Air Scoop February 2008

8/14/2019 Air Scoop February 2008

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EDITORIAL

Highlights in this IssueDid Ryanair Believe in its Gloomy Predictions? p. 2

Investing in SkyEurope a bottomless bag? p. 3

Slowdown of LCCs Industry p. 7

SWOT Analysis of Wizz Air p. 8

LCCs Get Slammed Over Hidden Charges p. 18

Air Scoop - February 2008 www.air-scoop.com

The Low Cost Carriers Analysis Newsletter

Slowdown of European LCCs Industry:

What Comes Next?

These weeks, analysts havent been really enthusiastic about the

European low-cost carriers market. Investors decided not to

take risks which resulted in a fall of most LCCs shares. By

now, there is no doubt that European LCCs face an important eco-

nomic slowdown; demand is naturally limited (p. 7). This recession

combined with high oil prices and an average load factor could slash

Ryanairs prot by 50% next year. However, this is not the rst time

that Michael OLeary announced such gloomy predictions; last June

the Irish carrier announced a pessimist outlook to come, but 6 months

later results published by the company were far beyond the initially

pessimistic forecasts. Once again, Michael OLeary could transform

this threat into opportunity and launch a new attack on his competi-

tors by announcing a global recession to come (p. 2).

Two potential victims of this economic slowdown could be SkyEu-

rope and Vueling. Facing competition with Ryanair, easyJet and clic-

kair, Vueling faced many economic difculties last year. To survive,

Vueling needs to nd new investors or to merge with another carrier.Rumors of mergers with Spanish competitor clickair are in the air

On Central and Eastern market, after a major restructuring process

in 2007, SkyEurope is still not out of danger. Air Scoop realized a

complete analysis of SkyEurope investors and their goals (p. 3). Main

competitor of SkyEurope in this region is Wizz Air. To understand

strengths and weakness of this carrier, we have realized the SWOT of

Wizz Air (p. 8).

Ancillary revenues represent a great amount of LCCs revenues, and

could be a solution to compensate recession. Recently the number

of charges on passengers has increased and requires travelers to jump

through numerous hoops to avoid any additional fees. While consu-mers associations criticize LCCs over hidden charges (p. 18), many

conferences about ancillary revenues will take place this year, like

Ancillary Revenue in Travel 2008 in February in Dublin for instance.

AIR SCOOP ANNOUNCEMENTS

A Glimpse of Headlines News!

Ryanair quarterly prot down 27%

Ryanair posted a sharper than expected drop in

third-quarter net prot today and warned high

oil prices, an economic slowdown in the UK

and weak sterling meant prots may fall by half

next year. Europes biggest low-cost carrier saidexcluding a one-off gain from the sale of aircraft

net prot in the three months to the end of De-

cember fell 27 per cent to 35 million as winter

fares fell almost 5 per cent.

Edgardo Badiali appointed as CEO, GoAir

news

Wadia Group-promoted, GoAir, has announced

the appointment of Edgardo Badiali as the chief

executive ofcer of the company. It said that

Badiali, a senior aviation professional with over

15 years of senior management experience,

would report to GoAir managing director Jeh

Wadia. Badialis earlier assignment was with Ita-

lian low- cost airline, MyAir, as its CEO.

Cheap air fares killing British tourism

Budget airlines are squeezing the life out of

British tourism and the government is exacer-

bating the problem by promoting expansion of

the aviation industry, MPs were told yesterday.

Budget hotel chain Travelodge accused Ryanair

and easyJet of driving an 18bn tourism de-cit by drawing British holidaymakers away

from Britain with low fares underpinned by

state tax breaks.

Vueling shareholder, Hemisferio, conrms in

talks with Clickair

Vueling Airlines core shareholder, Inversiones

Hemisferio, with approximately 26% sharehol-

ding in the LCC, said it is in talks with various

companies in the sector, including LCC, Clic-

kair. However, the company stated no agree-ment or commitment with anyone has been

reached.

More on http://airscoop.blogspot.com

Air Scoop - In the Air

Flybe Target Of

Buyout?

Clickair And

Vueling Possible

Fusion


2/19

BIRDS EYE VIEW


Did Ryanair Really Believe in its June 2007 Gloomy Predictions?

UPDATE : As Ryanair just warned high oil prices could slash its prots by 50% next year, Air Scoop has decided

to analyse another past gloomy prediction made by the carrier just 6 months ago, in June 2007.

Will it be the same situation now?

On June 5th 2007, Ryanair made an unusual announce-

ment given its outstanding economic performances: the

airline predicted a low full-year prot growth of only

5 pc for nancial year 2007-2008. According to the com-

pany softening demand, rising interest rates and higher

airport charges were the main reasons for this pessimism.

But Ryanair quickly revised upwards its prot guidance.

On July 31th, in its Q1 nancial results, the airline re-

evaluated prot growth predictions to 10 pc, thanks to

cost cutting and capacity reductions. Finally, in Novem-

ber 2007, H1 gures published by the company were far

beyond the initially pessimistic forecasts. And the full-

year prot guidance was now pushed to 470 million ,

+17.5 pc over the year.

In retrospect, the cautious prot predictions on June 5th,

2007 are quite surprising regarding Ryanairs previous re-

sults. In 2006, the airline made more than 400 million

net prot, about 30% more than in 2005! The Irish carrier

is one of the most protable airlines in the world. What

is more, Ryanairs strategy of strong and quick growth ma-

kes the airline not really familiar with gloomy nancial

announcements.So, why did the airline published such low projections on

that day? Did it really had no visibility, as it pretended

at that time? Did it really believed in a very difcult

winter season? Or was this pessimism just intentionally

exaggerated?

There could have been several reasons for Ryanair to

lower its nancial prospect for 2007-2008. If the Euro-

pean leader makes poor predictions, the entire LCC bu-

siness is hurt. Smaller competitors are weakened; their

share value goes down, making them more exposed to

takeover. And Ryanair can justify the launching of a harshfare war, as it did this summer, putting all its challengers

under pressure. Besides, OLearys opinion on the market

is not approved by all his colleagues: EasyJet boss Andy

Harrisson, for example, rejected it.

But one important reason for Ryanairs pessimism may be

that it helped lowering the airlines own share value, in

order to benet from more attractive prices for a share

buyback. In fact, on June 5th, Ryanair also announced a

300 million share buyback, representing 3.5 pc of the

share capital. On the same day, after the bad prot an-

nouncements, Ryanairs share lost about 7 pc, and then

continued to decrease slightly. From 5.4 on June 4th,

it fell to 4.95 on June 26th, the day the airline began to

buy shares back. At the beginning of August, Ryanair had

bought back a total amount of 37.6 million of its shares

(2.5 pc of the share capital), for approximately 187 million

, about 4.97 per share.

As Ryanair does not pay dividends as long as I live and

breathe, as OLeary said, the purpose of buying back sha-

res is to increase the earning per share (EPS) ratio, for

the benet of shareholders. Ryanair established in its H1

report in November: Prot upgrade and share buyback

increase EPS by 19.5% in 08. The EPS is also an indica-

tor of a companys protability. The share value, however,

was not signicantly enhanced by this buy back operation.

