNCEMENTS

Air Scoop, 2 Years Already!

Launched in January 2006, Air Scoop has

already two years. Air Scoop Team has brou-

ght the best of LCCs analysis on hottest is-

sues (subsidies, ancillary revenues, business

models...). We have provided you with exclu-

sive interviews of top executives and reports

from main low-cost carriers events (World

Low Cost Airlines Congress, the Low Cost

Air Transport Summit, French Connect...).

Through our news portal weblog (airscoop.

blogspot.com), you are kept updated with

fresh and most important informations of the

market. Each month, a new carrier is deeply

analyzed in a SWOT matrix (read under),

and a Central and Eastern market is rigorously

studied from a LCC point of view (Hungary,

Slovakia, Romania, Czech Republic...).

These different services make today Air

Scoop Newsletter, a reference for European

low-cost carriers information and analysis.

We would like to thank all our customers and

partners for their confidence and their sup-

port!

Air Scoop Team

SWOTs AVAILABLE ONLINE

SWOT of European LCCs Market

SWOT ofRyanair

SWOT ofAir Berlin

SWOT ofeasyJet

SWOT ofVueling

SWOT ofSkyEurope

SWOT ofGermanwings

SWOTs COMING SOON SWOT ofFlybe

SWOT ofWizzAir

SWOT ofclickair


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BIRDS EYE VIEW


It seems that the competition between the rival carriershas been taken to a totally new level: level of litigations and

legal actions. The aggressive and fast expansion ofRyanair

has posed a threat both to large airlines and other low-cost

carriers. In their attempts to at least partly drive the Irish

airline out of business other carriers brought several cases

of airport subsidies before courts and the European Com-

mission to make the competition at the secondary airports

fair and open.

Subsidies are of course not given in cash. Usually airports

provide the carrier (in this case Ryanair) with a standardservice package at reduced price. That is, the carrier gets

lower landing fees, cheaper ground handling and mainte-

nance. This form of support is logically illegal and contra-

dicts the EU Competition Law. Ryanair has reportedly

tried some other types of commercial agreements in Fran-

ce which were then ruled as concealed subsidies by the

French Civil Aviation Authority. To find a loophole in the

law the carrier, for example, made contracts for media and

advertising services with airports either itself or through

its subsidiary: Airport Marketing Service. However, the

two contracts concluded by Ryanairs Airport Marketing

Service, Ryanairitself and the French Chamber of Com-

merce of Pau-Bearn which operates the Pau Airporthave

already interested the EC. The Commission is going to

investigate and examine the contracts to make sure that

they do not make for illegal advantages and benefits for

the carrier. Seemingly, the investigation seeks to bring the

needed certainty in the sector by distinguishing legal and

illegal forms of financial support.

Ryanairs run-ins with the European Competition Law be-

gan in 2003 with the BritAir case. Air Frances subsidiary

filed complaints to the EC for subsidies and unfair compe-tition on London-Strasbourg route. A year later, Ryanair

was ordered to repay about 3 mln Euros it had got in illegal

subsidies from the Charleroi Airport. The decision taken

by the EC was welcomed and upheld by other carriers.

OLeary in turn referred to it as a disaster for passengers

and small airports. In response to the decision the airline

cancelled its flight on London-Charleroi route as unprofi-

table. EC too checked the terms of deal between Ryanair

and the City of Derry airport which was questioned about

the public money it had given to the carrier in return to a

five-year obligation to bring passengers to the airport. Notonly national carriers seek to charge Ryanair. Air Berlin

too took a legal action against the Irish airline and its deal

with the airport of Luebeck in Augist 2006. Given that

about 20% of Ryanairs traffic depends on the publiclyowned airports, the reveal of further cases of illegal subsi-

dies might influence ticket prices.

The most recent cases show that subsidies do not guaran-

tee Ryanairs presence at the airport. Thus, two Croatian

airports of Pula and Zadar were basically deceived by Rya-

nair. Having received more than 500.000 Euro per year

and having promised to operate flight all the year round,

Ryaianr decided to terminate its contracts with the end of

the tourist season. The same happened in Poiters, Rodez

and Biarritz where the carrier just closed some of its flightswith winter approaching.

The concern about illegal subsidies prompted further in-

vestigations in Germany and Finland. Several small airports

were checked whether there were cases of too favourable

deals between the airports and the LCCs, especially Rya-

nairand easyJet, which could be regarded as illegal subsi-

dies. Upon the results of the investigation it was revealed

that both Ryanairand easyJetenjoyed some marketing

grants from the airports. OLeary of course had a good

case. He accused the biggest rivals, namely Lufthansa,

Air France-KLM, of having received illegal subsidies from

their respective governments and airports.

The situation with subsidies around the Ryanairbrought

about much confusion and suspicion. Thus, Ryanairs arri-

val at Malta caused a huge argument between the Minister

for Investment, Industry and IT, Austin Gatt and Michael

OLeary. Whilst the former ran down the carrier which

he believed breached the Competition Law and the very

law of business by asking subsidies, the latter told he had

never sought for any subsidies. Subsidies not only prevent

consolidation in the market but obviously detract fromother LCCs reputation as well. The taxpayers too seem to

be annoyed knowing that that money went to Ryanairs

pocket and are vividly discussing the issue on some online

forums, especially in relation to the Galicia case where

more than 7 ml Euros of public appeared to have been

spent to promote Santiago and Galicia routes operated by

Ryanair.

Battle for Subsidies: LCCs in the Storm


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BIRDS EYE VIEW


Together with Romania, Bulgaria is the youngest member

of the European Union, as the country gained its mem-bership status on 1 January, 2007. The 7.7 million (2006)

large population faces the future with confidence: the

economy has been rapidly growing in the past couple of

years and recently, foreign investors are also crowding into

the country. At the same time, Western European tourists

have begun to discover the natural beauties of Bulgaria and

many of them are considering of buying a property there.

