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Growth of Low Cost Carriersin Europe and AsiaGrowth of Low Cost Carriersin Europe and Asia
Eighteenth Annual Aircraft Finance Conference Eighteenth Annual Aircraft Finance Conference
Presented by:
David H. Treitel
Chairman and CEO SH&E, Inc.
Presented by:
David H. Treitel
Chairman and CEO SH&E, Inc.
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Presentation OverviewPresentation Overview
Low Cost Carrier Trends
United States
Europe
Asia-Pacific
Market Opportunity & Implications
Low Cost Carrier Trends
United States
Europe
Asia-Pacific
Market Opportunity & Implications
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Section 1Section 1
Low Cost Carrier TrendsLow Cost Carrier Trends
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3
These Are Threatening Times for Legacy CarriersThese Are Threatening Times for Legacy Carriers
Low Cost Carriers (LCCs) have the resources tocontinue expanding at a rapid pace
Even with renegotiated labor contracts, the LegacyCarriers can not approach the LCC costs
As LCCs Expand Their Point-to-Point Services, Demand isRemoved from the Traffic Pool Available to Network Carriers
Unable to generate a sufficient revenue premium theweakest Legacy Carriers have filed for bankruptcy
Low Cost Carriers (LCCs) have the resources tocontinue expanding at a rapid pace
Even with renegotiated labor contracts, the LegacyCarriers can not approach the LCC costs
As LCCs Expand Their Point-to-Point Services, Demand isRemoved from the Traffic Pool Available to Network Carriers
Unable to generate a sufficient revenue premium theweakest Legacy Carriers have filed for bankruptcy
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Since 2001, the LCCs Have Prospered While LegacyCarriers Have StruggledSince 2001, the LCCs Have Prospered While LegacyCarriers Have Struggled
Frequency
Routes
Traffic
Revenues
Fares
Profitability
Frequency
Routes
Traffic
Revenues
Fares
Profitability
Fares
Traffic
Revenues
Profitability
Fares
Traffic
Revenues
Profitability
LCCs Have Been the Clear Winners
LEGACY CARRIERS LCCs
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Competition Between Legacy and Low Cost CarriersIs Being Waged on Five Key FrontsCompetition Between Legacy and Low Cost CarriersIs Being Waged on Five Key Fronts
Size and Network
Growth and Access to Capital
Pricing Structure andInfluence
Cost Structure
Product/Brand
Size and Network
Growth and Access to Capital
Pricing Structure andInfluence
Cost Structure
Product/Brand
Legacy Advantage
Low Cost Advantage
Battleground
Low Cost Advantage
Battleground
Legacy Advantage
Low Cost Advantage
Battleground
Low Cost Advantage
Battleground
Competitive FactorCompetitive Factor Winner or LoserWinner or Loser
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The LCCs Have Large Virtually Insurmountable StructuralCost AdvantagesThe LCCs Have Large Virtually Insurmountable StructuralCost Advantages
Source: US DOT, Form 41Source: US DOT, Form 41
$0.00
$0.02
$0.04
$0.06
$0.08
$0.10
$0.12
$0.14
U S A i r
A m e r i
c a n
C o n t i
n e n t a l
N o r t h
w e s t
D e l t a
U n i t e
d S o
u t h w e s
t
A T A
J e t B
l u e
1Q2003 1Q2004
$0.00
$0.02
$0.04
$0.06
$0.08
$0.10
$0.12
$0.14
U S A i r
A m e r i c a n
C o n t i
n e n t a l
N o r t h
w e s t
D e l t a
U n i t e
d S o
u t h w e s
t
A T A
J e t B
l u e
1Q2003 1Q2004
Domestic CASM1Q2003 1Q2004 Domestic CASM
1Q2003 1Q2004
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Low Cost Carrier Growth Has Traditionally FollowedRegulatory ReformsLow Cost Carrier Growth Has Traditionally FollowedRegulatory Reforms
Late 1970s/Early 1980s inthe USLate 1970s/Early 1980s inthe US