At the end of 2007, it was lower than 4.7 , and even than4 in 2008.

Ryanairs intentions when it announced bad prot pers-

pectives in June, which were then nearly quadrupled until

November, cannot be established for sure. Was the airline

sincere? Was this just a strategy to hit the whole European

LCC business and lower share prices in prevision of the

buyback? However, even if Ryanair predicts a downturn,

it is the last company suffering from it, given the airlines

record economic performances. And it has the ability to

nally take advantage even of poor forecasts.


3/19

BIRDS EYE VIEW


In 2007, SkyEurope underwent a major restructuring pro-

cess. The business strategy of the company was signi-

cantly modied and the management board was renewed.

Christian Mandl and Alain Skowronek, the founders of

SkyEurope also had to leave the management. The reason

for this turmoil was the constantly bad nancial perfor-

mance of the carrier, which threatened SkyEurope with

bankruptcy. In spite of the daunting prospects of the com-

pany, certain investors did not refrain from investing in it.

Since the low cost carrier became listed simultaneously on

the Warsaw and Vienna stock exchange on 27 September

2005, the shares have been traded and exchanged among

several investment funds. In this article,we attempt to

analyze who invested in the company and we also try toexplain the motivations and goals of those investors.

Before the initial public offering (IPO), the shareholder

structure of SkyEurope was the following: Endavour Hol-

dings (43.45%), Bank Austria Creditanstalt AG (39.83%)

and Loryma Investments (16.72%) owned the assets of the

company. The latter group, Loryma Investments was ex-

clusively owned by Mandl and Skowronek. Within the

group led by Bank Austria, several investment funds took

their share, including East Capital Asset Management

(16.72 % of total shares) and DWS funds (7.79 %), whichis a member of Deutsche Bank Group.

The IPO price on 25 September 2007 was 6 per share,

therefore the company was valued at 120 million at the

beginning of the trading. In December, 2005 the 20 mil-

lion authorized shares of SkyEurope were divided among

Endavour Holdings (13.3%), Loryma Investments (8.8%),

East Capital (8.4%), Merrill Lynch (6.5%) and Grifn Ca-

pital Investment (5.7%). The rest of the shares (57.3%)

were on public oat.

However, the nancial downturn of the company soon

became critical, as SkyEurope failed to improve its load

factor in the rst quarter of 2006 (compared to the pre-

vious year), thus operating loss further increased. In April

2006, Endavour Holdings decided to sell all the 2 668 546

shares it owned.

These shares were bought buy institutional investors. As a

result of the transaction, within weeks, SkyEuropes share

price soared to an all-time high of 6.35 only to see the

price plummeting in the following month down to 1.42

in August, 2006. Within less than a year, market capita-

lization of SkyEurope fell from 120 million to 28.4

million. The decision of Endavour Holdings about the sale

of the shares triggered a wave of sales, which resulted inthe continuous decrease in the share price.

In September, 2006 a new investor appeared on the ho-

rizon, York Global Finance II (York), which is an afliate

of York Capital Management, an international private

investment fund group that manages over 7 billion of

assets globally. York has built expertise in investing in un-

dervalued corporations, such as SkyEurope, which seemed

to qualify for this title. The agreement between the air

carrier and York contained a considerable capital injection

into SkyEurope. 10 million new shares were issued thatwere subject to purchase by existing and new sharehol-

ders at a xed price of 1.75. Moreover, York purchased

an additional 8.99 million new shares also at a xed price

of 1.75. This transaction made York the largest share-

holder of SkyEurope, as it owned 23.06 % of the total

authorized shares of which number increased to 38.99

million with this transaction. In addition to these, York

also purchased bonds worth 6.7 million, which were

mandatorily convertible to an additional 3.8 million new

shares of SkyEurope. Upon conversion of these bonds to

shares, Yorks share was expected to rise to 29.9%. In sum,York invested approximately 22.4 million in SkyEurope

in order to become the largest shareholder and gain subs-

tantial control over the company. To reinforce its com-

mitment to SkyEurope, York also agreed to purchase a

further 17 million nominal amount of nonmandatorily

convertible bonds; therefore the total investment of the

fund exceeded 38 million ( 15.73 million of purchase of

shares, 6.7 million of purchase of convertible bonds, 17

million of nonconvertible bonds). Together with the is-

suing of 10 million new shares, this comprehensive equity

and equity-linked nancing package amounted to 56.3

million.

Investing in SkyEurope a bottomless bag?

Histor of Sk Euro es share rice Se 2005 Feb 2008


4/19

BIRDS EYE VIEW


Given that the IPO in September 2005 valued the com-

pany at 120 million, Yorks investment less than a year

later can be considered a risky bargain. On the one hand it

was a bargain, because control over SkyEurope was achie-

ved with a relatively low volume of investment given the

companys miserable performance in the stock market, onthe other hand, the risk was that if this investment had

not been followed by signicant changes in management

and in the business strategy, SkyEuropes bad performance

would have continued. Yorks commitment stabilized the

nancial situation of SkyEurope and thus, the air carrier

regained condence of the market. This is visible in the

share price which began to increase again after the deal

was arranged.

However rm the nancial situation of SkyEurope seemed

to be in the fall of 2006, the problems which were rootedin the stuck-in-the-middle market position of the carrier

still existed. The product portfolio lacked a clear focus,

mainly leisure and business travellers were targeted on

such routes that were characterised by high seasonality of

demand. Moreover, the company expanded from its rather

small home market too quickly and failed to compete on

the most protable British and German destinations, unli-

ke its rivals, like Wizz Air. The operating lease agreements

with GECAS (General Electric Commercial Aviation Ser-

vices) for 12 brand new Boeing 737-700 NG aircrafts put a

constant nancial pressure on SkyEurope. Operating leases

are a common form of nancing airliners. They are popular

because the lease term is short compared to the useful life

of the asset (aircraft) that is leased. However, it assumes a

payment of a xed monthly amount of money, which is

not subject to renegotiation, at least until the lease expires.

This is the reason why SkyEurope has been losing cash and

cash equivalents so dramatically.

In 2006, SkyEurope attempted to search for other methods

of expanding its eet and signed a long-term loan contract

with Halifax Bank of Scotland for 4 brand new Boeing

737-700 NG. SkyEurope thus directly ordered these air-crafts from Boeing and upon delivery, the airplanes will be

owned by the air carrier.

Yorks arrival suggested that changes in the management

would be likely in the nearest future. However, an interes-

ting battle for control over SkyEurope was developing in

early 2007. RPR Privatstiftung, an investment group owned

by former IT specialist, Austrian citizen Ronny Pecik, who

became one of the leading European long-term industrial

investors focusing on undervalued targets, obtained 16.55

% of the shares of SkyEurope by February, 2007. Pecikstransactions caused SkyEuropes share prices to soar once

again to 6 per share. Niki Lauda and Ronny Pecik are good

friends; moreover, Pecik is a sponsor of Laudas busines-

ses, including Lauda Air, a subsidiary of Austrian Airlines

and yNiki, a budget airline. Rumours were spread that a

merger was prepared between SkyEurope and Air Berlin

(a major stakeholder in yNiki) and this way, Mandl and

Skowronek could have saved their position at SkyEurope.

