innovation & cost leadership, 15. november 2004 © 1 the low-cost idea the low-cost idea has to...

1Innovation & Cost Leadership, 15. November 2004 www.advolar.com ©

The Low-cost Idea

The low-cost idea has to start in people´s mind!

Low-cost means...

...not simply reducing the price,

...but primarily changing well-known processes.

In doing so the simplicity of the new processes is most important.


Low-Cost Business Strategy Of Airlines: CEOs

Joachim HunoldChariman of executive board Air BerlinAirliner: no

Wolfgang KurthCEO Hapag-Lloyd Express Airliner: yes

Onno van den BrinkCEO TransaviaAirliner: no

Christian MandlCEO SkyEurope Airliner: no

Michael O´LearyCEO RyanairAirliner: no

Jozef VaradiCEO Wizz AirAirliner: no

Ray WebsterCEO EasyjetAirliner: yes

CEOs of LCCs don´t necessarily have an airline background

Tim ClaydonSenior Vice PresidentJetBueAirliner: no

Herbert D. Kelleher CEO SouthwestAirliner: no

David NeelemanCEO JetBlueAirliner: no


We are not an airline, we are a culture.

A culture founded by optimists - and built by believers.

We are not an airline.

We are listeners, innovators and technology creators.

We are not an airline.

We are magicians, musicians, acrobats and sprinters focused on a single goal: to give style, service and choice back to the people who fly.

That´s why we „cast“ our stars - to make sure each and every one is attentive and gracious.

Why we offer everyone 24 channels of real time, satellite TV and CD quality MP3 audio.

Why we hand picked a socially-conscious chef - to prepare fresh meals and cater to diverse tastes.

Why Kate Spade designed a collection for our stars, why we created exlusive programming for families, and offer cosmopolitans in the air.

All in all, it´s why we offer more. And now it´s time to dig deeper.

You see, we realize our difference doesn´t lie solely in the choices we offer, but also in how we offer them. ...

Song´s Credo


Song´s Credo Cont.

This means paying attention to those subtle, all-important details that give someone or something a certain specialness.

This means understanding that style isn´t just about the uniforms we wear, but in how we wear them.

It means remembering not only to say please and thank you - but how old is your son and happy birthday.

It means recognizing that some guests desire a sense of well-being and others - a sense of humor.

It´s knowing that smiling is contagious, technology is empowerment, and that some people like their martini - ice cold - with olives - shaken, not stirred.

It´s each and every day - in the lobby, the parking lot, on the web site and in the plane - demonstrating that we truly understand the frustrations our guests have with airline travel and exceeding their expectations with choices that are special and surprising.

Here, lies the Song difference.

Because in the end, as we all know, the proof is in the pudding.

And if it needs to be low-fat, organic pudding - so be it.

We are in tune with our guests.

We are not an airline. We are Song.


LCCs Have A Competitive Edge

0

2

4

6

8

10

12

14

300 550 800 1050 1300 1550 1800 2050

Virgin Express

Ryanair

GO

easyJet

Lufthansa

Southwest

Hapag-Lloyd Flug

Costs/ASK(€ cent)

Sector lenght (in km)

Comparison of the cost structure of different airlines

Source: Unternehmensberichte und -Websites, Analystenreports, AEA, Monitor Group Analyse

Full Fare Airlines

Charter

Low-Cost


Comparison Of The Average Unit Costs For Intra-European Flights

Low costcarriers

Britannia

Regional

airlines

Scheduled

airlines BA

EasyJet

LHAF

KL

IB

Ryanair

SK

SWA ATA

AS

AWA

NW

DL

CO

US

UA

TWAirT

AZ

AA

Average Route Length (Miles)

Cen

ts /

AS

M

ASM: Available Seats MilesSource: CASM Form 41, Air Transp. World June 2001 issue, Stage length data from the Airline Monitor Nov. 2001 issue; AirTran data Air Tran 10-Ks BAH Analysis

Charterairlines

25

20

15

10

5

00 200 400 600 800 1.000 1.200 1.400

1.600


0,0

2,0

4,0

6,0

8,0

10,0

12,0

14,0

LCCs Aircraft operation

Airport fees

Frills Sales Staff Fleet Others Traditional airline

Costs/ASK(€ cent) 6.0

2.7

1.2

0.80.6

0.4 0.20.1 12.0

• Fast turnarounds, direct flights, no transfer

• more seats per A/C

• Primary and secundary airports

• Standardized classes

• No Frills• Extras are

subject to additional rates

• No lounge• Etc.