Southwest goes interstate,People Express and othersform
1991 re-branding ofRyanair as low cost carrier
Expansion of low-costcarriers to the Continentwith the final deregulationof the market
Southwest goes interstate,People Express and othersform
1991 re-branding ofRyanair as low cost carrier
Expansion of low-costcarriers to the Continentwith the final deregulationof the market
1990s in Europe1990s in Europe
Early 1990s in UKEarly 1990s in UK
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The LCC Phenomenon New To Asia but A Maturing Marketin Europe and North AmericaThe LCC Phenomenon New To Asia but A Maturing Marketin Europe and North America
North AmericaSlow recovery from September
11 th Expansion of InternationalService Low cost carriers continue togain share in US and Canada Legacy carriers areresponding (Delta Song, AirCanada, United Ted) withLCCs LCC Market Share: 30%
North America Slow recovery from September11 th Expansion of InternationalService Low cost carriers continue togain share in US and Canada Legacy carriers areresponding (Delta Song, AirCanada, United Ted) withLCCs LCC Market Share: 30%
Europe Continued Low CostExpansion in UK/WesternEurope East-West trafficsimulation because ofexpanded EU LCC form in Eastern andCentral Europe LCC Market Share: 17%
Europe Continued Low CostExpansion in UK/WesternEurope East-West trafficsimulation because ofexpanded EU LCC form in Eastern andCentral Europe LCC Market Share: 17%
Pacific Rim/Australia Relatively infant market LCCs Have started inmore liberalenvironments Australia,Singapore, Malaysia,
Thailand India has announced afew low cost start ups LCC Market Share 4%
Pacific Rim/Australia Relatively infant market LCCs Have started inmore liberalenvironments Australia,Singapore, Malaysia,
Thailand India has announced afew low cost start ups LCC Market Share 4%
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If LCC Penetration in Europe and Asia reaches US Levels,They Will Need Aircraft Worth $170bn - $240bn Over the
Next 20 Years
If LCC Penetration in Europe and Asia reaches US Levels,They Will Need Aircraft Worth $170bn - $240bn Over the
Next 20 Years
Source: SH&E Analysis, 2004.Source: SH&E Analysis, 2004.
0 500 1,000 1,500 2,000 2,500 3,000
Asia Pacific
Europe
0 500 1,000 1,500 2,000 2,500 3,000
Asia Pacific
Europe
Estimated LCC Single-Aisle and Regional Jet Fleet Growth2004-2023
Estimated LCC Single-Aisle and Regional Jet Fleet Growth2004-2023
$97.0 bn -$140 bn
$70.0 bn -$100 bn
2,000 2,400
1,350 1,900
Value ($b)
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Section 2Section 2
United StatesUnited States
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Today Low-Fare Service Accounts for Almost 30% of theU.S. Domestic MarketToday Low-Fare Service Accounts for Almost 30% of theU.S. Domestic Market
8%10% 10%
12%14%
16%18% 18%
19%
21% 22%23%
24%
26%28%
Aug90
Aug91
Aug92
Aug93
Aug94
Aug95
Aug96
Aug97
Aug98
Aug99
Aug00
Aug01
Aug02
Aug03
Aug04
8%10% 10%
12%14%
16%18% 18%
19%
21% 22%23%
24%
26%28%
Aug90
Aug91
Aug92
Aug93
Aug94
Aug95
Aug96
Aug97
Aug98
Aug99
Aug00
Aug01
Aug02
Aug03
Aug04
Source: OAG Schedule TapesSource: OAG Schedule TapesLow cost carrier share of Intra-Canadian seats exceeds 30%
Low cost carrier share of Intra-Canadian seats exceeds 30%
U.S. Low Fare Carrier Share of Total U.S. Nonstop SeatsU.S. Low Fare Carrier Share of Total U.S. Nonstop Seats
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Average Unit Costs for LCCs Remain About A Third Lowerthan Those of Legacy CarriersAverage Unit Costs for LCCs Remain About A Third Lowerthan Those of Legacy Carriers
Source: US DOT, Form 41, 2004.Source: US DOT, Form 41, 2004.