Sofia is the cheapest living destination in the EU and the

property prices, in spite of the booming market, are still

comparatively lower than in other Central and Eastern Eu-

ropean EU members.

All of these factors contribute a great extent to the stea-

dy growth of the commercial air transport market of the

country, in which low-cost carriers play an increasingly im-

portant role. There are three international airports in Bul-

garia, which are served by LCCs. Two of them, the seaside

cities of Varna and Burgas, are popular holiday resorts in

the summer. For this reason, passenger turnover shows

high seasonality at these airports, which is also reflected in

the lower number of destinations offered by LCCs in the

winter season (Figure 2).

Currently, there are 15 low-cost carriers that operate in

Bulgaria, but in spite of this relatively large number, themarket seems rather concentrated. According to the win-

ter flight schedule of 2007/2008, 81 routes are served by

low-cost carriers. However, the three biggest take half of

the routes, while the first seven is responsible for almost

90% of the total routes (Figure 3).

This relative concentration of the market becomes really

striking if one takes a look at the distribution of destina-

tions among countries. While this year, in the summer

season, 22 countries were served with 71 destinations, low-

cost carriers currently fly to 18 countries and to 63 destina-

tions. However, the United Kingdom and Germany alonerepresents 20 and 17 of them, respectively (Figure 4). This

means that these two states are responsible for 58% of the

destinations, which implies that Bulgaria is a preferred tra-

vel location especially for German and UK citizens. In this

sense, it is not surprising that low-cost carriers of Germany

and the UK are the LCC market leaders in Bulgaria, with

the single exception of Hemus Air, which is the local, Bul-

garian low-cost carrier.

The further expansion of Hemus Air may be restricted,

however, because of several factors. First, German and UK

passengers have a limited knowledge of the Bulgarian low-

cost carrier, moreover, the incumbent LCCs, like Thom-sonfly or Germanwings have already established reputation

and raised customer awareness in their domestic market.

This is a natural consequence of being a first mover and

Analysis of the Bulgarian LCC Market


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BIRDS EYE VIEW


this is the reason why it is hard for new players to enter

into the competition. Even though passengers from the

UK represent a huge share of the Bulgarian LCC market,

it is quite surprising that the two biggest European low-cost companies are not present there. EasyJet serves only

one single route (Sofia London-Gatwick), while Ryanair

does not fly to Bulgaria at all.

This implies that once profitable routes with a significant

passenger demand are occupied, it may be hard for new

entrants either from the domestic or the external market

to challenge the positions of those players which enjoy the

benefits of being first-movers. Nevertheless, Bulgaria is a

growing market; therefore it is most probable that LCCs

will continue to offer new destinations for passengers. The

Russian and the Turkish market are particularly underser-

ved from this aspect. Given the traditionally good histori-

cal relations between Bulgaria and Russia, and considering

the fact that the Turkish minority is still estimated to reach

10 % of the population, it may be worth considering for

LCCs to start serving those markets. Wizz Air has already

taken the first step and introduced a flight between Ismirand Sofia.

All things considered, the Bulgarian LCC market is one of

the most promising in Central and Eastern Europe, espe-

cially due to its attractiveness for those Western European

citizens that are concerned about the way of spending

their holiday budget. As the awareness of Bulgaria grows

in Western Europe, more demand for flights can be expec-

ted. The booming property market of the seaside resorts

and of the capital of Bulgaria is already a certain sign of

further growth in the air transport sector, including the

low-cost segment as well.


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BIRDS EYE VIEW


SWOT Analysis of Germanwings SWOT TEAM

Introduction

European LCC market: The continuous growth of passen-

ger numbers masks the fact that the European market for

low fare air travel is radically changing. New airlines, ta-

keovers as well as bankruptcies are reflecting strong com-

petitive pressures within the market and from established

network airlines fighting back to retain their market sha-

res. European low-cost airlines (LCAs) operate with si-

gnificant differences in unit costs and most of them are

reporting marginal profits or losses. Low cost flights now

account for 16% of all flights and 20% of all seats worldwi-

de, compared to 14% and 17% a year ago. Within Europe,

low cost flights account for 22% of the total flight activitywithin this region for September 2007, up from 18% year

on year. Low cost capacity in September 2007 represents

30% of the total seats available within the market, a jump

of 6% compared with September 2006. The LCC market

is expected to increase to 35.7% of European traffic by

2010. A study carried out by the University of Amsterdam

estimated that 75% of the LC market share represents new

customers. The study of the University of Amsterdam fur-

ther provided that 70% of the LC customers are leisure

travelers, of which 20% are holiday markers, 25% are city

trips, weekend trips or visits to family/friends, and 25%are people traveling to their second residency.

German LCC market: Since 2002 there has been a huge

expansion of the low-cost airline market in Germany,

with growth rates in double figures. In March 2001 seats

on low-cost airlines represented only 1 per cent of the to-

tal seat capacity available to/from and within the German

market. In March 2006, this figure had grown to 21%. The

low cost market share of Germany for all international fli-

ghts was 21% in the first half of 2007, an increase of almost

3% over first half of 2006. Similarly, it also saw increasein its local low cost market share from 18.6% in 2006 to

21.4% in 2007. Thousands of cheap flights are now availa-

ble from German airports like Cologne/Bonn, Stuttgart,

Hamburg and Berlin-Schnefeld to almost every region in

Europe.

Low-cost travel in Germany has brought about a trend of

democratization in this once exclusive mode of transport.

Whilst a few years ago, flying was the privilege of middle

and senior management in large companies, the new low-

cost airlines have enabled company staff of all levels to fly

thus saving valuable working time. Even freelancers are

flying at affordable prices on a regular basis; freeing up the

German motorways as people opt to leave their cars in the

garage and choose a stress free journey. Interest in long-

haul holidays, city trips and the eastern Mediterranean is

increasing.

