Growth of Low Cost Carriers

in Europe and Asia

Eighteenth Annual Aircraft
Finance Conference

Presented
Presented by:
by:
David
David H.
H. Treitel
Treitel
Chairman
Chairman and
and CEO
CEO
SH&E,
SH&E, Inc.
Inc.
 Presentation Overview

Low Cost Carrier Trends

United States

Europe

Asia-Pacific

Market Opportunity & Implications

1
Section 1

Low Cost Carrier Trends

 These Are Threatening Times for Legacy Carriers

Low Cost Carriers (LCCs) have the resources to

continue expanding at a rapid pace

Even with renegotiated labor contracts, the Legacy

Carriers can not approach the LCC costs

As LCCs Expand Their Point-to-Point Services, Demand is

Removed from the Traffic Pool Available to Network
Carriers

Unable to generate a sufficient revenue premium the

weakest Legacy Carriers have filed for bankruptcy

3
 Since 2001, the LCCs Have Prospered While Legacy
Carriers Have Struggled

LEGACY CARRIERS LCCs

Ð Frequency Ð Fares

Ð Routes Ï Traffic

Ð Traffic Ï Revenues

Ð Revenues Ï Profitability

Ð Fares
LCCs Have Been
Ð Profitability the Clear Winners

4
 Competition Between Legacy and Low Cost Carriers
Is Being Waged on Five Key Fronts

Competitive Factor Winner or Loser

Size and Network Legacy Advantage

Growth and Access to Capital Low Cost Advantage

Pricing Structure and
Battleground
Influence

Cost Structure Low Cost Advantage

Product/Brand Battleground

5
 The LCC’s Have Large Virtually Insurmountable Structural
Cost Advantages

Domestic
Domestic CASM
CASM
1Q2003
1Q2003 –– 1Q2004
1Q2004

ll
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ess
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SAA

TAA
onn

ellt
orr
AAm

nii
m
UUS

CCo

No

UUn

AAT
DDe

SSoo

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N
$0.14
$0.14

$0.12
$0.12

$0.10
$0.10

$0.08
$0.08

$0.06
$0.06

$0.04
$0.04

$0.02
$0.02

$0.00
$0.00

1Q2003
1Q2003 1Q2004
1Q2004

6 Source:
Source: US
US DOT,
DOT, Form
Form 41
41
 Low Cost Carrier Growth Has Traditionally Followed
Regulatory Reforms

Late 1970s/Early 1980s in Southwest goes interstate,

the US People Express and others
form

Early 1990s in UK 1991 re-branding of

Ryanair as low cost carrier

1990s in Europe Expansion of low-cost

carriers to the Continent
with the final deregulation
of the market

7
 The LCC Phenomenon New To Asia but A Maturing Market
in Europe and North America

Europe
Europe
•• Continued
Continued Low
Low Cost
Cost
Expansion
Expansion inin UK/Western
UK/Western
North
North America
America Europe
Europe
•• Slow
Slow recovery from
recovery from September
September •• East-West
East-West traffic
traffic
11
11
th
th simulation
simulation because
because ofof
•• Expansion
Expansion of of International
International expanded
expanded EUEU
Service
Service •• LCC
LCC form
form in
in Eastern
Eastern and
and
•• Low
Low cost
cost carriers
carriers continue
continue to
to Central
Central Europe
Europe
gain
gain share in US and Canada
share in US and Canada •• LCC
LCC Market
Market Share:
Share: 17%
17%
•• Legacy
Legacy carriers
carriers areare
responding
responding (Delta
(Delta –– Song,
Song, Air
Air
Canada,
Canada, United – Ted) with
United – Ted) with
LCCs
LCCs
•• LCC
LCC Market
Market Share:
Share: 30% 30% Pacific
Pacific Rim/Australia
Rim/Australia
•• Relatively
Relatively infant
infant market
market
•• LCCs
LCCs Have started
Have started in
in
more
more “liberal”
“liberal”
environments
environments –– Australia,
Australia,
Singapore,
Singapore, Malaysia,
Malaysia,
Thailand
Thailand
•• India
India has
has announced
announced aa
few
few low cost start
low cost start ups
ups
•• LCC
LCC Market Share
Market Share 4%
4%

8
 If LCC Penetration in Europe and Asia reaches US Levels,
They Will Need Aircraft Worth $170bn - $240bn Over the
Next 20 Years