4
5
6
7
8
9
10
11
12
13
400 500 600 700 800 900 1,000 1,100 1,200 1,300 1,400
Trip Length (miles)
U n i t C o s t s ( i n
c e n t s )
JetBlue
AirTran
Southwest Spirit
AmericanContinental
Delta
Northwest
US Airways
Domestic Unit Cost versus Trip Length for Select Legacy and Low Cost CarriersYE 2Q2004
Domestic Unit Cost versus Trip Length for Select Legacy and Low Cost CarriersYE 2Q2004
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Overall, Less Than 55% of the LCC Cost Advantage ComesFrom Labor Cost SavingsOverall, Less Than 55% of the LCC Cost Advantage ComesFrom Labor Cost Savings
13.6%
22.0%
27.1%
42.3%
47.5%
55.0%
75.9%
30.8%
0% 10% 20% 30% 40% 50% 60% 70% 80%
Flying Operations
General & Administrative
Maintenance
Aircraft & Traffic Servicing
Promotion & Sales
Depreciation & Amortization
Passenger Service
Overall
13.6%
22.0%
27.1%
42.3%
47.5%
55.0%
75.9%
30.8%
0% 10% 20% 30% 40% 50% 60% 70% 80%
Flying Operations
General & Administrative
Maintenance
Aircraft & Traffic Servicing
Promotion & Sales
Depreciation & Amortization
Passenger Service
Overall
Cost Advantage of US Low Cost Carriers vs. US Legacy Carriers(Domestic CASM)
2Q2004
Cost Advantage of US Low Cost Carriers vs. US Legacy Carriers(Domestic CASM)
2Q2004
Source: US DOT, Form 41Source: US DOT, Form 41
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LCCs Will Continue Growing More Rapidly Than Legacy
Carriers
LCCs Will Continue Growing More Rapidly Than LegacyCarriers
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
Low Cost Regional Legacy
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
Low Cost Regional Legacy
Source: ACAS DatabaseSource: ACAS Database
Aircraft on Order as a % of Current Fleet, US CarriersSeptember 2004
Aircraft on Order as a % of Current Fleet, US CarriersSeptember 2004
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The Trend of North America LCC Penetration SuggestsThat It Will Reach 50%The Trend of North America LCC Penetration SuggestsThat It Will Reach 50%
LowCost
31%
Other3%
Majors
66%
Majors
40%
Other10%
LowCost50%
Domestic Seat Market Share By Carrier TypeDecember 2004 vs. the Future (estimated) Domestic Seat Market Share By Carrier TypeDecember 2004 vs. the Future (estimated)
Source: OAG Schedule Tapes. SH&E Analysis, 2004.Source: OAG Schedule Tapes. SH&E Analysis, 2004.
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Section 3Section 3
EuropeEurope
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The European Domestic Market Has Also Witnessed RapidGrowth of Low Cost CarriersThe European Domestic Market Has Also Witnessed RapidGrowth of Low Cost Carriers
1% 1% 1% 1% 1% 1%2% 3%
4% 4%5%
6%
9%
14%
17%
Aug90
Aug91
Aug92
Aug93
Aug94
Aug95
Aug96
Aug97
Aug98
Aug99
Aug00
Aug01
Aug02
Aug03
Dec04
1% 1% 1% 1% 1% 1%2% 3%
4% 4%5%
6%
9%
14%
17%
Aug90
Aug91
Aug92
Aug93
Aug94
Aug95
Aug96
Aug97
Aug98
Aug99
Aug00
Aug01
Aug02
Aug03
Dec04
Source: OAG Schedule TapesSource: OAG Schedule Tapes
NB: Excludes charter seats which have historicallyNB: Excludes charter seats which have historically
carried up to a quarter of intracarried up to a quarter of intra --Europe demandEurope demand
European Low Cost Carrier Share of Total Nonstop Intra-Europe SeatsEuropean Low Cost Carrier Share of Total Nonstop Intra-Europe Seats
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Ryanairs Network Development Is An Example of the LowCost Carrier PenetrationRyanairs Network Development Is An Example of the LowCost Carrier Penetration
August 2000August 2000 May 2004May 2004
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European LCCs easyJet and Ryanair Are Expected To Leadin Capacity GrowthEuropean LCCs easyJet and Ryanair Are Expected To Leadin Capacity Growth
Source: UBS, 2004.Source: UBS, 2004.
