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8th Hamburg Aviation Conference
Trends in leisure travel: what holds for the future?
Current and future trends in the industry
Wolfgang John
CEO Hapag-Lloyd Flug
Hamburg, February 17, 2005
Hamburg Aviation Conference - Wolfgang John, Hapag-Lloyd Flug | 17.02.2005 | Page 1
Agenda
Selected trends in the travel industry on the demand and the supply side
1 Demand side Supply side 2
• Air traffic and tourism volumes • Increasing competition for travel
are coming back companies on all parts of the value
• The European travel market is in chain
a continuous change process • Low cost and internet based
• Holiday makers shop increasingly business models are booming:
for „modular“ and „do it yourself“ - airline business models converge,
products consolidation is expected
• Demand is polarizing between - Europe‘s online travel market expected
to grow 2005/2006 by above 45% p.a.
„quality“ and „budget“
• TUI reacts by implementing the
„content box“ model
3 Environment
Source: Hapag-Lloyd Flug
Hamburg Aviation Conference - Wolfgang John, Hapag-Lloyd Flug | 17.02.2005 | Page 2
1
Historic air traffic demand
2004 was yet another year with negative results for the airline industry -
however, traffic volumes are coming back
Worldwide air traffic volumes and results 1999-2004E
-0.9 -0.3 -3.0 -0.8 -1.5 +0.1 AEA result
(USD bn)
n Negative result since 2001 (in total
War in Iraq, RPK USD 36 bn from 2001 to 2004)
11. Sep. SARS growth n Reasons for negative result 2004
10 8.5 10%
among others
5 3.7 5% - hike in fuel prices 1) (e.g. 1999: Ø 51
USc/gallon versus 2004: Ø 115
0 0% USc/gallon)
1999 2000 2001 2002 2003 2004E
-5 -5% - aggressive pricing (AEA 1991-2002:
-4.8 Ø yield -3.5% p.a.; 2002-2003 yield
-6.5 -10.7%)
-10 -10%
-11.3 n Enormous RPK growth 2004 of
-15 -13.0 -15% 15% (inflated by depressed 2003
Result (total across all airlines, USD bn) baseline)
RPK growth year-on-year
1) Average of spot cash markets New York, US Gulf Coast, Los Angeles, Rotterdam, Singapore
Source: ICAO, IATA, AEA, ATW, Hapag-Lloyd Flug
Hamburg Aviation Conference - Wolfgang John, Hapag-Lloyd Flug | 17.02.2005 | Page 3
1
Future air traffic demand
Leading aircraft manufacturers forecast long term air passenger growth rates for
within Europe somewhere between 4% and 5%
Long term air traffic
Air traffic growth 2004-2008 growth Europe
Passenger growth p.a. RPK annual growth
Europe
8.3%
7.7% 4.8%
4.5% 4.2%
5.0% 5.3%
4.8%
World Within Europe- Europe-ME Europe- Boeing Airbus Rolls
Europe Asia/Pacific Africa 2003- 2002- Royce 02-
2022 2022 22
n IATA expects 2005 a $1.2 billion profit for the industry based on an average
price of $34 for Brent Crude
Source: IATA, Boeing, Airbus, Rolls Royce, Hapag-Lloyd Flug
Hamburg Aviation Conference - Wolfgang John, Hapag-Lloyd Flug | 17.02.2005 | Page 4
1
Historic and future holiday travel demand
Similarly for tourism, steady future growth is expected
Worldwide tourism growth 2003-2020
International arrivals m
3.5 European organized travel
market volume growth
5%
717
2001 2002 2003
7.7
2004E
527 -1% -1%
5.6 -3%
402 397
282
190 195 5.5 5.0
112 112 77 69
31 47 30 36
Americas Europe East Asia/Pacific Africa Middle East
2003 2010 2020
xx CAGR 2003-2020 (%)
Source: WTO, TUI, Hapag-Lloyd Flug
Hamburg Aviation Conference - Wolfgang John, Hapag-Lloyd Flug | 17.02.2005 | Page 5
1
European travel market
Trends in the European travel market
• The European market is in a continuous change process:
- Travel agencies will remain #1 booking channel, but loose market share in a multi-channel
landscape
- Dynamic packaging will gain importance, but even in the long run the package will remain #1
way of travel organization
- Tour operators are still relevant, but younger people more and more consider to travel
without them
• Largest lifestyle segments currently are:
- “Fun Seekers” (Ø 30 yrs., no kids, full-time workers)
- “Dynamic Duos” (Ø 46 yrs., “older” kids, full-time workers)
- In addition, the number of “elderly” travelers is continuously growing
• Older consumer segments will modify their behavior slowly, younger segments will change faster
• The Belgians and in parts the Germans behave more the traditional way, the Swedish and the
Dutch are the trend-setters
• General trend towards shorter trips but at an increased frequency and average spend
Source: TUI, Hapag-Lloyd Flug
Hamburg Aviation Conference - Wolfgang John, Hapag-Lloyd Flug | 17.02.2005 | Page 6
1
Types of holiday products
Customers will increasingly shop for „modular“ or „do it yourself“ holiday
products
Development of type of holiday trips
Number of holiday trips m
450
n Traditional „package“ holidays will
400 lose market share
Package
350 ~ 35% n „Do it yourself“ and „modular“
300 products will become increasingly
Orga-
45% DIY popular:
250 nized
- 30% market share in 2010
200 ~ 30% Modular - on the supply side, many new
6% entrants try to get a foothold in
150
this market (LCCs, internet portals)
100 Non- n Apart from „all inclusive“ also „city
49% ~ 35% organized
50 breaks“, „wellness holidays“, and
„cultural trips“ are on the rise
0
1970 1980 1990 2000 2010e
Source: TUI, Hapag-Lloyd Flug
Hamburg Aviation Conference - Wolfgang John, Hapag-Lloyd Flug | 17.02.2005 | Page 7
1
Budget versus quality holiday
Demand is increasingly polarizing between budget and quality holidays
Demand trends (schematic)
Volume
< Trends in opposite directions:
- „Trading down“, i.e. increasing
price awareness
AND
Criteria
„Price“ - „Trading up“, i.e. increasing
individuality and exclusivity
Criteria < However, the standard segment will
Standard „Quality“ remain the largest segment in the
segment near future
Price
Source: TUI, Hapag-Lloyd Flug
Hamburg Aviation Conference - Wolfgang John, Hapag-Lloyd Flug | 17.02.2005 | Page 8
Agenda
Selected trends in the travel industry on the demand and the supply side
1 Demand side Supply side 2
• Air traffic and tourism volumes • Increasing competition for travel
are coming back companies on all parts of the value
• The European travel market is in chain
a continuous change process • Low cost and internet based
• Holiday makers shop increasingly business models are booming:
for „modular“ and „do it yourself“ - airline business models converge,
products consolidation is expected
• Demand is polarizing between - Europe‘s online travel market expected
to grow 2005/2006 by above 45% p.a.
„quality“ and „budget“
• TUI reacts by implementing the
„content box“ model
3 Environment
Source: Hapag-Lloyd Flug
Hamburg Aviation Conference - Wolfgang John, Hapag-Lloyd Flug | 17.02.2005 | Page 9
2
Competition on the supplier side
Travel companies face competition along the entire value chain
• Direct sales channels, e.g. online/retail (tchibo.de, Plus Online
Sales Shop, Penny Markt) or TV shopping (TV Travel Shop, Sonneklar TV)
Tour • Internet travel platforms that also allow dynamic packaging, e.g.