Estimated
Estimated LCC
LCC Single-Aisle
Single-Aisle and
and Regional
Regional Jet
Jet Fleet
Fleet Growth
Growth
2004-2023
2004-2023
Value ($b)

$97.0 bn -
Europe 2,000 – 2,400 $140 bn

$70.0 bn -
Asia Pacific 1,350 – 1,900 $100 bn

0 500 1,000 1,500 2,000 2,500 3,000

9 Source:
Source: SH&E
SH&E Analysis,
Analysis, 2004.
2004.
Section 2

United States
 Today Low-Fare Service Accounts for Almost 30% of the
U.S. Domestic Market

U.S.
U.S. Low
Low Fare
Fare Carrier
Carrier Share
Share of
of Total
Total U.S.
U.S. Nonstop
Nonstop Seats
Seats

28%
28%
26%
26%
24%
24%
23%
23%
21%
21% 22%
22%

18% 19%
19%
18%
18% 18%
16%
16%
14%
14%
12%
12%
10%
10% 10%
10%
8%
8%

Aug
Aug Aug
Aug Aug
Aug Aug
Aug Aug
Aug Aug
Aug Aug
Aug Aug
Aug Aug
Aug Aug
Aug Aug
Aug Aug
Aug Aug
Aug Aug
Aug Aug
Aug
90
90 91
91 92
92 93
93 94
94 95
95 96
96 97
97 98
98 99
99 00
00 01
01 02
02 03
03 04
04

Low
Lowcost
costcarrier
carriershare
shareof
ofIntra-Canadian
Intra-Canadianseats
seatsexceeds
exceeds30%
30%

11 Source:
Source: OAG
OAG Schedule
Schedule Tapes
Tapes
 Average Unit Costs for LCCs Remain About A Third Lower
than Those of Legacy Carriers

Domestic
Domestic Unit
Unit Cost
Cost versus
versus Trip
Trip Length
Length for
for Select
Select Legacy
Legacy and
and Low
Low Cost
Cost Carriers
Carriers
YE
YE 2Q2004
2Q2004
13

12
US Airways
Delta
11
Continental
Northwest American
U nit C osts (in cents)

10

9
AirTran
8
Southwest Spirit
7

6
JetBlue
5

4
400 500 600 700 800 900 1,000 1,100 1,200 1,300 1,400
Trip Length (miles)

Source: US DOT, Form 41, 2004.

12
 Overall, Less Than 55% of the LCC Cost Advantage Comes
From Labor Cost Savings

Cost
Cost Advantage
Advantage of
of US
US Low
Low Cost
Cost Carriers
Carriers vs.
vs. US
US Legacy
Legacy Carriers
Carriers
(Domestic
(Domestic CASM)
CASM)
2Q2004
2Q2004
Overall 30.8%

Passenger Service 75.9%

Depreciation & Amortization 55.0%

Promotion & Sales 47.5%

Aircraft & Traffic Servicing 42.3%

Maintenance 27.1%

General & Administrative 22.0%

Flying Operations 13.6%

0% 10% 20% 30% 40% 50% 60% 70% 80%

13 Source:
Source: US
US DOT,
DOT, Form
Form 41
41
 LCCs Will Continue Growing More Rapidly Than Legacy
Carriers

Aircraft
Aircraft on
on Order
Order as
as aa %
% of
of Current
Current Fleet,
Fleet, US
US Carriers
Carriers
September
September 2004
2004

50%

45%

40%

35%

30%

25%

20%

15%

10%

5%

0%

Low Cost Regional Legacy

14 Source:
Source: ACAS
ACAS Database
Database
 The Trend of North America LCC Penetration Suggests
That It Will Reach 50%

Domestic
Domestic Seat
Seat Market
Market Share
Share By
By Carrier
Carrier Type
Type
December
December 2004
2004 vs.
vs. the
the Future
Future (estimated)
(estimated)

Other
Other
10%
3%
LowCost Majors
31% 40%

Majors
66% LowCost
50%

15 Source:
Source: OAG
OAG Schedule
Schedule Tapes.
Tapes. SH&E
SH&E Analysis,
Analysis, 2004.
2004.
Section 3

Europe
 The European ‘Domestic’ Market Has Also Witnessed Rapid
Growth of Low Cost Carriers

European
European Low
Low Cost
Cost Carrier
Carrier Share
Share of
of Total
Total Nonstop
Nonstop Intra-Europe
Intra-Europe Seats
Seats

