Air Scoop May 2006

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Highlights in this IssueAir Berlin IPO: Raising Funds before the Battle p.2

Future expansion of Ryanair and easyJet in Europe p.3

Bloodbath in Central Europe p.7

The LCCs Rush to Poland p.8

First Central European Aviation Forum in Poland p.9

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The Low Cost Carriers Analysis NewsletterAIR SCOOP ANNOUNCEMENTS

Low cost carriers on

Estonian TV

EDITORIAL

Air Scoop Team offers you a special newsletter focused on

Low Cost Carriers in Central Europe.

Central Europe market is seen by many LCCs as the next Eldorado

for further routes expansion. Headlines news regularly announces

new routes and bases opening in this area. Recent airlines confer-

ences and pressure on governments are signs of this interest. After

western market, Central Europe market is the natural expansion to-wards East.

In this emerging market, regional LCCs have appeared within last

years by structuring their local networks. First arrived on main air-

ports, generally located near big cities and capitals, these LCCs have

taken a serious advantage in terms of slots and passengers catch-

ments. Most profitable routes are then already occupied.

However, most of these local LCCs remain small in size. Islanders

arrival on the market, and especially Ryanair, is really dreaded. The

main advantage ofRyanaircomes from its important size and finan-

cial power. This weight will be decisive to offer the lowest prices on

routes and to conquer them.

IATAhas estimated that Poland and Czech Republic will be among

the worlds fastest growing airline markets over the next four years.

With nearly 40 million people, Poland is central Europes biggest

market. Located as a central crossroads, this country is one of the

most, if not the most, competitive battlefield.

Rumours about a settlement of a Ryanairs hub in Wroclaw, and the

possible choice of Rzeszow as a technical service centre, point out

the interest of the LCC European leader for the country.

The battle is in Poland, and Poland will become a two-player with

Wizz taking half and Ryanair taking the other half. Everyone else

will be knocked out has recently declared Joszef Varadi, CEO ofWizz Air.

The market is however extremely priced sensitive which curb the

projects of many, includingeasyJet. Even ifRyanairis seen as the

main danger for main local carriers, such as Sky Europeor Wizz Air,

the game wont be as easy as on the western market for the Irish

airline

FR & U2: New

bases in Greece?

Cyber-cafes in

LCCs?

Air Berlin: Taking away

free meals or preparing

long haul flights?

Nikki and longhaul

flights?

IN THE AIR Latest Rumours...

Check Air Scoop

Website for more

details on rumors...

8/14/2019 Air Scoop May 2006

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BIRDS EYE VIEW


Air Berlin IPO: Raising

Funds for the Battle

Germans second biggest airline, Air

Berlin, will be introduced on theFrankfurt stock exchange in May

2006. More than 50% of the com-

panys shares will be brought to the

market. This could be the second

most important stock market intro-

duction in 2006 in Germany.

Air Berlinaims to collect 700 to 900

million euros, in order to strengthen

its number three position among

LCCs in Europe, behind Ryanair

and easyJet, and to finance its ex-

pansion plans to Northern and Eas-

tern Europe.

Joachim Hunold, the companys

CEO, made this announcement at

the ITB (International Tourism

Show) in Berlin, in March. He also

announced an increase of capital by

130 million euros. Hunold, who is

running the airline since 1991, was

thinking for several years to intro-

duce his company on the stock mar-

ket. At the beginning of 2006, he

changed it into a PLC (public limi-

ted company), a British legal form of

company limited by shares.

Air Berlin is the first German LCCto be introduced on the share mar-

ket. Shareholders are expected to be

institutional investors, but also pri-

vate individuals, among others the

companys customers.

Air Berlinis Germanys fast-growing

low-cost airline. First focused on

charter flights, it began a few years

ago to develop regular low-cost fli-

ghts. In 2005, it carried 13,5 million

passengers (+ 12,5% relatively to2004) to 55 destinations, and made

a turnover of 1,22 million euros (+

17%). The company owns 52 planes,

and has ordered 60 more. It deve-

loped strong partnerships with the

Austrian airline Niki and with the

plane-leaser Germania. Hunold said

he does not oppose to other par-

tnerships or buyings. The hard com-

petition in the german sky already

led to partnerships between some

other carriers, like DBA and LTU,

or Germanwingsand Condor.

Air Berlins ambition is not only

to challenge the German leaderLufthansa, but also to compete on

the european level. Air Berlinis fo-

cused on international routes rather

than internal ones. Two of its plat-

forms are located abroad, in Mallor-

ca and London, from where internal

routes are operated in Spain and the

United Kingdom.

