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.
2Innovation & Cost Leadership, 15. November 2004 www.advolar.com ©
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
3Innovation & Cost Leadership, 15. November 2004 www.advolar.com ©
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
4Innovation & Cost Leadership, 15. November 2004 www.advolar.com ©
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.
5Innovation & Cost Leadership, 15. November 2004 www.advolar.com ©
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
6Innovation & Cost Leadership, 15. November 2004 www.advolar.com ©
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
7Innovation & Cost Leadership, 15. November 2004 www.advolar.com ©
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
8Innovation & Cost Leadership, 15. November 2004 www.advolar.com ©
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
9Innovation & Cost Leadership, 15. November 2004 www.advolar.com ©
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)
10Innovation & Cost Leadership, 15. November 2004 www.advolar.com ©
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
11Innovation & Cost Leadership, 15. November 2004 www.advolar.com ©
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
12Innovation & Cost Leadership, 15. November 2004 www.advolar.com ©
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.
13Innovation & Cost Leadership, 15. November 2004 www.advolar.com ©
Course of the day: 8:00 to 24:00, high utilisation also beyondthe “travel agency time”
Low-cost Business Strategy Of Airlines:Sales Cont.
14Innovation & Cost Leadership, 15. November 2004 www.advolar.com ©
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
15Innovation & Cost Leadership, 15. November 2004 www.advolar.com ©
Airlines Meals
Quelle: Die Welt, 08.10.2004
Lufthansa breakfast
HLX breakfast
16Innovation & Cost Leadership, 15. November 2004 www.advolar.com ©
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
17Innovation & Cost Leadership, 15. November 2004 www.advolar.com ©
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
18Innovation & Cost Leadership, 15. November 2004 www.advolar.com ©
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
19Innovation & Cost Leadership, 15. November 2004 www.advolar.com ©
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
20Innovation & Cost Leadership, 15. November 2004 www.advolar.com ©
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
21Innovation & Cost Leadership, 15. November 2004 www.advolar.com ©
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
22Innovation & Cost Leadership, 15. November 2004 www.advolar.com ©
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
23Innovation & Cost Leadership, 15. November 2004 www.advolar.com ©
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
24Innovation & Cost Leadership, 15. November 2004 www.advolar.com ©
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
25Innovation & Cost Leadership, 15. November 2004 www.advolar.com ©
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