The Flag Carrier Challenging

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• The Flag Carrier Challenging
• the Low-Cost Concept
• Vagn Soerensen,
• Chairman, AEA
• CEO, Austrian Airlines
• Copenhagen
• August 30, 2004

2
Todays Agenda
1. The No Frills Carriers phenomenon
2. The Changing Market Place for European Air
Transport
3. Full Service Network Carriers, an
essential macro-economic factor
4. The Way Forward
5. Conclusion
3
No Frills Carriers (NFCs) in Europe a few key
points

• NFCs operate in /- 400 markets ca 150 airports
  (2003)
• NFCs do develop new markets
• local services
• non-stop routes
• Explosive growth could be capped
• Network/Full Service Carriers find the right
  response narrow the competitive disadvantage
• Both business models converge
• NFCs complement products and services offered by
  Full Service and Network Carriers
• Air Travellers have clearly benefited from the
  mutual influence of both market approaches

4
NFCs in Europe market segment dominated by two
players
5
Overcapacity in the NFC segment

• Example
• Ryanairs expansion is predicated on the notion
  that their business model can be applied anywhere
• 14 Ryanair (FR) routes were abandoned since
  Summer 2003
• 37 FR routes were introduced since Summer 2003
• These 14 withdrawals show that the FR model
  doesnt work everywhere

• ...there is going to be the Mother and Father of
  all Fare Wars. There is going to be a ferocious
  bloodbath... Micheal OLeary, 25 April 2004

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The Changing Market 1 Greater Flexibility and
Simplicity of the Traditional Model
Cost reduction
Towards an Efficient European Air Transport
System
Strategic repositioning
7
The Changing Market 2 Customer behaviour is
changing

• Customer expects Internet to provide the
  best/lowest possible fare offer
• Price becomes the decisive factor
• Destination is not (always)!
• NFCs develop routes according to costs operating
  cost differential NFC vs. Full Service Carrier
  estimated to be minus 40-60 !
• No-Frills Carriers have generated air travel
  growth in the short-haul sector
• Yearly growth ca. 50 since 1995
• Appeal variety of market segments Existing
  EY/BC Pax new passengers travellers using
  other transport modes
• No-Frills create new, additional routes

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The Changing Market 3 The Structural Change of
the European market structure is driven by the
NFC Segment

• Ryanair
• is an Irish company,
• is registered in the UK
• flies from Belgium to Italy
• and customers love it
• Segmentation of market into
• International network airlines with their
  alliances
• Regional niche carriers
• No-Frills on local short-haul markets
• Charter Airlines

• Erosion of traditional national markets

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The Changing Market 4 Flexible adaptation of
traditional pricing models

• Many Full-Service Carriers offer simple and low
  prices!

• Different yield management philosophies

• In No-Frills model prices increase with demand
  A seat on a flight is a scarce commodity
• In Full Service model focus on business
  travellerA seat on a flight is a perishable
  commodity

In both cases, airlines can and do offer low fares
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AEA carriers are Full Service Network carriers
offering a Global Reach
From Linz to Kansas City
VIE
From Beijing to Odessa
From San Diego to Vienna
From Graz to Johannesburg
From Skopje to Sydney

• AEA
• 185 intercontinental destinations in 116
  countries
• 211 European destinations in
• 43 countries
• 800 destinations together with partner airlines!

• Networks and alliances enable
• travellers to fly from anywhere
• to anywhere

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Full Service Network Carriers are
Customer-oriented

• Through pricing, through ticketing
• Through check-in and baggage handling
• Onboard service
• Full-facility airports
• Frequent Flyer Programmes
• Schedule disruption backup

• Air travellers - especially on long-haul-routes -
  expect convenience

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The response of the Network Full Service
Carriers
1. Create customer focus
2. Reduce costs

• Fleet review simplification increased
  utilization
• Routes review
• Staff reduced numbers, contracts
• Direct distribution reduction of commissions and
  increased use of on-line booking and automated
  ticketing
• Purchasing rationalization of procurement
  procedures

• New simplified fare structures
• Benefited from increased demand generated by
  low-fares
• New revenue report architecture
• Maximize existing investments in aircraft, IT,
  staff
• Reduce wastage inefficiencies

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Some AEA members have adopted a simplified
pricing structure

• One example Aer Lingus new approach

• Simplify the business less complexity
• Low fares
• Quality service
• More direct routes
• Lower costs
• Profits

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Austrians reaction to the LCC-challenge

• Dynamic approach in all important markets of
  origin in order to generate additional incoming
  traffic to destination Austria
• Attractive offers on home-market in order to
  promote outgoing traffic
• Aggressive offers to stimulate transfer traffic
  via Vienna
• Comprehensive European-wide advertising and
  promotion-campaign with innovative pricing
  concepts, as
• Special offers of free capacities at low prices
• "E-Weekend"
• "Click and Fly"
• red ticket (destinations in Germany from EUR
  110.- , London and Dublin from EUR 150.- net.)
• Consequently taking advantage of competitors'
  weaknesses

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Offensive Marketing leads to gains in Market Share
Marktanteilsgewinn AAG vs. AEA (Passagier-Km)
Change in yoy (Passenger-Km, total int'l)
Source AEA Monthly Traffic Update, Austrian
Airlines Group
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Trends on containing costs continue
What did AEA-members do to cut costs?
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We now need even more pressure on external costs
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Survival of European Air Transport infrastructure
depends upon the active participation of all
industry providers

• Operating margins in airline industry must be
  enhanced

19
New European Parliament European Commission is
anopportunity to formulate new Air Transport
Policy

• AEA expects the EC to create a level playing
  field
• Between the airlines and their service providers
• Between the different airline business models
• With other modes of transportation
• Open Aviation Area needed on an international
  level
• Promote sustainable growth by liberalising
  aviation and allowing the market to function
• EP EC should therefore
• Avoid micro-management
• Focus on framework
• Make solid cost/benefit analysis

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Conclusion

• No-Frills Carriers have changed the market
  behaviour irreversibly
• Network carriers remain vital because they
• offer services which Pax need to all
  destinations, globally
• offer services, that No-Frills can not offer
• are beneficial to regional, national and
  European economy
• Network carriers are more nimble than ever before
  by
• reducing costs
• offfensive marketing
• expansion (into niches)
• Network Full Service Carriers will co-exist and
  create a wider product range
• Regulators must deal with underlying structural
  issues and allow marketto absorb effects of NFC

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• Thank You!