In 2005, Air Berlin lost 115, 9 mil-

lions euros. According to the mana-

gement, this was caused by severalelements like important kerosene

prices, the rise of the dollar, the

switch to IFRS standards, and ex-

ceptional taxes. However, in 2006,

the company is expected by its ad-

visors, Commerzbankand Morgan

Stanley, to make a profit of 51 mil-

lion euros, and of 80 million in the

following years.

2

The 2006 Worlds Low Cost Airlines Congress ADVERTISEMENT

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BIRDS EYE VIEW

Future expansions of Ryanair and EasyJet in Europe

Expansion of Islander LCCs, Ryanairand easyJet(that we will call Islanders), has been in three phases till now.

1. In the first one, these low cost carriers opened routes inside their local and regional area, mainly in Ireland and in theUnited Kingdom.

2. Then during phase 2, the Islanders opened longer routes to and from continental airports. West Europe was a totallynew market with no major competitors yet. Legacy airlines had difficulties to counter this new airline business model, so

Ryanairand easyJetwere quickly able to open new bases and routes on the continent.

3. Facing saturation of slots and airports capacities, Islanders had to find new attractive destinations towards East, North

and South Europe. This led them to Scandinavia, Central Europe and northern Africa. We are currently in this thirdphase.

What about the next step?

LCCs business models imply to always open new routes and densify in order to maintain the growth. Central Europe

represents an important market for LCCs future, and is also a necessary stop before eastern countries market (Belarus,

Ukraine, Russia). But entering these new markets will be a much harder task for Islanders as they will face stronger

resistance of local LCCs, already deserving the area. In Central Europe, Islanders will face organised airlines such as Air

Baltic, Wizzair, Sky Europeor Estonian Airlines, which we will call Centralers. Even if these companies havedifferent business plans and strategies (as we will see later), they are strong on their lands due to their networking. As we

know, the first to set routes has better chances to win the market.

On the Western european market, Islanders could justify secondary airports because prices were cheaper there andcompetitors were mostly legacy airlines, more expansive. This approach is no longer possible in Central Europe with

local LCCs offering low prices from and to main airports. Slots are already taken by these airlines, and routes have been

tested and approved.

Two opposing blocks

Islanders didnt face much resistance till now. Therefore, their expansion appeared quite easy and their growth was

important. However, Centralers had sufficient time to observe and copy Islanders models and strategies. Taken indivi-

dually, Centralers are still not strong enough to maintain their position, but as a block, they appear sufficiently strong to

contain the absolutely necessary Islanders eastern expansion. Facing Islanders, here are some of their main Centralers

competitors:

Air Scoop Special

Central Europe Analysis

ISLANDERS

CENTRALERS

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BIRDS EYE VIEW

Air Baltic

With around 20 airports each deserving at least 10 routes, Air Baltichas a networking strategy. Through a variety of

alliances, Air Balticoffers a wide range of destinations. Partnership with Spanairopens routes to Spain, Blu1gives access

to Finland market, and AtlasJet, with one route Riga Izmir, leads travellers to Turkey. The business model ofAir Bal-

ticis to link eastern cities (St Petersburg, Moscow, Minsk, Kiev, Dnepropetrovsk, Odessa, Baku, Tbilisi) to Westerns

(Helsinki, Stockholm, Oslo, Copenhagen, Hamburg, Dusseldorf, Berlin, Vienna, Munich, Milan, Barcelona, Paris, Brussels,

London, Manchester, Dublin). Air Baltictransports its passengers to main business cities, with important catchmentsareas.

Tallinn, Riga and Vilnius are located between these two blocks and connect both eastern and western cities. They play a

hub and access point role.

Warsaw and Budapest are also located between these two blocks. Currently only three routes are deserved from these

airports, but further openings should logically occur there in a near future.

Air Balticstart to include its LCC strategy once Ryanairreally threathened its own market. Even ifAir Balticlost some

market shares in Riga, its PAX rises thanks to Ryanairarrival. Air Baltichas adapted its strategy to a mix model: LCC

and legacy in the same flights, like others in the area such as Estonian Airfor instance.

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BIRDS EYE VIEW

Wizz Air

Like most of LCCs, Wizzairhas developed its own model specificities. When classical LCCs offer point to point des-

tinations, Wizzairhas started few routes with connecting flights. For instance, passengers from Copenhagen/Malm can

flight to Sofia going through Budapest. This line is a typical example of inter-european cities connections and networking

strategy ofWizzair. Warsaw is Wizzairs another hub offering to Kaunas (Latvia) passengers flights to western and nor-thern Europe destinations (London, Paris, Dortmund, Stockholm).