Nevertheless, the planned merger did not occur and Pecik

decreased its interest in the airline to 4.5% by March 2007.The sale of more than 4.7 million SkyEurope shares shook

the share price again, which started to plummet for the

second time within less than a year. York won the battle

against RPR.

In May, 2007, a major change in the management structure

was announced. Mandl and Skowronek stepped down; Ja-

son Bitter became the new CEO and Nick Manoudakis the

new CFO. Changes took place in the Supervisory Board,

too. Christophe Aurand and Jeremy Blank from York Ca-

pital, who became members of the Supervisory Board inSeptember, 2006, reinforced their positions.

In September, 2007 York converted its convertible bonds

to shares on a conversion price of 1.75, therefore the

bonds were converted into 3.806 million common bearer

shares. Following this transaction, Yorks shareholding has

increased from 23.06% to 29.9% and currently the invest-

ment fund holds 12 796 004 shares of SkyEurope. Under

Austrian law, a direct or indirect controlling interest in a

company is established by the ownership of more than 30

percent. If York exceeds this threshold, then, according to

the law, it would be required from it to make a compul-

sory offer for the remaining shares of the issuer. Evidently,

this will not be the case and this also implies that further

issuing of new shares is very unlikely.

In the meantime the new management decided on subs-

tantial modications of the business strategy. SkyEurope

abandoned the Hungarian and the Polish market and re-

directed its eet to the remaining three bases. In Prague

and in Bratislava the carrier deployed 4 planes while in

Vienna it operates with 6. The new strategy is to increase

frequency on most protable routes; however, the Medi-terranean destinations still outnumber the others, which

are less exposed to seasonality.

The drastic measures yielded certain results, however, the

nancial situation of SkyEurope is still far from convin-

cing. For the rst time in its history, in the fourth quarter

of 2007 the company had a positive operating result of

9.6 million and earnings before interest and taxes (EBIT)

dropped from a negative 55.9 million to 20.9 million.

At the same time cash and cash equivalents dropped to a

mere 11.579 million from the previous years 41.789million. It is not a coincidence that SkyEurope was forced

to sell two of the Boeings before they were due for deli-

very. These airplanes are part of those four nanced by a

long-term loan provided by Halifax Bank of Scotland. Ci-


5/19

BIRDS EYE VIEW


tigroup, which is one of the major shareholders of SkyEu-

rope, purchased the two Boeing 737-700 NGs.

In order to save SkyEurope for the winter season, York

provided a 15 million nancing facility (loan) to the air

carrier at the end of 2007. This amount of capital shouldbe adequate for the forthcoming months but it is still dis-

putable whether the carrier will individually survive in the

long run. However, a merger with another air carrier is

possibly the most likely outcome. York is specialized in

mergers and acquisitions, thus the investments that they

have made so far might prepare the ground for a sale to

another air carrier. Who can be the potential candidate?

Air Berlin has expanded at a high speed in the previous

months and may not stop at this point. Recently, a merger

between TUIy and Germanwings is being considered and

SkyEurope might also be involved in this process. Howe-

ver, Austrian Airlines might be the most suitable candi-date for a potential acquisition, given SkyEuropes route

portfolio and customers. The share price of SkyEurope is

still around 1.70, thus a relatively small investment could

enable the purchaser to gain full control over the low cost

carrier. Odds are high that SkyEurope will be acquired this

year...

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6/19

BIRDS EYE VIEW


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 trafc development in France, will take place in

Courchevel, French Alps from 9th to 11th April 2008. Created in 2004 to respond to the specic 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 trafc 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

EVENTS


7/19

BIRDS EYE VIEW


Although easyJet reported its load factor had fallen by

more than 2%, the carrier took it bravely and announcedthat it was getting the necessary revenue. Investors, howe-

ver, reacted differently and decided not to take risks which

resulted in 13.9% loss in easyJet shares. The panic soon

reached Ryanairs investors and its shares have already lost

17% though the carrier did not report of any losses on its

side. The question is whether the industry that seems to

run ahead its customers is indeed facing a dramatic slow

down or it is all about market psychology and investors

worrying about low passenger numbers.

There are at least two main issues which inuence airlinesearnings: fuel prices and capacity. As regards fuel prices,

carriers are most likely to pass the additional cost to their

passengers in one way or another. Although LCCs often

claim to be less affected by increased fuel prices as they

operate modern fuel-efcient planes, experts believe that

rises in fuel price will do a lot to slow the entire industry.

Filling seats is, thus, a key goal for airlines. This December

the carriers saw the largest drop in demand whereas supply

continues to grow. To articially provoke demand the car-

riers will have to sell extra seats otherwise they might fail

to cover the cost of new aircraft and new bases. Ryanairwas the rst to react and launched a major giveaway of

seats for 10 each having excepted revenues from check-in

fees, meals, hotel rooms, etc. Auxiliary prots is an impor-

tant source of income yet the most sensitive and logically

such sales cannot be introduced on a regular basis.

What caused the decrease in load factor is obviously ex-

pansion that now seems to have been carelessly planned.

The growth of routes and aircraft put under pressure other

airlines and passengers. Having set up new bases in Conti-

nental Europe, easyJet and Ryanair introduced additional

fees for baggage check-in which can now reach as much as

20. Nevertheless, investors have raised big concerns over

ticket revenues arguing that prots generated from additio-

nal charges wont be enough to hold yield at the sufcient

level. Slow down in consumers demand as the determinant

factor for ticket revenues was probably the main argument

for the analysts who recommended to sell.

LCC themselves ascribed the slump to weak national eco-

nomies and seem to stay calm. In a situation like this it is

difcult to except any shares price recovery unless LCCs

develop new strategies to attract back both investor andpassengers. The recent decline in the number of passengers

does not really indicate that LCC are no more popular. It

simply proves that demand is naturally limited.

Slowdown of LCCs Industry


8/19

BIRDS EYE VIEW


SWOT Analysis of Wiiz Air SWOT TEAM

Introduction

The global airline industry is going through a difcult

period which is bound to continue throughout this year

2008. The major factors contributing to this are:

a) Slowdown in the US economy;

b) Reduction in consumer spending in H2 of 2007;

c) Increase in the fuel prices;

But the impact of the above factors on European airline

industry is predicted to be less intense as the Euro has

remained strong against the relatively weaker Dollar. The

coming few years will be a scene of not only intra-Eu-

rope airline industry consolidation, but it will also witness

many international mergers and acquisitions due to theUS Open Skies Agreement coming into effect this year.

This will be aided by the slowdown in US economy and

the weakening of the Dollar.