The premium form of the LCC Model: In order to improve

margins and differentiate from the established LCCs many

market participants are re-evaluating the low cost business

model and departing from aggressive low-cost, no-frills po-

sitioning by using service features to offer something more

than just cheap tickets. A new breed of budget airline has

thus emerged thats spurning the golden rules of the tried-

and-true low-cost formula -- such as having a single type

of aircraft and offering point-to-point service only. The

new model introduces paying perks, such as lounges, lea-

ther seats, extra leg room, speedy boarding and frequent-flyer miles as a way of differentiating from competitors

and sweetening the margins. An example of such an airline

is the legacy daughter ofLufthansaGermanwings.

We think the first phase of low-cost is over. ... We believe

that the landscape is changing and some of the basic rules

of the low-cost model are not being respected anymore,

said GermanwingsMD Thomas Winkelmann. The new

low-cost carriers are offering amenities to passengers who

are willing to pay for the extra comfort. They are also so-

metimes flying to central, expensive airports, he said.

Germanwings: Germanys premier low-cost airline laun-

ched its first services in October 2002. The airline began

operations in October 2002 as a separate low-cost car-

rier entity but fully belonging to the EurowingsGroup.

Lufthansa(LH) participated with 24.9% of the shares, and

later increased its stake to 49%. Cologne is Germanwings

home base, with Stuttgart as its second base. In the fol-

lowing years it established bases at Berlin Schnefeld

Airport, Hamburg and Dortmund. The Airlines has a fleet

size of about 27 aircrafts - 24 Airbus A319-100 & 3 AirbusA 320-200.

Fleets are maintained by LufthansaTechnik. In compa-

rison to other LCCs, Germanwingshas the advantage of

using Lufthansa training centre that involves both staff

educational training and aircraft maintenance. This and

the extremely strict statutory requirements in Europe en-

sure the highest safety standards. The airline also offers

guaranteed connection flights between some of its destina-

tions (from 20 all inclusive, one-way, to all destinations).

Germanwings also operates one of the most successful

European travel web pages, visited by 2.5 to 3 million users

each month.

In May 2006, the Supervisory Board ofEurowingsAG ap-


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BIRDS EYE VIEW


pointed Thomas Winkelmann, previously Vice-President,

The Americas ofLufthansaGerman Airlines as a member

of the Executive Board ofEurowingsAG with effect from

1st September 2006. He simultaneously became Mana-

ging Director of the Eurowingssubsidiary GermanwingsGmbH. Dr. Andreas Bierwirth, previously Managing Di-

rector ofGermanwingsGmbH, became Marketing Ma-

nager of Lufthansa German Airlines in Frankfurt as of

1st September 2006. In this position he succeeded Harald

Eisencher.

Extensive fleet enhancement, hubs close to major cities,

flight operation to more 30 European destinations and

valuable LH experience all these factors helped the

company achieve record passenger numbers: more than a

quarter of a million passengers a day. Lufthansas financialand infrastructural support and Germanwingsposition of

being the first pure German LCC, contributed greatly to

its success.

Awards

According to the survey of one of the leading economic

magazines in Europe, Capital, Germanwingswas awarded

as Discount Airline - 2004. 1200 readers and online users

participated in the survey, which evaluated altogether 20

000 flights. Germanwingsreached excellent results in thecategories of punctuality, safety, onboard comfort and ser-

vice.

In 2004, Germanwings was awarded by frequent flyers

with the First Prize for being the airline with the best ratio

value for money. Around 4000 frequent flyers took part

in the survey conducted by Internet Booking Portal Travel

Channel.

In April 2006, Germanwingswas voted best German air-

line, according to a survey by consumer protection groups

from 6 European countries (Belgium, France, Italy, Por-tugal, Spain and The Netherlands) who evaluated more

than 36 000 flights from legacy airlines, charter airlines

to low cost carriers. The 9 000 passengers provided in-

formation on their travel experiences on board in flights

from July 2004 to September 2005. Germanwings, with

an overall rank at the 14th spot, became the best German

airline with highest evaluation. This result was attributed

to the punctuality of its flights, the good relation between

price and performance, the cleanliness on board and the

efficiency of the ground staff.

Skytraxawarded them 3 stars, with it earning good marks

for food, seats and staff.

Overview ofGermanwings

History: Germanwingsis a low cost airline based in Colo-

gne-Bonn airport, Germany. Germanwingsstarted opera-

tions with a fleet of five A320s and brought the total fleetto 43 items in less than 4 years. The low cost carrier was

quick to establish a presence at its flagship base at Colo-

gne-Bonn, where it based its first eight A319s. It had offe-

red fares from 19 one way to each of its 11 destinations

throughout Europe--Barcelona, Berlin, Istanbul, London,

Madrid, Milan, Nice, Paris, Rome, Vienna and Zurich. La-

ter it established bases at Berlin, Hamburg and Dortmund.

It operates a large network from all its bases.

The foundation of Germanwings resulted from the

transformation of the unprofitable charter business of

Eurowingsinto a low cost carrier. Though Lufthansapu-blicly stresses that the relationship is settled only by the

definition of the financial investment through its partici-

pation in Eurowings, Lufthansa supported the creation

ofGermanwingsin the supervisory board ofEurowings.

Prior to this, Lufthansacarried out several studies in exa-

mining the start of an own low-cost carrier, but it conclu-

ded that this could be realized only as a separate entity. At

that time, Lufthansaalso examined the possibility of ma-

king an investment in Ryanair. Germanwingsis conside-

red as the legacy carriers daughter. The interest is both

financially and strategically given, but the influence on theoperating decisions ofGermanwingsis limited.