operator Expedia, Flyloco, Lastminute.com, ebookers, touropa
Competition
mainly from low
• Low cost carriers, e.g. Ryanair, easyJet, HLX,
cost and internet
Airline germanwings, hapagfly
based business
models
Destination • Travel portals offering similar services, e.g. rental cars
services (holidayautos, easycar) or airport transfer (terravision)
• Internet hotel platforms and budget hotel chains, e.g. hrs,
Hotels hotel.de, Etap Hotels, Formule1 Hotels
Source: Hapag-Lloyd Flug
Hamburg Aviation Conference - Wolfgang John, Hapag-Lloyd Flug | 17.02.2005 | Page 10
2
Booming low cost carriers
The low cost carrier concept is booming around the globe - further growth is
expected
LCC passenger growth by region 1990-2003
Passengers m
100
90 US1) LCC growth 1972-2003: 16% p.a.
80 LCC market share 2003: 22%
70
60 Europe2) LCC growth 1991-2003: 44% p.a.
50 LCC market share 2003: 15%
40
30
20
10 Asia/ Pacific3) LCC growth 2000-2003: 241% p.a.
0 LCC market share 2003: 3%
2000
2002
1980
1982
1984
1990
1992
1994
1986
1988
1996
1998
1) Includes JetBlue, Southwest, Frontier, AirTran (from 1997 onwards)
2) Includes among others Ryanair, easyJet, VirginExpress, bmibaby, dba, Germanwings, HLX, AB City Shuttle, SkyEurope, Norwegian Air Shuttle
3) Includes AirAsia, Virgin Blue, Australian Airlines
Source: Airline Monitor, company web pages, press, Hapag-Lloyd Flug
Hamburg Aviation Conference - Wolfgang John, Hapag-Lloyd Flug | 17.02.2005 | Page 11
2
Low cost market share
In 2004, Ryanair and easyJet became the third and fourth largest passenger
airlines within Europe
European passengers by carrier 2004 LCC market share in Europe 2004E und 2010E
Passengers m
2004 E 2010E
46.31)
39.5
18%
33%
26.6 25.7
23.5 22.8 52%
19.92) 18.8 23% 59%
15%
AF/KL LH FR U2 BA IB SK Scheduled Charter Low Cost
Note: Domestic and European passengers only
1) Estimate based on March/April to December 2004 figures
2) All TUI airlines; total traffic (incl. relatively small
number of non-European passengers)
Source: CSFB, company web pages, TUI, Hapag-Lloyd Flug
Hamburg Aviation Conference - Wolfgang John, Hapag-Lloyd Flug | 17.02.2005 | Page 12
2
Low cost graveyard
Many European low cost carriers were launched in the past and went bust -
consolidation will take place in the future
LCC launches and exits in Europe 2003-2004
L Flying Aeris Express, Air Fly Me, Bexx Air,
C Finn gexx, WindJet VBird Polonia thomsonfly EUJet Blue Air
C
Jet Green,
L Jet Magic, Jetsky, Wizz Air,
A snowflake, Nordic Helvetic, Fairline Smart Wings, Central-
U Jet2 volare.web Airlink Duo Austria Now Vueling wings
N
C
2003 2004 2005
H
01 02 03 04 05 06 07 08 09 10 11 12 01 02 03 04 05 06 07 08 09 10 11 12 01 02
L
C Good- Aeris Jet Green, Bexx Air volare.web
C jet Express Now,
Duo
E
X Berlin Jet, Jetsky, Fairline VBird Air Polonia
I AirLib JetMagic, Austria
T Express Flying Finn
n Future consolidation is expected (and needed), also among scheduled airlines in Europe
Source: Company web pages, press, Hapag-Lloyd Flug
Hamburg Aviation Conference - Wolfgang John, Hapag-Lloyd Flug | 17.02.2005 | Page 13
2
Scheduled/charter carriers in the LCC arena
Scheduled carriers and tourism companies try to participate in the low cost hype
Scheduled • Copying of certain low cost carrier elements (e.g. Austrian)
airlines
• Partial withdrawal from certain markets, e.g. British Airways, Iberia
• Participation in low cost market, e.g. Lufthansa (germanwings), bmi
(bmibaby), Finnair (flynordic), SAS (snowflake), LOT (Centralwings)
• Re-invention as low cost carrier, e.g. Aer Lingus and British European
Charter carriers/ • Establishment of low cost carrier subsidiary, e.g. TUI (thomsonfly,
tourism companies HLX), MyTravel (MyTravelLite)
• Launch of a low cost product or re-positioning of seat-only business,
e.g. Air Berlin (Euro Shuttle), Condor (“Fliegenpreise”), hapagfly
(“Himmlische Preise”)
Source: Hapag-Lloyd Flug
Hamburg Aviation Conference - Wolfgang John, Hapag-Lloyd Flug | 17.02.2005 | Page 14
2
Converging business models
In consequence, business models of low cost carriers, charter carriers, and