Eurocontrol had recently revealed that the number of i-

ghts in Europe surged to approximately 10 million in 2007,

an all-time high and an increase of 5.3% on 2006. Average

daily trafc was 27,676 ights last year compared to 26,286

in 2006. Trafc growth was strongest in Eastern Europe,

with several states seeing growth near 20%. Growth was

driven mainly by low-cost carriers (up 25%) and businessaviation (10%), which together accounted for nearly all

the net new ights. The number of ights in 2008 is ex-

pected to rise 4.2%. For the rst time, 20% of all ights

are expected to be operated by LCCs. Trafc growth is

expected to be strongest in countries along the Adriatic

coast and in Poland and the Baltics.

May 1, 2004, saw the simultaneous accession of 10 new

members into the EU of which eight are CEE states: Czech

Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slo-

vak Republic and Slovenia. Two more CEE countries, Bul-garia and Romania, joined in 2007. No-frills air travel in

CEE is blossoming, primarily from the new EU members,

as their entry allowed carriers to operate freely among

all 25 member states without the restriction of bilateral

agreements limiting the number of ights and favouring

national airlines. In the New EU member countries, cur-

rent market share stands at 80% traditional carriers, 20%

LCCs, and by 2010 it is predicted that LCC market share

will grow by 8% to 28%.

Forecasts by IATA for airline trafc among the nations of

Central and Eastern Europe are very good with Poland, the

Czech Republic and Romania featuring in IATAs world-

wide list of the top 10 countries with the highest average

annual growth rates in passenger trafc for 2005-09. Po-

land leads the group with an AAGR of 11.2% while the

Czech Republic is third at 9.5%. This compares with anoverall industry AAGR of 5.6% for international passenger

trafc between 2005 and 2009, and 5.1% within Europe.

We believe that the boom in passenger trafc in the CEE

region is the result of EU enlargement, strong economic

growth and the ongoing liberalization of civil aviation in

the region. While the EU enlargement and the strong eco-

nomic growth have vigorously increased demand, the li-

beralization and privatization of civil aviation has resulted

in improved supply coupled with a reduction of costs and

prices, says IATA Aviation Intelligence Assistant Director

Charles De Gheldere.

But the European low cost industry could still experiencean overhaul due to the increasing fuel costs, excessive capa-

city, green taxes, tough competition and lower consumer

spending which negatively impacts leisure and business

travel. The effect has already been felt by lower load fac-

tor and fall in share prices of leading players. This is bound

to lead to a price war and consolidation of markets sooner

than later, as the players scufe for survival. Analysts have

also predicted that Eastern European LCCs would need

strong balance sheets to compete with deeper-pocketed

rivals such as Ryanair and EasyJet.

The Hungarian LCC Market: Hungarians are the second

most frequent users of low-cost services after the Poles in

Central and Eastern Europe, a survey released recently by

easyJet said. According to the survey, 63 percent of Hun-

garians prefer to y with low-cost airlines, the poll of 500

passengers showed. (The corresponding Polish gure is 77

percent). Cheap fares are the main motivating factor for

Hungarians but e-ticket and 24-hour on-line ticket boo-

king options are incentives too, the survey said.

Ryanair, easyJet, Wizz Air, Germanwings are some of the

major players in the Hungarian market. However, Hun-gary is one of those few European countries where the rate

of growth of the LCC market has fallen behind the normal

growth rate of European markets. The number of ights to

the UK is surprisingly very low compared to those from

Poland and other European countries. The reasons for this

slow growth has been attributed to lesser number of air-

ports in the catchment areas and expensive airport charges

which discourages low cost carriers like Wizz Air from

increasing the number of routes and capacity which is not

the case with the Polish market.

The Polish LCC Market: Among the Eastern European

countries, Poland maintains strong growth and now has the

4th highest low-cost market share with 21%. The Interna-

tional Air Transport Association had forecast that, during


9/19

BIRDS EYE VIEW


2005-2009, Poland would become the fastest-growing air

transport market in the world. Its average annual growth

in passenger numbers was expected to be 11.2 percent over

that period. The top-10 air carriers now include ve bud-

get airlines: Hungarys Wizz Air, Britains easyJet, IrelandsRyanair, Germanys Germanwings and the beleaguered

LOT Polish Airlines own Centralwings.

The boom in Polands low-cost carrier business is reected

by the development of air transportation between Poland

and the UK, a result of the British and Irish labour mar-

kets opening up to Poles following EU accession. Many

carriers have chosen Poland, as it is the only country with

a sizeable population and one with extremely poor road

infrastructure. Before EU enlargement, passengers could

y directly to the UK only from Warsaw and Krakow to

London or Manchester. But now short-term migrants suchas plumbers or builders are routinely ying to Britain and

Ireland from almost every Polish airport. A research study

has indicated that, in 15 years, the number of passengers

served in Poland could reach 39 million, rising to 63 mil-

lion by 2030.

Romania and Bulgaria: Romania has seventeen commercial

airports. The busiest is Bucharest Henri Coanda (formerly

Otopeni), which handled 3.5 million passengers in 2006.

The second busiest airport is Timisoara which handled

608,000 passengers during the same period. The third bu-

siest is Bucharests second airport, Aurel Vlaicu (formerlyBaneassa) which processed 386,000 in 2006. Blue Air is

Romanias rst home grown low-cost carrier which was

created in 2004 and is based in Bucharest and is a strong

competitor to Wizz Air. The growth of low-cost service

from Romanias second Bucharest airport at Baneasa has

been impressive, increasing from just ve routes in April

2006 to 22 in April 2007. Passengers wanting to travel from

Bucharest to London and Paris have a good choice of LCCs

from this airport namely Blue Air, MyAir and Wizz Air. In

the rst two months of 2007 trafc between the UK and

Romania was up 87% on the previous year.

In Bulgaria the principal airports are Soa, the main inter-

national gateway, Bourgas and

Varna. These airports account for the vast majority of pas-

senger trafc in Bulgaria. Soa is the busiest airport, han-

dling 2.2 million passengers in 2006. (till Jan. 2007). Al-

though Bulgaria does not yet have its own low-cost airline,

LCCs such as Germanwings, MyAir and Wizz Air ope-

rate to and from Soa and Scandinavian carriers Sterling

and Norwegian y to the summer resort areas around the

Black Sea. In the rst two months of 2007, trafc between

the UK and Bulgaria was up 83% on the previous year.

Wizz Air: Wizz Air is a Polish/Hungarian low-cost airline

focusing on the markets of Central and Eastern Europe.

Its main bases are Budapest Ferihegy International Airport

(Hungary), Katowice International Airport (Poland), War-

saw Frederic Chopin Airport (Poland) and Gdansk Lech

Walesa Airport (Poland) with hub at Soa Airport (Bul-

garia).

Wizz Air Ltd. is a London-registered company, with subsi-

diaries in Hungary, Poland and Bulgaria. London, according

to its CEO Jozsef Varadi, provides easy access to capital

markets. The holding company controls Wizz Air Polska

and Wizz Air Hungary, a legal entity licensed by the Hun-

garian CAA. Jozsef Varadi, alongwith ve friends, launched

Wizz Air in September 2003. The airline was launched to

coincide with the EU accession of 10 new countries in

May 2004.