The organization ofGermanwingsis located in Cologne,

away from the headquarters ofEurowingsin Dortmund.

Partly, the staff and certain departments, like the pro-

duction and network planning and marketing and sales,

have been transferred from Eurowingswhile other func-

tions, such as financing, controlling, revenue accounting,

and IT, are sourced from Eurowings. The autonomy of

Germanwings is moderate to high, only restricted in

terms of investments and basic strategic decisions towards

Eurowingsand Lufthansa.

Growth: The growth of Germanwings since 2003 hasbeen extraordinary. It initially leased its planes and 10%

of its pilots but later placed direct aircraft purchase orders.

During the very first year of operations, Germanwings

became the largest airline to operate from its home base

- Cologne/Bonn airport. Cologne/Bonn is located in the

west of Germany which is the most populated area. More

than 2.4 million passengers traveled on Germanwingsthat

year from this airport. In September 2003, it opened its se-

cond base at Stuttgart. The load factor reached an average

of 77% during this year on all their 23 destinations. Ger-

manwingsalso started operating flights to Athens Elefthe-rios Venizelos International Airport in Greece.

By the end of year 2004, 3.5 million guests flew with Ger-

manwings(plus 44 percent in comparison with the year


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BIRDS EYE VIEW


2003), the revenue climbed from 150 to 247 million Euros

(plus 65 percent). A load factor of more than 82 percent

was recorded. Eurowingsand its low cost subsidiary, Ger-

manwings, achieved profits after tax of 6.4 million for

2004, up from 900,000 the previous year.

In June 2005, the German low-cost carrier Germanwings

opened its hub at Berlin Schnefeld Airport. Berlin was

chosen for economic considerations and for its strategic

importance as a gateway to Eastern Europe a focus for

future development. Germanwingsoffered daily flights to

and from four German cities of Cologne/Bonn, Stuttgart,

Munich and Dsseldorf. It also operated weekly flights

from this base to six international destinations namely:

Ankara, Istanbul, Moscow, Stockholm, Split and Zagreb.

It also placed a direct order for 18 A319s as well as op-

tions for a further 12. Deliveries are scheduled from 2006

onwards. During the summer of 2005, the airlines be-

gan flight operations between Cologne and Moscow and

between Berlin and Moscow. Germanwingsbecame the

first west European no-frills airline to operate scheduled

flights at the Vnukova International Airport in Moscow.

In August 2005, the capital of growth, Hamburg, was cho-

sen by Germanwingsto be their fourth base in Germany.

The new Germanwingsdestinations from Hamburg are:

Munich, Istanbul, Krakow, London (Gatwick), Munich,

Oslo, Stockholm, Stuttgart, Toulouse, Warsaw, Zagreb.

The low-cost airline Germanwingscarried 5.5 million pas-

sengers in 2005, a massive 57% increase over 2004 and has

now become market leader in Cologne with a 35% share

and ranks second in Berlin Schnefeld with a 17% share.

In Stuttgart the airline has the highest share of 20% as an

LCC. Germanwingshad, by now developed a broad and

attractive route network to 43 primary destinations in Eu-

rope.

During 2006, Germanwingsexpanded its routes rapidly.

In June it started flights from their Cologne-Bonn base toAlbania and Serbia and Montenegro. In the summer sche-

dule, it operated flights to Saint Petersburg and later in

October, Germanwingsconnected Hamburg to Moscow

and Berlin to Saint Petersburg. On 28th July, 2006 Ger-

manwings took delivery of the first of 18 A319 aircraft

on 14-Jul-06 and announced plans to expand its Cologne

Bonn hub.

Germanwingsenjoyed a successful year in 2006. It wel-

comed 7.1 million passengers on board its aircraft, in-

creasing their number by 31.2 per cent. The passenger loadfactor stood at 82.2 per cent. Adjusted for consolidation

effects (Germanwings) revenue climbed by 7.5 per cent

with a turnover of 560 million Euros.

During 2007, the airline continued expanding its opera-

tions. In March Germanwings announced the launch of

new seaside destinations in Bulgaria like Varna and Burgos

besides the flights to the capital city of Sofia. It also laun-

ched its flights to and from Malta International Airport,operating from Cologne and Stuttgart. Later in the year it

also began operating flights from Cologne/Bonn to Mos-

cows Vnukova airport.

On June 22 Germanwingsopened its fifth base in Dort-

mund. It flew to Vienna, Istanbul, Ataturk, Palma de

Mallorca, Ibiza and Faro from this base, using the A319

aircraft. It later added Ankara, Izmir and Antalya to its des-

tinations.

The Flex Plus offer, which was introduced in Germany inMar-07 for business travelers was later extended to select

international routes to allow passengers to make altera-

tions in travel plans at a short notice or even cancel the

booking, all free of charge.

In September, the German budget airline, introduced for

the first time low-cost connecting flights from Russia.

Ten destinations would be available from Moscow and

seven destinations from St. Petersburg, connecting flights

through the airports of Cologne-Bonn, Stuttgart and Ber-

lin-Schnefeld.

Last year Germanwings served 3.5 million passengers in

Northern and Eastern Europe, Gerdes said. This year the

company expects this number to increase to four million,

and to 4.7 million in 2009.

Current Status: CEO Thomas Winkelmann stated that

the carrier was growing organically and is on its way to

becoming an important player in Europes crowded LCC

market. A sixth German base is expected to come on line

next year. He also stated that, Germanwingswill not be

opening any overseas bases in the near future as there were

plenty of opportunities to expand in its home market. Fol-lowing the sale of dba, Condorand LTUto rival Air Ber-

lin, Germanwingsbecame the only pure low-cost carrier

left in Germany. He also pointed out that Germany had a

population of 80 million. Germanwingscurrently opera-

tes 27 A319s/A320s and flies to 53 destinations. The fleet

will become a pure 42-strong A319 by 2009. The passenger

turnover is expected to cross 8 million this year and pre-

dicted to reach 10 million in 2009.