Wizzairhas taken from both networking and densification strategies. All destinations south of Budapest, such as Barce-

lona, Roma, Athens, Split, Sofia, dont have more than two routes. This networking strategy is a necessary step to allow

further expansion in this southern area. By occupying airports in major cities (Milan, Split), and in capitals (Ljubljana,

Zagreb), Wizzairanticipates airports saturation and affirms its presence, absolutely necessary in order to get more slots

and then develop the densification phase.

Routes above Budapest (included) are far more numerous. Organized around three major hubs (Budapest, Warsaw and

Katowice), Wizzaircovers both regional routes in Central Europe, and main European western airports. Wizzaircant

be seen just as a local LCC any longer, and must be considered as a global Europe provider.

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BIRDS EYE VIEW

Sky Europe

Like Air Baltic, Sky Europe has few cities

acting as main hubs as they are historical

centers of expansion of the carrier. Almost

all routes deserved by Sky Europeare fromand to these hubs, and not between cities

outside Central Europe area. With a star

development around Poland, Czech Repu-

blic, Slovakia and Hungary, Sky Europehas

become a major local actor, deserving main

western cities routes.

Salzburg and Innsbruck are currently two

emerging hubs with routes linking cities in-

side western block (Amsterdam, Paris, Bar-

celona and Manchester). Located in Austria,

these two airports are not linked to historicalhubs (except Salzburg to Warsaw) contrary

to other western destinations. By developing

these autonomous hubs and by expanding

new routes and flights numbers, Sky Europe

directly competes with Islanders on their

market. A next move could be the develo-

pment of current airports (Cologne/Bonn;

Stuttgart) or the settlement of new ones in

Germany deserving more European cities

and competing against Ryanair, easyJetand

Air Berlin.

What are the different options left to Islanders?

Partnerships with local LCCs.

One strategic option for LCCs could be to signed partnerships with local carriers. These partnerships would mainly be

focused on slots allocations. For instance, a proximity already exists between Ryanairand SkyEurope; a partnership or

even a take over would give Ryanairan access to these markets.

Centralers partners would also receive slots allocations in western countries which would boost their expansion. On

the other hand, Islanders dont have signed yet any major agreement with another carrier, and they dont have enough

cash to buy them.

Densifications of current routes.easyJethas chosen a densification strategy by linking its bases to many others with few flights per day. Because of the

densification rhythm slowing down, easyJetis now in a sensitive position as it needs to open new airports. The recent

routes opening in Morocco, Croatia or Poland are significant of the current situation. easyJetnow faces some consequen-

ces of its early strategic choices: the lack of available mail airports and slots.

With priority put on networking strategy, Ryanaircan still raise number of its flights on many routes. Anyway, this op-

tion is not viable on long term, especially because the airline will still face the lack of slots and air traffic saturation.

New routes to specific airports with important catchments area.

Islanders look for airports with low fees and important catchments area. These airports will be located outside main ci-

ties where airports are already taken by local LCCs. They can also be in secondary cities not yet deserved by Centralers.

In any case, this option will surely lead to a strong competition between Islanders and Centralers.

6

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BIRDS EYE VIEW

Bloodbath once more but in Central Europe

Due to Central Europe market deregulation and Ryanairs arrival, Centralers (LCCs from Cen-

tral Europe) will soon begin their consolidation process. Many predicts a new Bloodbath

The industrys facing big consolidationand from central Europe, only one will survive, the one

with the lowest cost base and the one that can become a European and not just a Central European

airline declared Jozsef Varadi, CEO ofWizz Air.

The Scandinavian market

Could Ryanairand easyJetmaintain and develop their current business by targeting Scandinavian market? Scandinavia

still doesnt have strong regional routes networks. SAShas developed its strategy around two main hubs, Stockholm and

Copenhagen, leaving many routes free. But many other LCCs are already on main hubs (Copenhagen, Stockholm, Hel-

sinki) and competition is already strong. Furthermore, even if Nordics travel a lot, is it a sufficient market in terms of

passengers?

Eastern market

Eastern market is probably the logical market development target of Islanders strategy: coming from west and moving

to east. But Centralers block the access to this market and develop meanwhile their own network to eastern main ci-

ties (see above with Air Baltic). One option could be to open routes from western bases. But these flights will become

middle/long haul, and no frills model will be difficult to maintain.