On May 19, 2004 the rst Wizz Air ight took off fromKatowice International Airport in Poland and since then

the carrier has transported 6.6 million passengers and be-

come the leading low fare airline in Central and Eastern

Europe. Wizz Air ies a young eet of 13 Airbus A320

aircrafts with 180 leather seats on board. These are main-

tained by Lufthansa Technik and SAS Technical Services.

Wizzs eet will reach 19 A320s by next summer, and this

will grow to over 50 aircraft by 2012.

In summer 2007, Wizz Air offered ights to 48 European

airports on 90 routes covering 17 countries, and carried

around 4.5 million passengers through the year. It is cur-rently the largest low cost - low fare airline in Central and

Eastern Europe. We look forward to becoming the single

largest airline of all carriers in Central and Eastern Europe

in 2008, said Jozsef Varadi

Awards: During 2007, the readers of pasazer.com - the

largest polish travel-news portal, voted Wizzs Airbus

A320-200, boarding at Aurel Vlaicu International Airport

for London Luton Airport, as the best low-fare airline in

Poland.

In January 2007, the CEO and Chairman of the airlines

Jzsef Vradi, was awarded the Ernst & Young Award of

the Brave Innovator for Wizz Airs business model, bu-siness conduct and its breakthrough performance in the

airline business in Hungary and the region.

Wizz Air was chosen as the favourite discount airline in

Hungary in April 2005, by the readers of Budapest Busi-

ness Journal (BBJ).

Overview of Wizz Air

History: The plan to launch a new Central-European low

fare low cost airline, was conceived in June 2003 by

Jozsef Varadi, Chief Executive Ofcer. Together with 5

friends and airline experts, he founded Wizz Air in Sep-tember 2003. After researching the business models of es-

tablished low-fare leaders such as Ryanair in Europe and

JetBlue in the United States, Varadi chose to go with a

low cost business model similar to that of Ryanair. Since


10/19

BIRDS EYE VIEW

Air Scoop - February 2008 www.air-scoop.com0

Western Europe was already too crowded with low-fare

airlines, Varadi selected Central and Eastern Europe as the

home ground for Wizz Airs operations. Katowice and Bu-

dapest became the airlines rst bases.

According to the CEO, the reasons behind choosing Po-land and Hungary in 2004 were their impending accession

into the EU and that they were the biggest countries in

terms of population. In its rst four months of operations,

it introduced six 180-seat A320s. All were leased. In July,

Wizz Air signed an LOI with Airbus for up to 24 V2500-

A5 powered A320 family aircraft.

Wizz Air secured up to zl.231 million ($60m) of venture

capital funding from American and European institutional

investors. The board of directors included Lynn Wothers-

poon, former COO of Buzz (the former low cost arm ofKLM), and high-ranking employees of regional branches

of Procter & Gamble and The World Bank. The company

funding in the rst year amounted to E34 million, with

some 20 high net worth individual investors from 10 Eu-

ropean countries providing the start-up cash. The leading

investor in the company is an American private equity

rm - Indigo Partners that specializes in transportation in-

vestments. Indigo Partners is also an investor in Singapore-

based LCC - Tiger Airways.

The biggest challenge for LCCs based in Central or Eas-

tern Europe was to be able to convert passengers from

their basic travel methods into using air travel. Apparently,

only 3%-5% of the population in Poland and Hungary used

air travel. Residents in Central and Eastern Europe are

constrained by budgets, as the average income per person

in the region is much below the EU average. The com-

petition in these markets is not with incumbent carriers

but with coach services, train services and personal travel

modes, limiting the yield for the LCCs. Wizz Air had been

quite successful in stimulating the market; 40% to 50%

were rst-time iers.

Growth; Wizz Airs start was strong, with 1.2 million pas-

sengers carried at an average load factor of 60% in its rstfull year of operations to May 19, 2005. Revenue in its rst

nancial year, which covered the 11 months to March 31,

amounted to E60 million. For the nancial year of 2006,

it had set the goals of carrying 2.2 million passengers and

generating 150 million Euros in revenue, while for the year

beginning April 1, 2006 it intended to nearly double tho-

se gures to 3.5-4 million passengers and earn revenue of

about E250-E300 million. It also expected to post its rst

signicant prot in FY07.

In January 2005, Wizz Air launched a new scheme to at-tract corporate travellers and Government ofcials called

Wizz Biz. The airline had also launched some new routes

in March to ll gaps in the market left when Air Polonia

collapsed. These routes included ights from Warsaw to

Paris, Frankfurt, Stockholm and Barcelona. The Polish na-

tional airline LOT launched a no-frills airline called Cen-

tralwings in February 2005, while Irish low-cost giant Rya-

nair entered the Polish market in March 2005 with ightsfrom Wroclaw to its London and Ireland bases. Wizz Air

had started operations in Lithuania in December 2005, of-

fering ights from Kaunas to the Polish capital, Warsaw,

with connections to major European cities.

In April 2006, Wizz Air CEO, Jozsef Varadi, had predicted

that only one airline from Central Europe will survive to

wage the looming competition with Ryanair. Both Wizz

and chief rival, SkyEurope, had yet to attain protability,

but both had predicted an operating prot in 2006 and a

net prot in 2007.

According to gures published by the Polish Civil Avia-

tion Authority, Wizz Air has strengthened its position as

the largest LCC and the second largest airline in Poland.

Wizz Air carried 15.5% of the total passenger trafc to/

from Poland in 1Q06, compared with 11.7% for the same

period last year. In the rst half of 2006, Ryanair had quic-

kly achieved 12 per cent share of the Polish airline market,

ying to nine airports there, up from almost nothing in

2005. It now ies to most of the countries that most re-

cently joined the EU.

In 2006 April, Wizzair had 38% share of the low cost airli-

ne market in Poland and 26% share in Hungary. Mr Vradi

has stated that, like Ryanair, Wizz Air is more focused on

keeping costs low, an approach that has already generated

an operating prot although the closely-held company

has not given out any details.

The airlines rst ight from Cork took off on July 14th,

2006, to Katowice in Poland. The airline has carried over

70,000 passengers between Cork airport in Ireland and

Poland (Gdansk and Katowice) since it commenced ope-

rations in July 2006.

Current Status: (2007-2008) In January Wizz Air, offered

free tickets (only taxes and charges to be paid) to strandedpassengers of SkyEurope following SkyEuropes cancel-

lation of its ight between Bucharest and Budapest until

25 March 2007, starting on 16 January 2007 along with 7

other new Romanian routes. It also announced plans to

open a base in Romania in May.

According to a news report published in April, Wizz Air,

the Hungarian budget airline was planning to oat on the

London Stock Exchange in a listing that could value it at

400m-500m, reports The Daily Telegraph(April 2007).

Chief executive Jozsef Varadi, was to select one fromamong six investment banks interested to assist it in its

IPO. The company hoped this issue would include as

much as 200m in fund-raising to nance expansion. The


11/19

BIRDS EYE VIEW


banks include the trio behind the successful otation of

Spanish low-fare airline Vueling: Goldman Sachs, JPMor-

gan and Morgan Stanley besides UBS, Credit Suisse and

Citigroup.