Lately, there have been rumors from reliable media sour-

ces of a possible merger between Germanwingsand TUIsTUIfly division which would also include Eurowings as

the third partner. Travel giant TUITravel, which is 51 per-

cent owned by TUI, had told in September that it could


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BIRDS EYE VIEW


sell TUIfly. But Lufthansa, TUIand Germanwingshave

not made any official comments on a possible tie-up. But

such a merger would definitely strengthen the position of

Germanwingsin the European LCC market.

Issues/Challenges:

1. Would Germanwingsbe able to contain itself to for-

ming bases within Germany or be forced to look outside

with the changing competitive scenario?

2. Will the current stable relationship between Lufthansa

and Germanwingscontinue in the long term?

3. Which is a better strategy for Germanwings? - Organic

growth or growth through mergers/acquisitions or both.

4. What should be the long-term objective? To become

a successful German LCC or a successful European LCC.

Business Model ofGermanwings

The carrier can be called a premium low-cost carrier. The

airline follows the easyJet-type low cost formula, flying

mostly to primary airports and deploying airplanes which

are equipped with leather seats and in-flight entertain-

ment devices. Germanwingsshares flight crews, mainte-

nance and some aircraft with Lufthansaand Eurowings,

who are its owners. Flying to a total of 53 destinations in 20

European countries on nearly 100 routes,Germanwings

is now one of the major low cost airlines in Europe. Their

base is in Germany at Cologne Bonn airport, with other

flight hubs at Berlin Schoenefeld, Hamburg, Stuttgart and

Dortmund airports. In the UK, Germanwings schedu-

led flights operate between: Edinburgh - Cologne-Bonn;

London Gatwick - Hamburg; London Stansted - Cologne-

Bonn & Stuttgart.

The Germanwingsteam of approx. 460 employees, from

check-in specialists to pilots, is trained at LufthansaFli-

ght Training Center in Frankfurt with the objective of

providing a safe and pleasant flight with top-quality ser-

vice.

Germanwingspassengers constitute: 40% business trave-

lers and 30% students and young people. Although the

majority is German, the percentage of foreign bookings

is around 30%.

Innovation has been the hallmark of its business model

which aims to attract and retain business travelers. Mr.

Thomas Winkelmann believes that success lies in the

airlines ability to win over the business customer. In his

words, No low-cost airline can survive without the busi-ness customer in the long term.

Main Innovative features of its business model are:

A319 aircraft: In July 2007 Germanwingsowned a fleet

of 22 Airbus A319 and 3 A320. Seven of the A319 use a

special Germanwingsconfiguration offering 156 instead

of 144 seats. Germanwingshas raised the productivity of

its existing modern fleet of Airbus A319 and A320 aircraft

from 12 to 14 hours per day. Aircraft are used more effi-

ciently and are often only on the ground for 25 minutesbefore they take off again. The average fleet age was 6.9

years in 2006. The new A319s for Germanwingsfeature

a comfortable single-class cabin layout for a maximum

of 156 passengers. Seats are all made of leather and have

30-32 seat pitch between rows, a good legroom for a low

cost airline. The aircrafts would be powered by V2500

engines from International Aero Engines.

User-friendly website: Germanwings operates one of

the most successful European travel web pages, visited

by over 3 million users each month, who along with theairlines partners make it the most visited and attractive

website in the low-cost airline sector. In 2006 the airlines

www.germanwings.com website was the airline portal

with the highest revenue in Germany. Almost 95% of all

the airlines flights are booked through the internet. Its

website offers everything from flight tickets, hotel nights

and rental cars to events tickets and mobile phones.

Virtual tour: Germanwingspresents a virtual tour for its

online visitors giving outdoor and indoor views of the air-

craft A319, accompanied by short explanations about the

products on the carrier. A real impression of the aircraftand its on-board-quality can be obtained at the virtual

guide at its friendly website.

Safety and Security: By the year 2009, Germanwingswill

be having a young fleet of 42 A319 aircrafts with an average

seating of around 150. These aircraft are market leaders in

terms of space, noise protection and energy consumption,

which would be continuously, maintained using state-of-

the-art technology at Lufthansa Technik. The selected

qualified pilots and the crew are further trained at the

LufthansaFlight Training centre in Frankfurt. Thus Ger-

manwingsensures the safety and security of all its flights

by following the above process stringently.

Germanwings Credit card: As a holder of the Ger-

manwingscredit card one can withdraw cash at any lo-

cation in the world with no handling charge. Card holders

also enjoy increased baggage allowance; ten kilos, giving

you a total baggage allowance of 30 kilos. Furthermore

one can use it to book a Germanwingsflight online wi-

thout any handling fee. One can purchase it at just 19

p.a.

Smart Connect: The airline recently introduced low-costconnecting flights from Russia. The company has intro-

duced over 500 new destinations, which can be accessed

through the airports of Cologne-Bonn, Stuttgart and Ber-

lin-Schonefeld. The system, called Smart Connect, allows


9/18

BIRDS EYE VIEW


passengers to order stop-over flights indicating only the fi-

nal destination and showing the total price, which is lower

than the cost of two separate flights. One of the major

advantages was the short time of about 90 minutes requi-

red for changing flights. The company gets the advantageof entering new markets and new clients.

Flex Plus Tariff: A special Flex Plus tariff, which was pre-

viously only available for business travelers on routes wi-

thin Germany, has been extended to selected internatio-

nal routes to allow passengers to make alterations at short

notice or cancel the booking, all free of charge. This free

Flex Plus tariff can be booked at a fixed price of 169

Euros, and offers all customers full flexibility, in planning

business trips. Flex Plus tickets are also eligible for dou-

ble points, as part of the airlines Boomerang Club loyalty

scheme. Over 40% ofGermanwingspassengers are busi-ness travelers, representing the single largest group of cus-

tomers.