Northern Africa

Some LCCs are already offering routes to northern Africa, such as Air Berlin(Morocco, Tunisia, Egypt), or easyJetand

Ryanairin Morocco. It is clear that these markets offer many advantages: sunny destinations, cheap vacations packages,European silver age settlement

Routes still have to be created there, but how many? There arent that many interesting airports available, penetration

of Internet for ticket booking is weak, destinations are outside the European Union which implies rigorous passports

checking, rapid 25 minutes turnovers are difficult to hold

Due to their strategic choices, Ryanairand easyJetare not in the same position in front of Centralers. Both will need

to adapt their model and find original solutions in order to maintain their development.

By choosing a densification strategy, easyJethas fewer options than its rival. It appears difficult for the airline to open

sufficient new routes to Central countries as local competitors are already there. In addition, a densification strategy im-

plies more slots allocations which could soon be impossible due to traffic saturation.Ryanairstrategic choices make them more solid. Often first to open routes, Ryanairhas a precious anteriority which

will be helpful to accelerate a densification strategy. However, the model applied till now will be difficult to replicate to

Central Europe market. Local LCCs fly from main airports to main airports offering cheap tickets. Then, passengers wont

really be attracted by secondary airports, far from their cities and business centres, except if prices are a lot cheaper than

local LCCs. But can Ryanairafford it?

ANALYST PORTHOLE

Sector experts agree with Mr Varadi and affirm the market is overcrowded. For them, it will be either Sky Europeor

Wizz Airwhich should remain, alongside with Ryanair.

Even though, we agree the number of LCCs will reduce, our global analysis is a bit different from this. We believe the

Central market has its own specificities, and therefore will not react like Western Europe market. Some Centralers have

developed their own routes without competition from other local LCCs. As long as they open and densify new routes

unchallenged, they will develop themselves.We definitely agree with Mr Varadi about the size of the carriers. The main risk during the 3 to 5 years to come would be

to remain a regional carrier. Sooner or later, bigger LCCs, Ryanairfirst, will attack their network offering lowest prices

thanks to their size.

Jozsef Varadi

7

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BIRDS EYE VIEW


The Rush to Poland

Poland is in good position to become

a regional centre for airline transport,

as its market is bigger than its neigh-

bours, Czech and Hungary, and itsgrowth rate is about 25% each year.

In fact, in 2005, arriving and depar-

ting from Poland airports increased

by 31%! In May 2004, Polish govern-

ment signed the open skies agree-

ment which opened the market to

competition. Airports network in

Poland is composed of one central

airport (Warsaw Okecie), one main

regional airport (Krakow Balice) and

about 50 smaller regional airports.

According to Civil Aviation Office

(the highest ranking Polish civil

aviation authority), CentralWings,

a subsidiary ofLOT(Polands natio-

nal airline), is still the second budget

airline in Poland. CentralWingshad

to face recent offensive manoeuvres

of Islanders, especially from Rya-

nair which declared that by 2007

they will have more passengers than

LOT.

Like other LCCs (Air Baltic, Esto-

nian Air...), CentralWings quickly

counter-attacked by setting a new

long term strategy which will inclu-de the development of sells by tradi-

tional means and through Internet,

and by avoiding routes duplication

with LOT. Furthermore, an IPO

will probably be conducted within

a year.

European LCCs leader Ryanair

started to flight to Poland market

in March 2005. Last year, the airline

transported 3% of all passengers and8% of LCC passengers in this mar-

ket. Ryanairhas announced its ob-

jectives: to set 3 bases in Poland wi-

thin 2011. To support this strategy,

Ryanair has started an impressive

campaign against Polish government

to break up the centralised control

of airports and to open a second

airport in Warsaw in Modlin. Indeed,

Warsaw Okecie airport is expected

to reach its capacity limits by 2010.

There are projects to build a second

airport for passengers and cargos,

either in Modlin or in Mszczonow.

Ryanairuses Rzeszow argument to

add pressure on the Polish govern-ment. Rzeszow is considered as the

leading candidate for Ryanairtech-

nical service centre which will cost

about 84 million dollars. Most mu-

nicipalities that own and manage re-

gional airports lack necessary funds

to develop these airports. Ryanair

project is considered as an impor-

tant opportunity to drag funds in

the area. Motivated, Rzeszow has

already offered about 30 hectares ofland by the local airport with pos-

sibilities of serving the interconti-

nental flights. Final decision will be

taken with its partner Singapore

Technologies Aerospace (St Aero).

Recently, Michael OLeary decla-

red about this issue: All were as-

king the government to do is to stop

screwing around at the airports and

just deregulate the bloody things.