-10%
0%
10%
20%
30%
40%
50%
e a s y
J e t
R y a n
a i r
F i n n a
i r
A u s t r
i a n A i r l i n
e s
A i r F r a n
c e
L u f t h
a n s a
I b e r i a
K L M
S A S
B r i t i s
h A i r w a y
s
A l i t a l
i a
1997-2002 2003-05E
-10%
0%
10%
20%
30%
40%
50%
e a s y
J e t
R y a n
a i r
F i n n a
i r
A u s t r
i a n A i r l i n
e s
A i r F r a n
c e
L u f t h
a n s a
I b e r i a
K L M
S A S
B r i t i s
h A i r w a y
s
A l i t a l
i a
1997-2002 2003-05E
European Carriers Capacity Growth Forecast1997-2002 and 2003-2005E
European Carriers Capacity Growth Forecast1997-2002 and 2003-2005E
N/A
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Upstart LCCs and National Airlines Transforming intoNo-Frills Carriers Have Plans for Significant Growth in 2004Upstart LCCs and National Airlines Transforming intoNo-Frills Carriers Have Plans for Significant Growth in 2004
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21
LCCs in Europe Have A Significant Labor Cost Advantageand Labor EfficiencyLCCs in Europe Have A Significant Labor Cost Advantageand Labor Efficiency
Source: Company Reports, 2004.Source: Company Reports, 2004.
0
2,000
4,000
6,000
8,000
10,000
12,000
Ryanair easyJet Virgin Exp Lufthansa Austrian Alitalia BritishAirways
Finnair Air France KLM0
0.5
1
1.5
2
2.5
3
3.5
4
0
2,000
4,000
6,000
8,000
10,000
12,000
Ryanair easyJet Virgin Exp Lufthansa Austrian Alitalia BritishAirways
Finnair Air France KLM0
0.5
1
1.5
2
2.5
3
3.5
4
Passengers Served Per Employee and Labor CASK Europe2003
Passengers Served Per Employee and Labor CASK Europe2003
Low Cost Low Cost Legacy Legacy
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Average Unit Costs for European LCCs Are More Than 40%Lower than Those of European Major CarriersAverage Unit Costs for European LCCs Are More Than 40%Lower than Those of European Major Carriers
Source: Company Reports, 2004.Source: Company Reports, 2004.