Automated check-in: Passengers will be able to save a con-

siderable amount of time by checking in at home or at the

office before they fly: meaning there is no need to queue

to check in and passengers can proceed directly to the gate

when they arrive at the airport. In combination with the

GermanwingsCredit Card, which guarantees early boar-

ding, Germanwingsfrequent flyers can now take the fast

lane.

Rail&Fly scheme: Flying with Germanwings starts right

from the customers doorsteps. Using the Rail&Fly sche-

me, the budget airline now covers the whole of Germany.

Customers will be able to travel to the airport by train for

19 Euros by booking Rail&Fly online for all flights to and

from Germany at www.germanwings.com. Each of the

Germanwingsbases can be reached within two hours.

Before You Go: It is the name of the new and innovative

newsletter which, in addition to providing information

about the latest saving offers for hotels and car rentals, gi-

ves passengers a free travel guide to the holiday destinationof choice. Germanwingspartners such as HRS, comple-

ment this perfect all-round service for passengers. Custo-

mers can save valuable time searching for a suitable hotel

as the best offers will be sent to them by the airlines. In

order to ensure the accommodation offers from HRS are

always up to date for the newsletter, Germanwingsauto-

matically checks the best prices for each destination in

real-time. The offers which exactly match the customers

requirements are then compiled and sent to the customers

conveniently by email 14 days before departure.

Travel Agents Internet Portal: The premier low cost car-rier is promoting travel agents as a sales channel. A sepa-

rate portal has been created for travel agents on Germanys

most successful airline website: www.germanwings.com/

reisebuero. Group enquiries can be submitted directly via

the portal to which Germanwingswill answer within two

working days. The new travel agents channel also offers

agents important and useful information at their finger-

tips, a newsletter specially designed for travel agents with

attractive prize giveaways and regularly discounted flightoffers for travel agent employees. Germanwingsadverti-

sing packages can also be ordered via the website.

Corporate Flex: This program is exclusively for corporate

customers. Companies who wish to participate can regis-

ter on the website under the section business travel. It has

flexible boarding prices starting from 49 Euros plus taxes,

fees and other charges. It offers full flexibility and allows

free rebooking, reservation changes and cancellation until

2hrs. prior to departure.

Boomerang club: Their frequent flyer program, called

Boomerang, allows members to accumulate miles and re-deem them against free flights. The main elements of this

program are:

One can register as member by filling in a registration

form available on the website, pay a processing fee of 5

and immediately earn 1000 Boomerangs.

An award flight is gifted after every eighth return flight or

a collection of 24000 Boomerangs

Boomerangs are allotted on every Germanwingsflight.

3000 Boomerangs are earned for every return flight and

1500 points for a one-way flight.

As a member of the Boomerang Club one can also col-

lect Boomerangs with the club partners ofGermanwings,

such as HRS, Sixt, Lindner Hotels.

A Boomerang club member becomes automatically eli-

gible for the Germanwingscredit card with pre-boarding

function.

Exclusive Boomerang offers are often announced on cer-

tain flights through which a passenger has the opportunity

to earn double Boomerang points on just one flight. Infor-

mation about all the offers can be obtained either on their

website or in the Boomerang newsletter.

Other facilities: These include: reasonably prized qualityfood, fast & efficient baggage handling, attractive travel

packages, special care for babies and the disabled and on-

board entertainment like journals, music and videos

Ancillary Sources of Income:

Baggage: The free check-in baggage limit is 20 kg, but a

maximum of 50kg per person is allowed for a fee. There is

no weight restriction on hand luggage of just one item only

with maximum dimensions of 56x45x25cm. Babies under

2 years old get no baggage allowance. Excess baggage costs5/kg per flight. Sports equipment charges are from 14-

17 per item, but skis are carried free on selected routes.


10/18

BIRDS EYE VIEW

Air Scoop - December 2007 www.air-scoop.com0

Ticket Booking: The earlier one books, the cheaper are the

tickets. No tickets are issued; only the Booking Reference

number has to be presented for check-in. A credit card

payment charge of 1 pp. per flight is added to the fare.

Babies under 2 years travel for a fixed fee of 10 Euros. Seats

cant be reserved at the time of booking or checking in, but

there is priority boarding for the disabled and for parents

with small children.

Flight Changes: Date changes can be done online for

17/25 pp. per flight plus any fare increase for interna-

tional flights. The rebooking charges within Germany are

29.75 Euros. Changes by telephone cost an additional 5/7

pp. per flight outside Germany and +8.33 Euros(incl. 19%

VAT) within Germany. Destination or passenger name

changes are not possible. No refunds for missing or can-celing a flight.

Other Sources of ancillary income: This includes fuel sur-

charge (12 euros), Germanwingscredit card fees, Boome-

rang club registration, the Rail&Fly scheme, sale of food

and entertainment, online advertising and direct marke-

ting revenue etc.

SWOT Analysis

The main advantage that Germanwings has had over

other lesser successful legacy daughter airlines is the hi-

gher degree of freedom it enjoys in managing its network,

the overheads, and its fleet.

Strategic goal ofGermanwings is to emerge as a leading

low-cost carrier in terms of market share and prices at all

its hubs, while a short-term goal entails achieving a mi-

nimum market share of 30% in all airports where their

aircrafts are stationed.

Fly high pay low is the motto ofGermanwings.

Their claim: you fly to the highest standard at an attractive

price.

Recommendations

1. Germanwings should not restrict its bases within theGerman market for the following reasons:

- Germany is becoming intensively competitive with

many low cost players wanting a share (70% of the mar-

ket is shared almost equivalently between Air Berlin, Ger-

manwings, Ryanairand easyJet).