The oat was planned before the year end of 2007 andWizz Air was expected to have a higher market worth

than Vueling, currently valued at 640m (435m), also

including the new money raised. But the listing seems to

have been postponed. According to last year news re-

ports, Wizz Airs Chief Executive, Jozsef Varadi, had said

that the airline was years away from a listing.

In April 2007, Wizz Air, reached the six million passenger

gure since its May 2004 launch. Within one year the car-

rier had doubled its passenger numbers and had now out-

performed its competitors. As a part of its Eastern Eu-

ropean expansion, this summer the airline started ightsfrom Croatia (Zagreb, Split) and Slovenia (Ljubljana).

In May, Wizz Air took delivery of the rst of 32 directly

purchased A320s, featuring the all new A320 Family new

cabin, giving passengers more space and a quieter travel

experience. The latest A320 models also feature additio-

nal advanced aerodynamics helping reduce fuel burn even

further. It also extended its catering agreement with gate

Gourmet for another two years after a successful, initial

three-year term.

In June the airline inaugurated its sixth operational base,at Bucharest Baneasa Aurel Vlaicu International Airport.

The decision was determined by the companys ambi-

tious growth plans for the country. Wizz Air had begun

to operate ights from Tirgu Mures in July 2006 and from

Bucharest in January 2007. The operational base would

function inside the Henri Coanda airport until the reope-

ning of the Bucharest Baneasa Aurel Vlaicu International

Airport and would host a new Airbus A 320 aircraft with

180 leather seats. The aircraft would be own by a Ro-

manian team of pilots and cabin crew already hired. By

summer 2008, Wizz Air will become the largest low cost

airline in Romania. stated Jzsef Vradi, Chief ExecutiveOfcer of Wizz Air.

Wizz Air had also announced that it would establish its

7th operating base in Poznan airport starting in January

2008. The airline had also revealed the launch of four new

routes from Poznan; Doncaster-Shefeld, Prestwick-Glas-

gow, Malmo-Copenhagen and Oslo-Torp (from 31 Janua-

ry 2008), complementing its existing services to London-

Luton, Stockholm-Skavsta and Dortmund.

In July, Hotelopia, the online hotel booking specialists,

today 30, launched its partnership with Wizz Air, to sup-ply accommodation services on wizzhotel.com to the

airlines 47 destinations which included: Budapest, War-

saw, Gdansk, Bucharest, Soa and Katowice UK, Ireland,

France, Spain, Italy, Scandinavia, Germany and Greece.

During October 2007, SkyEurope withdrew its opera-

tions from Poland and Hungary, having decided to focus

on Slovakia, Austria and Czech Republic. This partially

fullled Jozsef Varadis prediction the previous year thatonly one major player from Central Europe would survi-

ve to compete with Ryanair. During October 2007, Wizz

Air placed a new order for 50 A320 family aircraft. It had

been aggressively gaining markets, by focusing on Poland,

Hungary, Romania, and Bulgaria, while keeping out of

Austria and the Czech Republic.

In October Wizz Air announced that it would operate all

of its ights serving Transylvania in Romania from Cluj-

Napoca International Airport and would cease ying from

Tirgu Mures Airport. Wizz Air started ying from Tirgu

Mures in July 2006 and since then severe weather condi-tions combined with the airports inability to improve

low visibility operations had been continuously jeopardi-

zing the airlines on-time performance causing delays and

forced cancellations. On the contrary Cluj Airport had

already got more advanced operational capabilities as well

as adequate development plans in place to accommodate

Wizz Airs growth by ensuring a smooth operating envi-

ronment. Wizz Air later declared plans to open its 8th

operating base in Cluj, Romania with one new A320 air-

craft and local crew in May 2008.

In December Wizz Air further enhanced its operations

by scheduling 35% more ights for summer 2008 from

its bases in Hungary and Poland. It planned to add 15 new

weekly ights compared to summer 2007 or 27% more

capacity. The airline will increase frequencies on most of

its current routes, add Goteborg, Oslo-Torp and Veni-

ce-Treviso to its Budapest network and reintroduce the

popular summer seasonal ights to Bulgaria (Bourgas and

Varna), Spain (Barcelona-Girona and Palma de Mallorca)

and Greece (Corfu, Rhodes and Heraklion).

Finavia, the governing body of Finnish airports, has in-

troduced a low cost concept at Turku Airport in Fin-land. The previous, maintenance building would become

a passenger terminal at the beginning of April 2008. The

terminal would have capacity for 10 to 12 ights per day.

The rst airline to take advantage of the concept would

be Hungarian Wizz Air, which will start operating inter-

national ights between Turku and Gdansk, Poland.

Overall, in 2008 both Hungarian and Polish markets

would see a signicant network enhancement from Wizz

Air resulting in the largest choice of low fare routes from

its bases and further strengthening its leadership on the

market.

Wizz Air remains the largest low cost airline in Poland.

In 2007 the airline carried 2.8 million passengers on its


12/19

BIRDS EYE VIEW


Polish routes, 33% more that in 2006. Wizz Air is the low-

cost leader in Poland with a 35 percent share in the Polish

low-fare market. Ryanair controls 26 percent and Centra-

lwings 24 percent. The airline offers ights from Poland,

Hungary, Bulgaria, Croatia, Slovenia and Romania. WizzAir accounts for 15% of the total airline market in Poland,

3 percentage points up from last years 12%, while Ryanair

accounts for 11%.

In Hungary Wizz Air had carried 700,000 passengers on

its Budapest ights, 14 percent more than in 2006, Vara-

di said, adding that the limited increase was due to the

high fees Ferihegy international airport operator Budapest

Airport charged. The low-cost airline, the largest in Hun-

gary with a 34 percent market share, expects to carry 6.3

million passengers on all of its ights next year, about 45percent more than in 2007. The airlines market share in

Bulgaria, the airlines new market, reached 52% just six

months after its launch in the country. Wizz Air, which

entered the Romania in 2006, has stated its intention to

provide transport services for one million passengers, to

and from Romania in 2008, by increasing the number of

weekly ights. Representatives of the Hungarian company

say the company intended to become leader of the local

low-cost market in 2008 ahead of Blue Air.

In Januay 2008, Wizz Air and GECAS announced a sale

and leaseback transaction covering six A320s scheduled

for delivery in 2009 and set to be leased for 11 years each.

The companies have similar deals covering eight additional

A320s to be delivered over the next two years.

Wizzs eet is expected to reach 19 A320s by next sum-

mer, and this would grow to over 50 aircraft by 2012. We

y to almost all European countries and we follow the

low-cost model, so we prefer secondary airports, says Va-

radi during Q4 of 2007. Wizz is a privately-held company

and Varadi declined to provide details of its nancial per-

formance, except to say that given our growth rate and

the size of our operation, nancially we are doing ne. He

added that the carrier continues to look at [its] optionsregarding the possibility of launching an initial public offe-

ring some time in the future, but stresses that no decision

has yet been reached.