Inaugural Air Transport Conference For Central and Southeast Europe

Air Scoopis proud to be partner of the Inaugural Air Transport Conference For Central and Southeast Europeorga-

nised by EastEuro Link Air Transport. Under the auspices of Ministry of Transport, Posts and Telecommunications of

the Slovak Republic, this conference will be held in Bratislava, Slovak Republic, the 26th of May.

Other LCCs are quite active too.

EasyJet also plans to build a base

in Poland in a big airport, like in

Gdansk or in Poznan, to add new

routes after Warsaw and Krakow.

The final decision should be taken

in June. Their goal is to raise by 15%

the number of their passengers in

2006.

Wizz Airhas already 3 facilities im-

plemented and plans to create a na-

tionwide network of airline bases.

Norvegianrecently set its first basein Warsaw deserving 5 European

cities (Spain, south of France and

Oslo). Sign of this change, its web-

site is now translated in Polish.Source: Wikimedia Commons

ADVERTISEMENT

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9/9Ai S M 2006

DOWN TO EARTH

i

Ryanairs ChecknGo Finally

IntroducedAlthough online check-in system has alrea-

dy been introduced on some European rou-

tes, security staff at Dublin airport refused

to accept passengers with ChecknGotic-

kets (Air Scoop April 2006). After some

easyJet Shares Sinking

easyJet shares have reached their

lowest point for the last 6 months.

Shares in easyJet increased sharply

in January as speculation swirled

about the motive behind FL Groups

stake in the carrier. But when hopes

for a bid faded, shares sunk. The

sale came as a blow for easyJetin-

vestors, who had been hoping for a

takeover bid from FL Group.

9

First Central European Aviation Forum

in Poland: A Strong Signal

The first Central European Aviation Forumoccurred the

11th and 12th of April in Warsaw.

LCCs issues were fully covered by many speakers from

different European LCCs like Michael OLeary, CEO

of Ryanair, who talked about how its company has in-

fluenced and will influence the Aviation Map of the new

Enlarged Europe. Other managers, such as Jozsef Varadi,

Chairman and CEO ofWizz Air, Christian Mandl, CEO

ofSky Europeor Grzegorz Polaniecki, Acting President

ofCentralwingswere there too to present their company

strategy and perspectives.

Many LCC topics were discussed during this forum such

as How to Make an Airport Attractive to LCCs and Yet

Still Make Money?, Will well established West EuropeanLCCs speed up their expansion on CEE markets?, Some

traditional airlines respond to LCCs invasion with their

own LCCs: is this the right strategy?, Regional govern-

ments financial support for airports and LCCs coming to

those airports: is it in line with fare competition?

During the forum, Rzeszow has been analysed as a case

study of development of regional airports. It is interestingto note that Rzeszow is currently under the spotlights as it

is considered as the leading candidate for Ryanairtechnical

service centre.

Another Air transport conference for Central and Southeast

Europe will be hold in Bratislava the 26th of May: Inaugu-

ral Air Transport Conference For Central and Southeast

Europe. Both traditional and low cost airlines will be pre-

sent at this major regional event. Rebuilding European

competitiveness in the field of Air Transport will be the

central topic of this forthcoming international conference.

Air Scoopis proud to be partner of this conference whichwe will cover from the LCC market perspectives.

Air Scoopis a Registered Trademark ofGlobal Wings Publications.

Subscription to Air Scoop: 290 euros for 1 year (12 issues)

Copyright 2006 - Unauthorized distribution or reproduction is forbidden.

http://www.air-scoop.com ; http://airscoop.blogspot.com(free portal news)

Ryanair & easyJet: Still Leading Blogshere

Ryanairstill leads the discussions over the blogos-

phere. Two important peaks occurred mid-April.

The first one, around the 12th, corresponds to thebomb alert in Ryanairs aircraft from Paris to Du-

blin. The second, around the 18th, is due to the

emergency plane landing following an engine failu-

re on Ryanairs flight.

easyJet trend gets higher at the beginning of the

month when FL Group sold easyJet stakes. The

peak around the 20th is due to the scalded grand-

mother story.

Air Berlin trend remains stable over the months.

The IPO development is mainly followed by spe-

cialized blogs.

BLOGS TREND

UPS AND DOWNS

negociations, the SIPTU (Services, Industrial, Professio-

nal and Technical Union) finally agreed to stop blocking

the service. Ryanair now waits for the Department of

transports approval to introduce this online check-in sys-

tem on all of their Irish routes.

Documents

Air Scoop May 2006