scheduled carriers are converging
Charter carrier
l Price adjustments seat-only
Charter
l Unpackaging and profitabilization
carrier
of add-on services
Low cost carrier Scheduled carrier
l Increased number of l Price adjustments on
flights to tourist Low cost Scheduled high-frequency routes
destinations carrier carrier l Maintaining “hub &
l Expansion of offer by spoke” logic
additional services
n Business models in the airline industry are converging
n High-frequency charter & business routes become low cost routes
n Other models copy successful low cost elements
n Success factors are price, cost base, frequence, and client access
Source: Hapag-Lloyd Flug
Hamburg Aviation Conference - Wolfgang John, Hapag-Lloyd Flug | 17.02.2005 | Page 15
2
Low cost carrier passengers
BACK-UP: Low cost carriers pose a threat to charter and traditional network
airlines as they target both markets
Source of LCC passengers
60% “new 40% “stolen LCC “charter” destinations 06/2004
passengers” passengers”
58 52 45 32
Would not Drawn from 16 13 15 15
have traveled 60% 40% other carriers.
before (70%) Share likely PMI Costa Costa AGP, LEI,
Brava Blanca XRY
or by a to increase
different Number of LCC routes1) Number of LCCs
Costa Blanca = ALC, MJV, VLC; Costa Brava = BCN, REU, GRO
mean (30%)
n Both scheduled airlines and charter airlines suffer as LCCs target both types of passengers
- easyJet contends that up to 50% of its passengers travel on business
- germanwings reported 42% business passengers in 2004
1) The same route offered by different carriers is counted multiple times
Source: Roland Berger, press, company web pages, Hapag-Lloyd Flug
Hamburg Aviation Conference - Wolfgang John, Hapag-Lloyd Flug | 17.02.2005 | Page 16
2
Low cost carrier cost advantage
Low cost carriers enjoy a significant cost advantage - network and charter carriers
are under pressure to reduce costs
Cost comparison low cost, charter and network carrier
Costs per ASK in % of network carrier’s costs
Area of cost advantage
100
-30% 8 Other: crew & overhead
-60% 16 Airport related: landing fees and handling charges
~70
15 Product driven: no frills, internet sales
~40 21 Production driven: seat density, aircraft utilization, single-fleet
Network Charter Low cost
carrier carrier carrier
Hamburg Aviation Conference - Wolfgang John, Hapag-Lloyd Flug | 17.02.2005 | Page 17
2
Secondary/regional airports
The benefits given to low cost carriers by some secondary/regional airports are
currently hotly disputed
Airport related cost advantages Charter/network carrier perspective
• Low cost carriers enjoy cost • Actions to narrow the cost gap could include:
advantages regarding landing fees and - re-defining the amount of handling
handling charges due to: services requested (process re-design)
- operating to secondary, in general - demanding (or at least paying for) less
cheaper airports “chic” airport infrastructure
- enjoying “subsidized” handling charges - ultimately re-considering airport choice
in return for traffic generation (fosters airport competition as e.g. in the UK)
- receiving “marketing” bonuses for • The ongoing discussion between the „high
launching new routes margin“ airport and „low margin“ airline industry
- demanding less handling services - operating margin airline industry 2003: ~-1%
(less complex processes) - operating margin airport industry1) 2003: ~+17%
- having to pay for “less chic” airport
terminals Examples of discussed/challenged airport deals
• Do “LCC airports” operate profitable? • Ryanair at Strasbourg, Charleroi, and Lübeck
• EasyJet at Berlin Schönefeld
• Planned low cost terminal at Geneva
1) TOP 100 airport groups by revenue
Source: ICAO, ACI, press, Hapag-Lloyd Flug
Hamburg Aviation Conference - Wolfgang John, Hapag-Lloyd Flug | 17.02.2005 | Page 18
2
Online sales
The European online travel market will continue to see strong sales growth at
around 40% annually in 2005 and 2006
European online travel market size European online sales1) 2003 and market share
Sales EUR bn. EUR m.