17%
17%
14%
14%

9%
9%
6%
6%
5%
5%
4%
4% 4%
4%
3%
3%
1% 1%
1% 2%
2%
1%
1% 1%
1% 1%
1% 1%
1% 1%

Aug
Aug Aug
Aug Aug
Aug Aug
Aug Aug
Aug Aug
Aug Aug
Aug Aug
Aug Aug
Aug Aug
Aug Aug
Aug Aug
Aug Aug
Aug Aug
Aug Dec
Dec
90
90 91
91 92
92 93
93 94
94 95
95 96
96 97
97 98
98 99
99 00
00 01
01 02
02 03
03 04
04

NB: Excludes charter seats which have historically

carried up to a quarter of intra-Europe demand
17 Source:
Source: OAG
OAG Schedule
Schedule Tapes
Tapes
 Ryanair’s Network Development Is An Example of the Low
Cost Carrier Penetration

August 2000 May 2004

18
 European LCCs easyJet and Ryanair Are Expected To Lead
in Capacity Growth

European
European Carriers
Carriers –– Capacity
Capacity Growth
Growth Forecast
Forecast
1997-2002
1997-2002 and
and 2003-2005E
2003-2005E

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a

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nnnn

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uss
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A

A
50%
50%

40%
40%

30%
30%

20%
20%

10%
10%

N/A
0%
0%

-10%
-10%

1997-2002
1997-2002 2003-05E
2003-05E

19 Source:
Source: UBS,
UBS, 2004.
2004.
 Upstart LCCs and National Airlines Transforming into
No-Frills Carriers Have Plans for Significant Growth in 2004

20
 LCCs in Europe Have A Significant Labor Cost Advantage
and Labor Efficiency

Passengers
Passengers Served
Served Per
Per Employee
Employee and
and Labor
Labor CASK
CASK –– Europe
Europe
2003
2003
12,000
12,000 44
Low Cost Legacy
3.5
3.5
10,000
10,000

33

8,000
8,000
2.5
2.5

6,000
6,000 22

1.5
1.5
4,000
4,000

11

2,000
2,000
0.5
0.5

00 00
Ryanair
Ryanair easyJet
easyJet Virgin
Virgin Exp
Exp Lufthansa
Lufthansa Austrian
Austrian Alitalia
Alitalia British
British Finnair
Finnair Air
Air France
France KLM
KLM
Airways
Airways

21 Source:
Source: Company
Company Reports,
Reports, 2004.
2004.
 Average Unit Costs for European LCCs Are More Than 40%
Lower than Those of European Major Carriers

Unit
Unit Cost
Cost versus
versus Trip
Trip Length
Length for
for Select
Select European
European Legacy
Legacy and
and Low
Low Cost
Cost Carriers
Carriers
2003
2003
12
Lufthansa
Finnair KLM
10

Austrian
U nit C osts (in cents)

8
BA
Virgin easyJet
6
Express

4
Ryanair
2

0
400 600 800 1000 1200 1400 1600 1800
Trip Length (miles)

22 Source:
Source: Company
Company Reports,
Reports, 2004.
2004.
Section 4

Asia-Pacific
 Asian Environment Offers Special Challenges to Low Cost
Airline Models

Lower Asian legacy carriers typically already

Lower Cost
Cost
Structures have lower costs than large European and
Structures
North American carriers

Stronger
Stronger Direct-to-consumer distribution strategies
Agency
Agency Role
Role may be harder to implement in Asia

Distances between major cities in Asia

Longer
Longer tend to be longer, pointing to different
Distances
Distances fleet tradeoffs, product offerings etc

Limited
Limited Route
Route Bilateral agreements could limit
Rights
Rights extensive/rapid service development

24
 But, Low Cost Carrier Activity Is Growing in South East
Asia

Recent Liberalization of Some Markets, Particularly

in South East Asia

Strong Economic Growth

Ready Access to Capital

Newly Emerging Government Support for Airline

Competition

Over 500,000,000 People in 240 Cities and 130 Cities With a

Population Base of 1 Million +

Some Underutilized Regional Airports

25
 And Now Accounts For Under 5% of Seats, Showing Similar
Growth to Europe in the Early 90s

Low
Low Cost
Cost Carrier
Carrier Share
Share of
of
Total
Total Nonstop
Nonstop Intra-Far
Intra-Far East
East Asia/Australian
Asia/Australian Seats
Seats