• Direct channels

• Bookings via travel agency are subject to addidtional rates

• Less staff (limited service, no transfers)

• Lower maintenance-, trainings costs

• simplified change of flight personnel

Unit Costs Of LCCs Are Only Half Of The Costs Of Traditional Airlines

Source: AEA, Analysten Reports, Artikel, Monitor Analyse


Differences Between Low-cost & Traditional Carriers

Low-Cost Carrier

• Primary and secondary airports

• Direct channels, use of travel agencies only if extra costs

minimal

• Standardised fleet (only one aircraft type), higher seating density (737-300: e.g. 146)

• Various aircraft types, low seating density (737-300: e.g. 134)

Full Fare airlines

• International airports

• Most tickets sold via travel agencies and by the airline itself

• Fast turnarounds (up to 25 min.)

• Turnaround slowed down by use of major airports with large amount of traffic (approx. 45 min.)

Retail

Airports

Fleet

Utilisation

Frills • No Frills, extras paid for (e.g.

catering, extra luggage) • Entertainment program, quick

check in, lounges, paper tickets, business class, catering

• Direct flights, no transfers, short routes

• Long haul and short haul routes with transfers

Network

• High variable-proportion of salary (up to 26 %), better capacity

utilisation

• High basic salaries (variable proportion up to 11 %), trade union affiliation

Personnel

• Lower maintenance, spare parts and training costs, simpler swopping around of flight staff, higher capacity utilisation

Low-Cost advantages

• Lower airport charges

• Lower distribution costs, lower

complexity

• Higher utilisation

• Lower ancillary costs, less complexity, additional income

• Lower complexity, higher capacity utilisation

• Lower fixed personnel costs


Distribution, Staff And Network Planning

Business processes

Sales

Direct sales channels

Processes such as

„information“, „booking“, „seat-

reservation“ and „payment“

are relocated to the client

Bookings via Call-Center or

travel agency are subject to

additional charges

No paper tickets

Pricing-strategies

Aggressive marketing

Staff

Lean-management

Fast decision making

Less staff (e.g. no service)

Flexibility and motivation of staff

Network planning

Point-to-point traffic

High frequencies

usually short distance flights

(max. 1.500 km)


Low-cost Business Strategy Of Airlines: Sales

92%

1%

4%

3%

Online

Call Center

Amadeus

Others

Sales channels as per bookings in % in 2004

92%

1%4%

3%

Online

Call Center

Amadeus

Others

Sales channels as per revenue in % 2004

1 including 79% Internet, 4% flyloco/LTUR, 9% Skyagent2 including 2% CC, 2% Agencies via CC3 e.g. group-, press- and member of staff bookings

1 including 74% Internet, 5% flyloco/LTUR, 13% Skyagent2 including 3% CC, 1% Agencies via CC3 e.g. group-, press- and member of staff bookings

2 23 3

1 1


Low-cost Business Strategy Of Airlines: Sales Cont.

Website performance per month Page visits: 2,0 m Page impressions: 14,8 m Newsletter subscription: >560.000 Conversion rate: 16 % (August 04)

Cooperation with Flyloco.de offers:

Dynamic packaging.

Hotel data base With about 2400 hotels Average prices from € 85 to € 130

per double room 40 % of these hotels in 3-stars segment

Sales via internet is essential


HLX „Rock Buttom Site“

Clearly laid out overview of the cheapest flights

„Happy HLX Hours“ Regular promotion at especially favourable conditions (Tuesday- Wednesday)

Partner HLF and others

Distribution synergies due to „piggy backing“ on partners´ natioal website

Targeted promotion generates demand

Low-cost Business Strategy Of Airlines: Sales Cont.


Course of the day: 8:00 to 24:00, high utilisation also beyondthe “travel agency time”

Low-cost Business Strategy Of Airlines:Sales Cont.