0
2
4
6
8
10
12
400 600 800 1000 1200 1400 1600 1800
Trip Length (miles)
U n i t C o s t s ( i n
c e n t s )
easyJet
Ryanair
Austrian
Finnair
VirginExpress
LufthansaKLM
BA
Unit Cost versus Trip Length for Select European Legacy and Low Cost Carriers2003
Unit Cost versus Trip Length for Select European Legacy and Low Cost Carriers2003
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Section 4Section 4
Asia-PacificAsia-Pacific
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Asian Environment Offers Special Challenges to Low CostAirline ModelsAsian Environment Offers Special Challenges to Low CostAirline Models
Asian legacy carriers typically already
have lower costs than large European andNorth American carriers
Direct-to-consumer distribution strategiesmay be harder to implement in Asia
Distances between major cities in Asiatend to be longer, pointing to differentfleet tradeoffs, product offerings etc
Bilateral agreements could limitextensive/rapid service development
Asian legacy carriers typically already
have lower costs than large European andNorth American carriers
Direct-to-consumer distribution strategiesmay be harder to implement in Asia
Distances between major cities in Asiatend to be longer, pointing to differentfleet tradeoffs, product offerings etc
Bilateral agreements could limitextensive/rapid service development
Lower Cost Structures
Lower Cost Structures
Stronger Agency Role
Stronger Stronger Agency Role Agency Role
Longer Distances Longer
Distances
Limited Route Rights
Limited Route Limited Route Rights Rights
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But, Low Cost Carrier Activity Is Growing in South EastAsiaBut, Low Cost Carrier Activity Is Growing in South EastAsia
Recent Liberalization of Some Markets, Particularlyin South East Asia
Strong Economic Growth
Ready Access to Capital
Newly Emerging Government Support for AirlineCompetition
Over 500,000,000 People in 240 Cities and 130 Cities With aPopulation Base of 1 Million +
Some Underutilized Regional Airports
Recent Liberalization of Some Markets, Particularlyin South East Asia
Strong Economic Growth
Ready Access to Capital
Newly Emerging Government Support for AirlineCompetition
Over 500,000,000 People in 240 Cities and 130 Cities With aPopulation Base of 1 Million +
Some Underutilized Regional Airports
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And Now Accounts For Under 5% of Seats, Showing SimilarGrowth to Europe in the Early 90sAnd Now Accounts For Under 5% of Seats, Showing SimilarGrowth to Europe in the Early 90s
0.8% 1.1% 2.2%
4.3%
Aug 01 Aug 02 Aug 03 Dec 04
0.8% 1.1%2.2%
4.3%
Aug 01 Aug 02 Aug 03 Dec 04
Source: OAG Schedule TapesSource: OAG Schedule Tapes
Low Cost Carrier Share ofTotal Nonstop Intra-Far East Asia/Australian Seats
Low Cost Carrier Share ofTotal Nonstop Intra-Far East Asia/Australian Seats
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Air Asia and Virgin Blue Have Lower Costs Than TheirRegional Legacy Carrier CounterpartsAir Asia and Virgin Blue Have Lower Costs Than TheirRegional Legacy Carrier Counterparts
CASKs for Australian and Southeast Asian Carriers2003
CASKs for Australian and Southeast Asian Carriers2003
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
Qantas Virgin BlueSingapore
Airlines Thai AirwaysMalaysian
Airlines Air Asia
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
Qantas Virgin BlueSingapore
Airlines Thai AirwaysMalaysian
Airlines Air Asia
Source: Company Reports, 2004.Source: Company Reports, 2004.
Southeast Asia Southeast Asia Australia Australia
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Several Independent LCCs Are in a Strong First-to-MarketPositionSeveral Independent LCCs Are in a Strong First-to-MarketPosition
Malaysias Independent Carrier Serves 10 Domestic Markets.Began International Service to Thailand in November, Adding19 Aircraft (737-300s) by December 2004
Orient Thais Success with LCC Service on IntlRoutes Spurred Development of a Domestic Airline,One-Two-Go based in Bangkok
Philippines LCC Operating Two Airlines in One from bothCebu (F28 aircraft) and Manila (DC-9 aircraft)
Received its First Two A320s in March 2004, In June StartedServices at Changis Terminal in Singapore
Thai AirAsia - Joint venture with AirAsia and Thai interests;Reported Profits in its 2 nd Month of Service, 86%Load Factors
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However Several Established Carriers in the Region AreCompeting With LCC OperationsHowever Several Established Carriers in the Region AreCompeting With LCC Operations
Virgin launched Low Cost Carrier inSoutheast Asia, first to market in Australia
Major investor in Singapore-Based, LowCost; Carrier Starting by year end 2004,the 2 nd Low Cost Operation in One Year forQantas
Tiger Airways (SIA owned). First carrierto commit to the new Low Cost CarrierTerminal at the Singapore Changi Airport
Launched Nok Air, a Budget CarrierServing Domestic and Regional Markets
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Section 5Section 5
Implications/MarketOpportunityImplications/MarketOpportunity
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The Worlds Fleet Will More Than Double Over The Next 20Years, With Asia-Pacific Leading In Expected Order ValueThe Worlds Fleet Will More Than Double Over The Next 20Years, With Asia-Pacific Leading In Expected Order Value
Source: Boeing Current Market Outlook 2004.Source: Boeing Current Market Outlook 2004.