- It already has five bases in important cities that are stra-

tegically located to attract maximum number of travelers.

More bases could lead to overlapping of routes and dou-

bling of costs.

- Long term goal for any big player is to be able to expand

internationally which will ensure its survival and success.

2. The continuance of the current strategic relationship

between Lufthansa and Germanwings is very critical

for the progress of the daughter for achieving its stated

objectives. But history has been a witness to breaking up

of many such relationships profitably or otherwise. This

occurs due to several incompatibilities that arise in course

of the journey such as: cannibalization between business

models; implausibility of the communication concept; in-

crease in organizational complexity to mention a few. So

the sustainability of this relationship will depend on the

extent of fulfillment of the basic purpose, for which thiswas initialized and the value generated.

3. In order to be successful, any organization has to expand

its operations as far as possible at a reasonable pace to keep

ahead of the competition. The rule is: You beat the com-

petition or the competition eats you. In the LCC market,success can be achieved organically or through mergers

and acquisitions or both. When Germanwings expands

into markets that are not travel savvy and are extremely

price sensitive, the better option would be to go for a mer-

ger or acquisition or collaboration.

Conclusion

The success of Germanwings can be attributed to two

major factors: Its innovative business model and the wide

economies of scale enjoyed by it from Lufthansa. It has

managed to integrate and reinforce the quality image of its

parent within the low cost framework. The key challenge

for Germanwingsis to be able progress rapidly under the

strategic protection of its parent in a market which is in-

creasingly changing from a growth market into a displa-

cement market.


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12/18

BIRDS EYE VIEW



13/18Air Scoop - December 2007

DOWN TO EARTH

www.air-scoop.com3


14/18

BIRDS EYE VIEW


If one man believes in consolidation in the European sky,

its him! After buying two of his challengers, DBA andLTU, in less than one year, Joachim Hunold, Air Ber-

lins CEO, announced in September his intention to pur-

chase the Thomas Cook affiliated charter airline Condor

in 2009. This old German company, created in 1955 and

operating 35 planes, is currently detained by both Tho-

mas Cook (75.1%) and Lufthansa(24.9%). Air Berlinwill

first receive Thomas Cooks shares, in February 2009, and

then Lufthansas ones. In return, Thomas Cook will get

120 million Euros in cash, plus 380 to 475 million Euros of

Air Berlinshares (29.9% of the airlines capital). Air Berlin

and the travel group Thomas Cook also signed a long-term

commercial partnership.

Condorcarries 8 million passengers yearly to more than

70 destinations, including many exotic places like India,

Kenya, Egypt, Thailand, the Caribbean, South America,

Florida... Its network has many common points with LTUs

one, the other German charter airline Air Berlinbought in

2007. After this merger, yet to be approved by the German

cartel office in 2008, Air Berlin will carry more than 30

million passengers yearly on more than 160 planes, not in-

cluding those ordered. The company consolidates its third

position on the European LCC market: EasyJet has about170 planes and Ryanairabout 200. Air Berlinmay even

begin to threaten Lufthansa, even if the German leader,

with 400 planes and 50 million passengers yearly, is still

out of reach: Lufthansadid not even try to block the sale

of its 24.9% ofCondorshares to Air Berlin.

With this new takeover, Joachim Hunold sticks to his

strategy of growing as big and as fast as possible. He also

confirms his ambition to expand on long-haul flights, some-

thing never done by a European LCC before. Up to 2008,

the airline will launch flights from Dsseldorf to the USAand China under the brand Air Berlin, with an improved

business class, which makes long-haul flights so profitable.

The takeover ofCondorwill also provide Air Berlinwith

important slots in Munich and Frankfurt. This intercon-

tinental strategy, together with other factors - mid-level

fares, low ancillary revenues, frequent flyer program, etc -

is also a sign of the growing normalization ofAir Berlin

compared to genuine LCCs like Ryanairand EasyJet.

But there is no certitude Hunolds coup will succeed. Even

if his consolidation strategy is expected to generate im-portant synergy savings, it costs Air Berlin a lot of mo-

ney. Some experts expressed skepticism about this new

acquisition, pointing out the fact that integrating three

companies - DBA, LTUand Condor- in a few years is a

tough operation. The stock market reacted cautiously tothe announcement of the deal: the Air Berlin share lost

5% the following day, and remains quite low since then. In

November, the share was weaker than its 12 Euros issuing

price in 2006.

For some analysts, Air Berlincan even remind the Swissair

frantic investing strategy in the 1990s, ending with a trau-

matizing bankruptcy in 2002, which had important conse-

quences on the European air transport market. Big does not

mean rich in the air industry... Of course, Swissairs huge

investments in about ten international companies, and the

tremendous debts that followed, were far more important

than Air Berlins purchases. But the more Air Berlin in-

vests the less financial elbow room it has. Its 2007 financial

results are quite deceiving. The airline has to hope that no

important crisis will occur in the European sky, and that its

promises of improved financial results in 2008 will come

true.

While concentrating on mergers and intercontinental ex-

pansion, Air Berlinalso loses battles: in October, the airline

suppressed its UK domestic routes from London-Stansted

to Belfast City, Manchester and Glasgow, officially due to

rising taxes. The Belfast route had just been opened oneyear before. At the same time, Ryanair just begins to fly

from Belfast City, and EasyJet announces new routes from

Belfast International! Is Air Berlins withdrawal in the UK

a strategy - with its mid-fare profile, the airline may not

be interested anymore in challenging the aggressive Islan-

ders on their own British battlefield - or a clear defeat ?