Ryanair 850
+46%
easyJet 800
+49% 725
41,6
+51%
28,6 Lastminute.com 660
+66% 19,2 Expedia.com 370
12,7
7,7 ebookers 340
Travelocity 140
2002 2003 2004E 2005E 2006E
1) Estimates
Source: PhoCusWright, TUI, Hapag-Lloyd Flug
Hamburg Aviation Conference - Wolfgang John, Hapag-Lloyd Flug | 17.02.2005 | Page 19
2
Importance of airline brand
A strong airline brand is the ticket to the online world
Online share of total sales (2004E) Where to look for online travel offers?
% of interviewees (multiple answers possible)
Low cost carriers 90-95% Search engine 44%
Other airlines 15-25% Airline web page 36%
Villas & Cottages 30-40% TO web page 32%
Last Minute 15-25% Online travel agency 31%
Hotel 15-25% Destination portal 25%
Package 5-8% Hotel web page 22%
Source: TUI, Hapag-Lloyd Flug
Hamburg Aviation Conference - Wolfgang John, Hapag-Lloyd Flug | 17.02.2005 | Page 20
2
Integration in Tourism Industry
TUI‘s answer to the developments in the market environment is a paradigm
change from the traditional integrator „funnel“ model to a „content box“ model
From a „Funnel Model“ to ... ... a „Content Box Model“
Customer Customer
The advantage of
Retail
an integrated
Retail
travel company is
Tour Operator
Tour
the combination
Operator of retail strength
Airline
with own content
Dest. Content
Dest. Serv. Airline Serv. Hotel
Box
Hotel
n Growth driven on trader level n Growth driven on supplier level
and leverage of strong market and leverage via direct sales into
position into supplier level new market segments
Source: TUI, Hapag-Lloyd Flug
Hamburg Aviation Conference - Wolfgang John, Hapag-Lloyd Flug | 17.02.2005 | Page 21
Agenda
Selected trends in the travel industry on the demand and the supply side
1 Demand side Supply side 2
• Air traffic and tourism volumes • Increasing competition for travel
are coming back companies on all parts of the value
• The European travel market is in chain
a continuous change process • Low cost and internet based
• Holiday makers shop increasingly business models are booming:
for „modular“ and „do it yourself“ - airline business models converge,
products consolidation is expected
• Demand is polarizing between - Europe‘s online travel market expected
to grow 2005/2006 by above 45% p.a.
„quality“ and „budget“
• TUI reacts by implementing the
„content box“ model
3 Environment
Source: Hapag-Lloyd Flug
Hamburg Aviation Conference - Wolfgang John, Hapag-Lloyd Flug | 17.02.2005 | Page 22
3
Environment
The travel industry currently operates in an unfavourable environment - only few
positive signs are visible
A Political environment B Economic environment
- increased fear for politically - ongoing global economic downturn
motivated terrorist attacks - oil prices at record levels
- uncertainty due to ongoing - „shocks“ from regional „events“
reform discussion (e.g. SARS, Tsunami)
C State interference
- increased financial burden from new regulations
(e.g. passenger rights, security, environment)
- continuous state intervention prevents necessary
market shake-out
Source: Hapag-Lloyd Flug
Hamburg Aviation Conference - Wolfgang John, Hapag-Lloyd Flug | 17.02.2005 | Page 23