0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 10,000
Africa and Middle East
Latin America
Asia-Pacific
Europe
North America
Single-Aisle and RJsTwin-Aisle747 and Larger
0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 10,000
Africa and Middle East
Latin America
Asia-Pacific
Europe
North America
Single-Aisle and RJsTwin-Aisle747 and Larger
$561.9
$529.5
$87.5
$135.2
Estimated Fleet Growth (New and Replacements)2004-2023E
Estimated Fleet Growth (New and Replacements)2004-2023E
$673.0
Value ($b)
If LCC Penetration in Europe and Asia reaches US LevelsIf LCC Penetration in Europe and Asia reaches US Levels
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If LCC Penetration in Europe and Asia reaches US Levels,They Will Need Aircraft Worth $170bn - $240bn Over the
Next 20 Yrs..
If LCC Penetration in Europe and Asia reaches US Levels,They Will Need Aircraft Worth $170bn - $240bn Over the
Next 20 Yrs..
Source: SH&E Analysis, 2004.Source: SH&E Analysis, 2004.
0 500 1,000 1,500 2,000 2,500 3,000
Asia Pacific
Europe
0 500 1,000 1,500 2,000 2,500 3,000
Asia Pacific
Europe
Estimated LCC Single-Aisle and Regional Jet Fleet Growth2004-2023E
Estimated LCC Single-Aisle and Regional Jet Fleet Growth2004-2023E
$97.0 bn -$140 bn
$70.0 bn -
$100 bn
2,000 2,400
1,350 1,900
Value ($b)
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Already Several Non US Low Cost Carriers Have MadeSignificant Orders for New AircraftAlready Several Non US Low Cost Carriers Have MadeSignificant Orders for New Aircraft
easyJet - 120 A319s
Ryanair - 153 Boeing 737s
AirAsia - Expected 80 A320 aircraft order from Airbus
Jetstar Airways Up to 60 A320s
Cebu Pacific 12 A310s
Source: ACAS Database, 2004.Source: ACAS Database, 2004.
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LCCs Will Expand Into More Market SegmentsLCCs Will Expand Into More Market Segments
LCCs are successfully penetrating long haul markets in theUS and Europe
jetBlue and America West are in transcontinental markets
Ryanair and easyJet have many flights longer then 3 hours
LCCs are expanding into the 70-100 aircraft that will servedifferent markets
There are plans for new LCCs to serve long haul
international markets with twin-aisle and larger single aisleaircraft
LCCs are successfully penetrating long haul markets in the
US and Europe jetBlue and America West are in transcontinental markets
Ryanair and easyJet have many flights longer then 3 hours
LCCs are expanding into the 70-100 aircraft that will servedifferent markets
There are plans for new LCCs to serve long haul
international markets with twin-aisle and larger single aisleaircraft
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LCCs Will Continue to Force The Industry To RestructureLCCs Will Continue to Force The Industry To Restructure
The traveling public has voted they accept, sometimes
prefer, the LCC brand and product
LCC penetration is gradual in the US, the effects onLegacy carriers have grown as LCCs have expanded
As more barriers fall, LCC influence will become even moredominant
Regulatory reform eliminated the main barrier
Internet broke the Distribution barrier
New aircraft helped offset the Safety barrier
The traveling public has voted they accept, sometimes
prefer, the LCC brand and product
LCC penetration is gradual in the US, the effects onLegacy carriers have grown as LCCs have expanded
As more barriers fall, LCC influence will become even moredominant
Regulatory reform eliminated the main barrier
Internet broke the Distribution barrier
New aircraft helped offset the Safety barrier