4.3%
4.3%
2.2%
2.2%
0.8%
0.8% 1.1%
1.1%

Aug
Aug 01
01 Aug
Aug 02
02 Aug
Aug 03
03 Dec
Dec 04
04

26 Source:
Source: OAG
OAG Schedule
Schedule Tapes
Tapes
 Air Asia and Virgin Blue Have Lower Costs Than Their
Regional Legacy Carrier Counterparts

CASKs
CASKs for
for Australian
Australian and
and Southeast
Southeast Asian
Asian Carriers
Carriers
2003
2003
Australia Southeast Asia
Singapore
Singapore Malaysian
Malaysian
Qantas
Qantas Virgin
Virgin Blue
Blue Airlines
Airlines Thai
Thai Airways
Airways Airlines
Airlines Air
Air Asia
Asia
8.0
8.0

7.0
7.0

6.0
6.0

5.0
5.0

4.0
4.0

3.0
3.0

2.0
2.0

1.0
1.0

0.0
0.0

27 Source:
Source: Company
Company Reports,
Reports, 2004.
2004.
 Several Independent LCCs Are in a Strong First-to-Market
Position

Malaysia’s Independent Carrier Serves 10 Domestic Markets.

Began International Service to Thailand in November, Adding
19 Aircraft (737-300s) by December 2004

– Orient Thai’s Success with LCC Service on Int’l

Routes Spurred Development of a Domestic Airline,
One-Two-Go based in Bangkok

Philippines LCC Operating Two Airlines in One from both

Cebu (F28 aircraft) and Manila (DC-9 aircraft)

Received its First Two A320s in March 2004, In June Started

Services at Changi’s Terminal in Singapore

Thai AirAsia - Joint venture with AirAsia and Thai interests;

Reported Profits in its 2nd Month of Service, 86%
Load Factors

28
 However Several Established Carriers in the Region Are
Competing With LCC Operations

Virgin launched Low Cost Carrier in

Southeast Asia, first to market in Australia

Major investor in Singapore-Based, Low

Cost; Carrier Starting by year end 2004,
the 2nd Low Cost Operation in One Year for
Qantas

Tiger Airways (SIA owned). First carrier

to commit to the new Low Cost Carrier
Terminal at the Singapore Changi Airport

Launched Nok Air, a Budget Carrier

Serving Domestic and Regional Markets

29
Section 5

Implications/Market
Opportunity
 The World’s Fleet Will More Than Double Over The Next 20
Years, With Asia-Pacific Leading In Expected Order Value

Estimated
Estimated Fleet
Fleet Growth
Growth (New
(New and
and Replacements)
Replacements)
2004-2023E
2004-2023E
Value ($b)

North America $561.9

Europe $529.5

Asia-Pacific $673.0

Latin America $87.5

Single-Aisle and RJs

Africa and Middle East Twin-Aisle $135.2
747 and Larger

0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 10,000

31 Source:
Source: Boeing
Boeing Current
Current Market
Market Outlook
Outlook 2004.
2004.
 If LCC Penetration in Europe and Asia reaches US Levels,
They Will Need Aircraft Worth $170bn - $240bn Over the
Next 20 Yrs..

Estimated
Estimated LCC
LCC Single-Aisle
Single-Aisle and
and Regional
Regional Jet
Jet Fleet
Fleet Growth
Growth
2004-2023E
2004-2023E
Value ($b)

$97.0 bn -
Europe 2,000 – 2,400 $140 bn

$70.0 bn -
Asia Pacific 1,350 – 1,900 $100 bn

0 500 1,000 1,500 2,000 2,500 3,000

32 Source:
Source: SH&E
SH&E Analysis,
Analysis, 2004.
2004.
 Already Several Non US Low Cost Carriers Have Made
Significant 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

33 Source:
Source: ACAS
ACAS Database,
Database, 2004.
2004.
 LCC’s Will Expand Into More Market Segments

LCC’s 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

LCC’s are expanding into the 70-100 aircraft that will serve
different markets

There are plans for new LCC’s to serve long haul

international markets with twin-aisle and larger single aisle
aircraft

34
 LCC’s 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 on

Legacy carriers have grown as LCCs have expanded

As more barriers fall, LCC influence will become even more

dominant
– Regulatory reform eliminated the main barrier
– Internet broke the “Distribution” barrier
– New aircraft helped offset the “Safety” barrier

35