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Copyright2003BusinessBreakfastBusinessBreakfastFrankfurt,July8,2003BudgetairlinesinEuropeThesteepclimbofthelow-costcarrierspromptstwoquestionsSource:McKinseyIsthelow-costcarriers‘successaflashinthepan,orisitheretostay?Willthelow-costcarriersthreatenorevendisplacetheincumbentnationalairlinessuchasLufthansa?12Upto2007:rapidgrowthinthelow-costsegmentTraditionalairlinetrafficCharterLow-costcarriersGrowthp.a.,2001-2007+3.1%+4.5%+20%Percent(millionsofpassengers)Source:AEA,ERA,IATA,AirlineBusiness,annualreports,AirTransportWorldTotaltrafficwithinEurope714757267232119199820012007E100%(365)(600)(435)12ComparisonofunitcostsofflightswithinEurope,2001Theirsuccessisbasedonaunitcostadvantageofupto60%*AvailableseatkilometersSource:AEA,ICAO,annualreports,McKinseyanalysisTop3(international)Top3(domestic)Top3GBchartereasyJetRyanair12.08.97.77.14.5-60%-40%OwnershipofaircraftAirport/airtrafficcontrolSalesCrew1.91.42.20.50.91.01.00.20.83.81.20.7Top3nationalairlineseasyJetRyanairlow-costcarriersUnitcostsinUSDc/ASK*,adjustedbydistanceflown(800km)1But:therewillonlybeaveryfewpermanentlysuccessfulplayers–“winner(s)take(s)all”effectOperatingmargin,average1997-2001,inpercentofrevenueEuropeUSASource:USDeptofTransportation,annualreports24-515-2RyanairOtherlow-costcarriersSouthwestOtherlow-costcarriers1easyJet(mitGO)Ryanair(mitBuzz)FlyBEDBABMIBabyHLXVirginExpressSonstigeShareofcapacityinlow-costsegmentPercent34297554412StartingpointofEuropeanlow-costcarriersforfuturecompetitionRyanair-30-20-100102030401998992000012002*easyJetVirginExpress*6monthsforeasyJetSource:OAG,April2003,annualreports,AirlineBusinessMarketsharesandperformanceOperatingmarginPercentofrevenue100%=1.6mill.seatsperweek1Ryanair(incl.Buzz)OtherseasyJet(includingGO)After2007:slowergrowth–forthreemainreasonsSource:McKinseyIncreasingcompetitionamonglow-costcarriersininternationaltraffic1Strongpositionofnationalairlinesonimportantdomesticroutes2Dominanceofthetouroperatorsinthepackagetoursegmentforpuretouristdestinations3114526218NumberofEuropeanroutesservedbylow-costcarriers,summer2003Low-costcarriersdonotliketocompetewithoneanother:stimulationofdemandonlyworksthefirsttimearoundSource:OAGRouteswithonlyonelow-costcarrierandtraditionalairlinesRouteswherelow-costcarriersholdmonopolyRouteswithtwolow-costcarriers100%=389routesNationalairlinesarehighlycost-efficientondomesticroutesCountry/companyDifferenceinunitcosts,domestic/internat.PercentComparisonofunitcostsUSDc/ASK*,800km*AvailableseatkilometersSource:AEA,annualreports,McKinsey-10.0-25-35-35-40GB/BritishAirwaysGermany/LufthansaFrance/AirFranceItaly/AlitaliaSpain/IberiaeasyJetTop3nationalairlinesAirFranceDomestic12.08.97.57.1DomesticInter-national1009014070Barrierstogrowthforlow-costcarriersMillionsofpassengers,2002Suitabilityforlow-coststrategyInter-nationalDomesticRegionalCharter400Source:AEA,ERA,IATA,annualreports,AirlineBusiness,AirTransportWorld•MarketsnotservedCompetitionminimizesnumberofattractiveairportsandroutes•LowvolumeStimulationpossibleifleisurecomponent•HighvolumeManyimportantroutesalreadyservedStimulationpossibleifleisurecomponent(otherwiseaircraftaretoobig)Difficulttoaccesspackagetourmarket,onlysmallnumberofoverlappingdestinationsSuitableUnsuitableBargainingpowerofcost-eficientnationalairlines•Highvolume•LowvolumeStimulationpossibleifleisurecomponent1Low-costcarriersandnationalairlines:complementary,notmutuallydestructiveSource:McKinsey2•Theservicesofferedbylow-costcarriersandincumbentsarecomplementary•Low-costofferingsactivatenewcustomergroupsandstimulatedemandasawholeTargetsegmentsandbuyingfactorsoverlaponlypartiallySource:McKinseyNationalairlinesBusinesstravel/weekendflights•Schedule•Flexibility•Frequentflyerprograms•ServiceCharterairlinesPackagetours•Simplicity•Oneprice•LocalserviceofferingLow-costcarriersPrice-sensitiveleisure/visitbusiness•Price•Destinations•AcceptablelevelofcomfortLeisure/visitsVacationers(flightonly)Businessrouteswithhighfrequency2Low-costcarriersenteringthemarketcanmeangrowthforallplayers02004006008001,0001,2001,4001,6001,800199697989920000102London-BarcelonaThousandsofpassengersSource:CivilAviationAuthorityUKIncumbentsCharterairlinesLow-costcarriers202004006008001,0001,2001,4001,6001,800199697989920000102London-Milan-40-20020406080100020406080100-3-2-10123020406080100-3-2-101230100200300400500600700-3-2-10123-3-2-10123-3-2-10123-3-2-10123Followinganinitialdip,themarketentryoflow-costcarriersdoesnothaveanegativeeffectonincumbents’medium-termearningsMarketentryoflow-costcarriersinYear0(sanitized)Route1Route2Route3Source:McKinseyNetearningsperpassenger(indexed)100806040200100806040200Netearningsfrompassengers(indexed)-3-2-101238040-40Profitabilityofroute(indexed)0Passengerloadfactor-3-2-10123706050402003010YearsYears2But:thelow-costcarrierscanposeathreatonsharedEuropeanroutes...Source:McKinsey•...iftheyofferbusinesstravelersattractivedestinationsandfrequentflights•...iftheymaintaintheirpresentunitcostlead2Low-costcarriersaresuccessfullyexpandingintothebusinesstravelmarketinLondoninparticu