Issues/Challenges

1. Can Wizz Air maintain its position as a niche player wi-

thin the CEE region in the face of competitive assault from

the leading low cost airlines like Ryanair?

2. Will organic growth be a sustainable strategy in the long

term?3. In the face of rising fuel costs, falling dollar value and

economy slowdown, will Wizz Air continue to attract the

budget-constrained consumers of CEE region?

4. What could be the right time to go for the IPO?

Business Model of Wizz Air

Wizz Air has built its business mainly by shuttling Polish

and Hungarian workers between eastern and western Eu-

rope using 180-seater A320 aircrafts. The carrier follows

the LCC model of single aircraft type and secondary air-ports (e.g., London Luton, Paris Beauvais, Frankfurt Hahn),

but prices itself at higher fares than some budget carriers,

and offers some comfort features for business travellers,

Wizz Bizz. Around 85% of its sales come off the Inter -

net. Home Internet penetration is low in Central/Eastern

Europe (at about 20%). Wizz Air also sells through call

centres and travel agents.

Wizz Airs business model is based on cutting out any frills

from its service and working with simple, standardised,

automated back-ofce processes. It operates a lean and

mean organisation where streamlining business processesis critical. The organisation focuses on constant improve-

ments in optimising process cycle times and seeking new

operational efciency as it grows by adding new routes,

services, and markets. It has been designed to be ultra-low

cost with the following elements: efcient, young Airbus

A320; over 13 hours aircraft utilization; use of seconda-

ry/regional airports; point-to-point ights; high internet

sales; highly efcient organization (7500 pax/employee/

year) and best operating practices.

Main features of the business model are:

1. Wizz Air website: The website of Wizz Air is well pre-

sented and quite clutter-free. All the information has been

clubbed under different headings on top of the web page.

It also provides a clear route map giving the names of the

destinations. Ticket booking section is on the left side and

easy to follow.

2. Booking of tickets: Ticket booking can be done online

or through call centres or through travel agents. There is

a credit card handling charge and an accurate breakdown

of all costs related to the total cost paid is provided. No

paper tickets are provided by the Wizz Air. Passengers are

provided with a conrmation code at the time of bookinga ticket. Changes in bookings can be made 3 hours before

take off at an additional cost and the payment of the diffe-

rence in fares. No refunds on cancellation.

3. Check-in and Boarding: There is no assigned seating but

priority boarding is provided at an extra fees. Check-in

desks close 40 minutes before departure and open 2 hours

prior to it. There is also a facility to book a seat with extra

legroom at an additional price.

4. Baggage: One piece of hand baggage per person with a

total dimension of 115 cm (55x40x20) weighing up to 10

kg can be carried on board. A smaal size handbag or coatis allowed with it. Excess weighing bag will be checked-in.

Every checked-in baggage is charged and maximum wei-

ght allowed per person is 20kgs. There is also an excess

checked-in baggage charge.


13/19

BIRDS EYE VIEW


5. Special need passengers: The number of disabled pas-

sengers allowed per ight is 10. The customer must notify

his/her condition at the time of booking and also present

a medical certicate or doctors approval to travel.

6. Delays and cancellations: When the delays go beyond atime period (2 to 3 hrs.), compensation is provided either

in the form of refreshment/meal voucher and two tele-

phone calls and for even longer delays the passenger can

claim refund.

7. WizzPlus: This scheme enables Wizz Air frequent yers

to purchase Wizz Airs services at a discounted price,

the discount being dedicated to the individual passenger

through the Passenger Registration process. WizzPlus is a

passengers personal rellable account with Wizz Air. By

transferring a set amount of money to his/her account,

he/she can automatically receive 15% or 25% bonus. Onecan use the accumulated credit to book any seat with Wizz

Air - including promotional ones.

8. Wizzit: This is an in-ight magazine of Wizz Air that

contains information about new route, travel places, food

and other attractive features.

9. Health & Safety: The Wizz Air website provides a very

interesting and informative page under the section Health

& Safety. This provides safety instructions, dos and do

nots on the ight, how to cope with air pressure changes

on ight so on, so forth. This seemed to be a real custo-

mer-friendly feature.

10. Other Services: Travel insurance package, coach trans-

fer service from London Luton airport to Victoria station,

free travel on Airport Arrow Bus (707), operating between

Doncaster Interchange and Robin Hood Airport are some

of new enhanced services being provided by Wizz Air.

Ancillary Sources of Income

1. Payment handling fee using credit cards

2. Flight change fee

3. Check-in baggage fee

4. Excess baggage fee

5. Special baggage fee6. Excess fee for Sporting equipment weighing more than

15kg

7. Extra-legroom seat fee

8. Pre-boarding fee(bus & aircraft)

9. Infant fee

10. Call centre booking fee

11. Name change fee per ight per passenger

12. Invoice change fee

13. Missed ight fee per ight per passenger

14. Hotel booking

15. Car rental16. Insurance

17. Airport transfer

18. Wizz cafe & Wizz boutique

SWOT Analysis

Aim and Objectives: Our aim is to make ying affordable

to the citizens of CEE, as well as to provide a new travel

experience to all travellers in the EU. The latest techno-logy is deployed to ensure that the Wizz Air experience

is outstanding in terms of service and value for money.

We are committed to our guests, to accessible prices, and

to reliable, comfortable travel- said Jzsef Vradi the CEO

of Wizz Air.


14/19

BIRDS EYE VIEW



15/19

BIRDS EYE VIEW



16/19

BIRDS EYE VIEW


EVENTS

Recommendations

1. Wizz Air can denitely continue growing as long asit keeps expanding rapidly, preventing the competition

from catching-up. It has to reinforce its leading position in

the CEE region by means of collaboration or acquisitions.

It also needs to adapt to the changing dimensions of the

dynamic aviation market.

2. Organic growth is suitable for expanding in smaller mar-

kets, but as the airline moves into larger markets, the rule

is survival of the ttest. As Jozsef Varadi has predicted,

consolidation is imminent. Supply is greater than demand

and therefore smaller/weaker players will be overpowe-

red by the stronger and larger players.

3. Based on IATA and Eurocontrol predictions, the Polish

aviation market is expected to have the highest growth

rate followed by the Baltic state. Therefore any airline that

is currently entrenched strongly in these markets would

be difcult to uproot. Therefore Wizz Airs outlook looks

strong as it aims to achieve 20-30% annual trafc growth

over the next few years.

4. Growth and rapid expansion need large funding for

which any dynamic company would eventually go to the

capital markets. The timing for this may be decided by

observing the market performance of leading players in

this difcult period (2007-2009) of economic slowdown.

Conclusion

Many airline CEOs have predicted that in the next 5 to10 years there will be only few low cost airlines in the

open skies. So from where will these winners emerge?

Only time will tell. But the players need to keep moving

forward quickly in order to win the race. Those compa-

nies that are proactive and have a exible approach will

most probably be the winners. So watch the skies!