Low-cost Business Strategy Of Airlines: No Frills

No Frills

No meals, drinks and snacks for free, therefore

reduction of costs for the catering itself but also for

cleaning and loading

No frequent-flyer programs

Excess baggage, sports equipment etc. is subject to

additional rates

No cancellation

Changes of booking are charged

Free-seating / seat reservations are changed

No lounges


Airlines Meals

Quelle: Die Welt, 08.10.2004

Lufthansa breakfast

HLX breakfast


Aircraft / Fleet

Homogeneous fleet, therefore low costs for maintenance, cockpit training

and „stand by“ crews

Higher number of seats, therefore higher capacity and higher utilisation of

the aircraft

In future functions will be paid instead of the hardware,

e.g. functions such as CAT IIIA, MTOW and

thrust are paid according to the

actual utilisation

instead of being an integral part of the

purchase

Low-cost Business Strategy Of Airlines: A/C and Fleet


Low-cost Business Strategy Of Airlines: Airports

Airports

Utilisation of secondary airports,

thererfore lower airport fees, lower

traffic and congestion, fewer delays

Basing of the fleet at several

airports, aircraft return to their base

at the end of the day, no hotel

expenses for the crew, crew

rostering is more efficient


Low-cost Business Strategy Of Airlines: A/C Basing

LCCs spread

their bases

across Europe

National / flag

carrier usually

have one or two

national bases

only



LCCs spread

their bases

across Europe

National / flag

carrier usually

have one or two

national bases

only


Flight operation

Higher productivity due to faster turnarounds (20 to 25 min. in comparison to 45

min and more from flag carriers) due to: Less traffic and less delays at secondary airports

No waiting time due to transfer-passengers and baggage

Simple boarding and loading processes

Time-saving fueling processes

No cargo

Cleaning by cabin crew

Catering for four legs

„Outsourcing“ of catering and bordshop,

airline only provides staff and sales area

Low-cost Business Strategy Of Airlines: Flight Operation


Low-cost Business Strategy Of Airlines: Staff

margin (%) average (%)+10 up to +35 +26%

Monthly / weekly working hours +10 up to +20 +15%-15 up to +30 +19%

-5 up to -50 -21%-12 up to -40 -24%-5 up to -20 -16%-5 up to -20 -13%

Extra pay per hourFree days per monthHoliday entitlement

Differences in working conditions compared to non-LCCs

Blockhours per month

Max. hours of overtimeMonthly basic salary

Source:http://www.verdi.de/verkehr/luftverkehr/sonstiges/zeitung_check-in


Low-cost Business Strategy Of Airlines: Staff Cont.

* pilots are charged an application fee of £ 50

*

Source: http://www.ryan-be-fair.org/pdfs/compare.pdf


Low-cost Business Strategy Of Airlines: Maintenance

Maintenance

New service concepts for LCCs

Suppliers should „provision“ according to the data they have collected during

hundreds of checks (e.g. knowledge of most frequent material repair)

LCCs want „air time“, suppliers want ground time, there´s a conflict of interest, less

incentive for suppliers to „improve“ themselves

Development of „equalised“ maintenance concepts, shorter ground time and higher

availability of the aircraft

For LCCs there is little incentive to take on board anything other than line

maintenance work. What LCCs really do well is flying passengers from point A to

point B, develop product and markets, manage yield and revenue

Cost reductions will have to come from smarter maintenance planning. Doing the

right work at the right time and not over-maintaining

Source: „Service Challenge“, Airline Business, October 2004


Price development of different airlines1,2

Index

1 Research 5.3.2003-11.3.2003, indicated floating average, (basis: one-way incl. taxes and fees 2 Ryanair: Frankfurt-Glasgow, Lufthansa: Munich-London, Aerolloyd: Düsseldorf-MalagaSource: Monitor Group, 2003

50

100

150

200

250

300

350

2510152023

Low-Cost

Flagship

Charter

Days prior to departure

Low-cost Business Strategy Of Airlines: Pricing

RemarksRemarks

LCCs flexibly adjust their prices to the respective demand

Prices rise towards departure time the higher the demand the higher the

price

Pricing of flag carriers is usually more inflexible

Price curves proceed flater, however they rise as well

Price structures of Charter-Airlines are contrary to those of LCCs

Prices decline towards departure time

LCCs flexibly adjust their prices to the respective demand

Prices rise towards departure time the higher the demand the higher the

price

Pricing of flag carriers is usually more inflexible

Price curves proceed flater, however they rise as well

Price structures of Charter-Airlines are contrary to those of LCCs

Prices decline towards departure time

innovation & cost leadership, 15. november 2004 © 1 the low-cost idea the low-cost idea has to...

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