From a German point of view, the purchase of Condor

could mean the end of the consolidation. After the an-

nouncement of the Condortakeover by Air Berlin, rumors

said in November the two remaining German LCCs, Ger-manwingsand TUIfly, could also merge. Both are too small

to compete on the European market, and TUIfly, created

earlier in 2007 from the merger of HLX and Hapagfly, is

in quite bad economic health. As Germanwingsbelongs

to Lufthansa, the German market could soon become a

duopole : Lufthansawith Germanwingsand TUIfly on

the one side, Air Berlinwith DBA, LTUand Condoron

the other side. But then, who will offer aggressive fares to

the customers?

After the Takeover of Condor, Which Perspectives for Air Berlin?


15/18

BIRDS EYE VIEW


EVENTS

French Connect 2008April 9 to 11 in Courchevel

Air Scoopis proud to be part of the 5th French Connectin Courchevel.

For the 5th consecutive year, CEOs of French airports and European low cost airlines will gather for 3 days of debates

and networking.

French Connect, the only professional forum dedicated to low cost air traffic development in France, will take place in

Courchevel, French Alps from 9th to 11th April 2008. Created in 2004 to respond to the specific needs of French airports,

French Connecthas become, in just a few years, a must-attend meeting and debating forum for French airports and low

cost airlines.

For 3 days, decision-makers will gather from over 20 low cost airlines and 50 French airports together with representa-

tives from regional, national and European political institutions. French Connect2008 is hosted by Grenoble-Isre and

Chambry-Savoie Airports, two airports managed by VINCI Airportsand Keolis Airportson behalf of the Conseils G-nraux (County Councils) of Isre and Savoie. Innovation and dynamism are the key words for next years event, which

will be an exceptional opportunity to understand the issues of low cost air traffic development in France.

To have more informations about last edition ofFrench Connectin La Baule, read the full coverage in Air Scoop May

2007.

For more information on French Connect2008, visit www.frenchconnect.net

World Low Cost Airlines 2008September 23 to 24 in London

Air Scoopis 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. (Youll

need to have flash installed on your computer.)

Dont miss out on next years 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


16/18Air Scoop - December 2007

DOWN TO EARTH

www.air-scoop.com6


17/18


18/18

BIRDS EYE VIEW

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Subscription to Air Scoop: 290 euros for 1 year (10 issues)

Copyright 2006-2007 - Unauthorized distribution or reproduction is forbidden.

terms and conditions, making it one ofRyanairs leading

ancillary revenue streams. Other LCCs have engaged in

similar tactics. If the EU has found that Ryanairor other

LCCs have improperly displayed terms and conditions,

then it could expose those carriers to considerable penal-ties. If restricted in these ancillary product offerings, LCCs

will likely see slower growth in this revenue stream, since

a significant percentage of ancillary revenue is generated

from customers who unwillingly purchase the product.

Moreover, as LCCs know, price is everything, and some

carriers may have been deliberately slow to transition to

all-inclusive pricing. With a lumbering EU bureaucracy,

carriers that continue to advertise fares without taxes

dont have any immediate threat of sanctions, and so if

they can make their fares appear cheaper than their com-petitors for a few more months, it helps them gain a com-

petitive advantage.

Its probable that LCCs that operate in more countries

and which have more complex Web interfaces are more

likely to be subject to penalties. Therefore, I suspect that

easyJet and Ryanairare most likely to have violations.

EasyJet currently automatically selects and prices a custo-

mers flight with a hold bag and travel insurance included.

Customers must remove these items to receive the price

of their ticket only, something the EU prohibits. EasyJetwill need to change this practice in the near future to

avoid penalties. Ryanaircurrently advertises flights on its

home page with taxes and fees included, but when a cus-

tomer goes to book that flight, he or she may see a price

much lower than that, as low as .01 EUR. Ryanairthen

adds the taxes and charges on the following page, possibly

misleading customers who thought that the flight cost .01

EUR, and a potential violation of the EU policy.

The Potential Effects on LCCs

Obviously, a Web site shutdown would have disastrous

consequences for any airline, not just an LCC. Since many

LCCs do not offer tickets through travel agencies, passen-

gers would have either the option of booking via phone

or booking at the airport, neither of which are very con-

venient or desirable for either airlines or passengers. If its

Web site closed, an LCC would quickly lose market share

and money, as it could not arrange bookings for enough

passengers to fill its airplanes.

The effects would be immediate and dramatic, and even

with a temporary site closure, the effects could last for

months: A carrier could see lower load factors months af-

ter a Web site closure. Moreover, the airlines reputation

for quality would likely suffer if its site closed, leading tosuspicions about other areas of the airlines operation.

Yet the possibility of an airlines Web site being taken

down is very real, even if a rogue hacker succeeds where

the EU doesnt, and needs to be taken more seriously by

carriers. As the expression goes, Dont put all your eggs

in one basket. LCCs put all their eggs in one basket in a

number of facets of their operations, including fleet ma-

keup (since many LCCs operate only one type of aircraft,

and most operate no more than two) as well as distribu-

tion method (since many LCCs sell virtually all of theirtickets through their Web sites).

Putting their eggs in one basket has led to enormous ef-

ficiencies; however, consolidating baskets also increases

risks for carriers if their basket breaks, leaving carriers

exposed and vulnerable. In this ultra-competitive mar-

ketplace, just a few things have to go wrong to lead to di-

saster. The EU probe will likely succeed in forcing LCCs

to make the necessary changes to their Web sites to make

their sites more transparent, easy-to-use, and consumer

friendly. These changes will cost LCCs some ancillaryrevenue, but they will also help make LCC sites more

attractive for consumers, helping to build brand loyalty

and strengthening the ability of LCCs to generate repeat

business.

Remarks, questions Join Samon his website to com-

ment 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 ofTake Control of Booking a Cheap

Airline Ticket, an ebook for travelers in the United States

who are interested in purchasing cheap airline tickets.

air scoop december 2007

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