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 ash 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


17/19Air Scoop - February 2008

DOWN TO EARTH

www.air-scoop.com7


18/19

BIRDS EYE VIEW


Recently, the consumer watchdog group Holiday Which?

released a report criticizing low-cost carriers for levying

an increasing number of charges on consumers and requi-

ring travelers to jump through numerous hoops to avoid

any additional fees. Holiday Which?s main culprit was

Ryanair, which charges consumers extra for virtually any

service outside of the ight itself in a manner that makes

it difcult for customers to avoid the charges.

While the carrier refutes Holiday Which?s criticism, its

undeniable that LCCs have increasingly resorted to the

unbundling of the ight cost in order to advertise lower

ticket prices and raise revenues. By separating all the ex-

tras from the cost of the ight, passengers can choose what

services they need. But passengers are nding that in fact,

they arent able to choose at all, instead they get misled

into accepting charges they do not want, or pay more than

they intended because they failed to read the ne print.

These charges may ultimately hurt trafc numbers at a

time when LCCs are expanding like wildre across Euro-

pe. Moreover, they could damage the ability of carriers to

attract business travelers, which many LCCs are counting

on to grow their trafc bases and increase yields. If carriers

take a more proactive approach to informing consumers

about these charges, then they can improve their customer

service reputations by preventing surprises at the airport,

while at the same time demonstrating to customers that,

in fact, their prices are lower than legacy carriers even if a

customer pays extra for certain services.

Trafc Issues:

As LCCs begin to add more and more extra charges for

services, the media will increasingly deride them for doing

so, and contrast them to legacy carriers, which dont enga-

ge in these practices. This hurts the reputation of low-cost

carriers, which are dependent on budget-sensitive trave-

lers and who will suffer if these travelers decide to take

their business elsewhere. While some passengers will ine-

vitably be lured by the promise of cheap fares at Ryanairand other LCCs, an increasing number will go elsewhere,

especially if it appears to customers that legacy carriers of-

fer a better value, even with a higher ticket price. A litany

of extra charges could become a customer service and an

image issue. For carriers that dont have strong customer

service reputations (such as Ryanair), levying additional

charges may not hurt the company as much as it would an

airline with a stronger customer service reputation (such

as easyJet).

LCC trafc and growth patterns are already starting to

show some weakness. As LCCs struggle to add capacity

into an increasingly saturated market, one that is weake-

ning as the economy weakens, load factors will inevitably

decrease. Middle-income consumers, which budget car-

riers depend on for trafc, could cut back on their ho-

liday spending. Unfortunately, for low-cost carriers such

as Ryanair and easyJet, recent load factors have declined

to around 80%, making it harder for these companies to

meet prot expectations, and these gures could head

downward further still. With a load factor decline, carriers

have been motivated to start charging more for additionalservices to make up for the lost revenue, which could

merely accelerate the problems the carriers are having,

if these additional charges generate additional negative

media coverage. For instance, Ryanair recently raised its

charges for some ancillary services, subjecting the carrier

to a new barrage of criticism over its pricing.

How to win over business travelers:

If fewer and fewer holiday travelers use LCCs due to the

slowing economy, the gap may have to be lled by busi-ness travelers. But with increased negative publicity sur-

rounding these carriers, many business travelers could be

reluctant to y LCCs. This would be a problem for both

Ryanair and easyJet. Ryanair is trying to nearly double its

passenger totals to over 80 million by the year 2012 and

is relying increasingly on business travelers to accomplish

this. EasyJet already has a higher market share among bu-

siness travelers than Ryanair, even though its a smaller car-

rier, and thats in part because easyJet has fewer surchar-

ges for certain services than Ryanair does. However, the

increasing tendency of both carriers to nickel-and-dimepassengers could make Ryanair and easyJet less attractive

for business travelers who are not used to unbundled tic-

ket prices, and who prefer the amenities that legacy car-

LCCs Get Slammed Over Hidden Charges

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Exclusive Analysis for Air Scoop


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BIRDS EYE VIEW

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riers offer. While Ryanair and EasyJet may never offer the

frequent yer programs or the rst class seating that these

business travelers desire, they can offer these travelers a

travel experience that offers a simplied means of travel,

and prevents them from facing a litany of extra charges.

To this end, LCCs should start offering different fare ty-

pes that are not based on the exibility of the ticket, but

rather on the kinds of charges that travelers would face.

For instance, a business traveler who purchases a more

expensive, but more amenity-laden ticket could receive

many services LCCs separately charge for in an all-inclu-

sive ticket price. Airlines could bundle into one ticket for

premium customers services such as free priority boar-

ding, a free checked bag allowance, the ability to check-in

how they want and when they want, a free coupon forfood and drinks on the aircraft, and other services. This

would offer a level of convenience to business travelers

who would receive these amenities without having to pay

extra fees in addition to the ticket cost and still likely

pay a lower ticket price than for comparable service on

legacy carriers.

How to help consumers understand the extra charges

levied against them:

Increasingly, passengers are complaining about additionalcharges being levied against them, which is understanda-

ble. But instead of merely criticizing airlines that try to

nd new sources of revenue, consumer groups like Ho-

liday Which? should be acting more proactively to de-

velop consumers knowledge of the products they buy.

And if LCCs really believe that they offer the best value

to consumers, then they should help groups like Holiday

Which? educate consumers.

The most important action that consumer groups and air-

lines can take is to get customers to read the ne print.

All too often when making online purchases (including

the purchase of an airline ticket), buyers will agree to a

set of terms and conditions that they have not even read.

In doing so, they sign a contract, whose terms they agree

to abide by, though they are often unaware of it. They

should, therefore, not be shocked when the terms and

conditions discuss the extra charges that may be levied on

passengers. For instance, Ryanairs terms and conditions

explicitly lay out what extra charges the carrier will levy:

Each passenger is permitted to check in up to a maxi-

mum of 3 bags combined weight of 15kgs subject to the

payment of the applicable checked baggage fees. Checked

baggage booked online is charged per bag/per one way

ight at a discounted rate of 6/9 for the rst bag and12/18 for each additional bag/ per one way ight

No pooling or sharing of baggage allowances is permit-

ted, even within a party travelling on the same reserva-

tion.

Any passenger exceeding their 15kg personal checked

baggage allowance will be charged for the excess at the

currently applicable rate of 7.50/10.00 per kilo (or lo-

cal currency equivalent).

This text makes it explicit to passengers what charges

they will face for checked baggage, yet all too often, pas-sengers agree to these terms and then become irate at the

airport when they are confronted with them. By helping

consumers understand the terms they agree to, LCCs can

become more transparent, and will likely face less scru-

tiny from consumer groups, government, and the media,

because passengers will have less to complain about.

Ancillary charges are an important source of revenue for

LCCs and will continue to be so for the indenite future.

But LCCs need to look at these charges in new ways in

order to better serve the needs of a shifting customer base,

as well as to respond to the concerns of interested thirdparties.

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 ofTake Control of Booking a Cheap

Airline Ticket, an ebook for travelers in the United States

who are interested in purchasing cheap airline tickets.

Documents

Air Scoop February 2008