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					                          Innovation & Cost Leadership


                                                  Wolfgang Kurth
                                                    15. November 2004




Innovation & Cost Leadership, 15. November 2004             1
    Agenda



       Trends In The Aviation Industry

        Low-cost Carriers

        Characteristics Of The Low-cost Business Strategy Of Airlines

        Low-cost Business Strategies In Other Trades

        Summary




Innovation & Cost Leadership, 15. November 2004   2
 Business Environment



                 BEGINNING TRANSITION                  RAPID GROWTH           TRANSITION   MATURE
                   STAGE                                   STAGE                           STAGE
    VOLUME/GDP




                                                                            U.S. and
                                                                            Europe
                    GDP

                                                                  Latin America

                                                              Middle East
                                                       Asia

                    Volume                    Africa



                                                                                       TIME

Innovation & Cost Leadership, 15. November 2004               3
    Growth Rates Are Declining



                                                                   US domestic market growth - 1980s vs
                                                                                 1990s
                                               6                                                                                    Passenger traffic
            Average annual growth (%)




                                               5                                                                                    Economy (GDP)
                                               4                                                                                    Real revenue
                                               3                                                                                    Real yield
                                               2
                                               1
                                               0
                                              -1
                                              -2
                                              -3
                                              -4
                                                                        1980s                                            1990s

                                        Growth rates are declining ( GDP >  Yield)
                                        Source: A. Sentance, Airline Business June 2000, R. Doganis, Airlines International, May-
                                             June 2001)




Innovation & Cost Leadership, 15. November 2004                                                   4
 Airline Prices vs Consumer Prices


                                                  Airline yields have not kept pace with inflation




                        135
                        130
     Index (1991=100)




                        125
                        120
                        115
                        110
                        105
                        100
                        95
                              91   92       93         94      95       96         97    98      99      00   01
                                                                 Airline (Yield)        Consumer (CPI)



Innovation & Cost Leadership, 15. November 2004                        5
 Yield Trend



                                                             Real international yields - real decline


                                 13,0

                                 12,0

                                 11,0
              Yield (cent/RPK)




                                 10,0

                                  9,0

                                  8,0

                                  7,0

                                  6,0

                                  5,0
                                        70    72     74    76    78     80    82    84       86   88   90     92   94   96   98   00   01   02   03
                                        Note: Yields on international scheduled services deflated by US
                                        consumer price
                                        Source: ICAO, updated by BA estimates in Airline Business July 2001




Innovation & Cost Leadership, 15. November 2004                                          6
 Utilisation & Load Factor Trends


                                                                  Utilisation & Load factor, US airlines

                            73,00                                                                                              10,4

                            71,00                                                                                              10,1




                                                                                                                                      Block hours per day (approx..)
                            69,00                                                                                              9,9
         Load factor in %




                            67,00                                                                                              9,6

                            65,00                                                                                              9,3

                            63,00                                                                                              9,0

                            61,00                                                                                              8,7

                            59,00                                                                                              8,4

                            57,00                                                                                              8,1
                                       90                  92                 94                 96                  98   00

                                                            Utilisation               Load factor (%)

                                    US airlines,. Source: The Airline Monitor in Air Transport World February 2002




Innovation & Cost Leadership, 15. November 2004                                            7
 Breakeven Passenger Load Factor
 at Record Highs


                                                     Low prices and high costs mean carriers must fill
                                       80,0
                                                     more seats to avoid losses
           Passenger Load Factor (%)




                                                                                                                 77,4


                                       75,0                                                                                75,0

                                                                                                    72,4                72,3
                                                                              70,9        71,1
                                                                   70,3                                       70,0
                                       70,0              69,3                                          70,4


                                              67,0
                                                            66,8                  66,6       66,5
                                                                      65,7
                                       65,0      64,9
                                              1995       1996      1997       1998        1999      2000      2001      2002F
                                                                             Actual        Breakeven



Innovation & Cost Leadership, 15. November 2004                                       8
 Airline Cost Overview:
 Externally & Internally Driven Costs


                                                                                                                              6
            Internal                                                                                                  6
                                                                                                           8
                40%

                                                                                                20

                                                                                      5
                                                                            5

            External                                          12

                60%                                12

                                     15


                        11                        Externally driven items


                                 Aircraft         Ground Maintenace Landing         Air traffic Personnel Sales &
                      Fuel       leasing          services                                                         Inflight   G&A
                                                                    charges          Control             Marketing

               Source: Roland Berger




Innovation & Cost Leadership, 15. November 2004                                 9
 Typical Airline Cost Split




                                                  Crew             Ownership




                                                    Fuel
                                                           Maintenance




Innovation & Cost Leadership, 15. November 2004               10
 Offset Higher Capital Cost with Lower
 Operating Cost


                                                      Present value of costs per seat




                                                             Net reduction
                                                               objective        Operations
                                          Operations




                                                                                 Capital
                                            Capital

                                      Classic fleet                          Next Generation



Innovation & Cost Leadership, 15. November 2004                   11
          Aircraft Prices



                         Aircraft (Sticker) prices
                         Estimate early 2002

                                               0,40                                                                                      600000
                                                                                                            0,34      0,34     0,32
                                                                                   0,32           0,31                                   500000
                                                      0,30     0,29
                       Seat prive in (m) US$




                                               0,30                      0,28




                                                                                                                                                  MTOW in lbs
                                                                                                                                         400000

                                               0,20                                                                                      300000

                                                                                                                                         200000
                                               0,10
                                                                                                                                         100000

                                               0,00                                                                                      0
                                                      737-800 737-900X A321 (216) 757-200         757-300   767-300   767-4ER A330-200
                                                       (184)   (205)               (217)           (256)     (324)     (375)   (375)

                                                                                Seat price            MAX. TOW




Innovation & Cost Leadership, 15. November 2004                                              12
 Yield Per Passenger vs Price Per Seat

            Index
        1,8
                                Airplane Price per Seat    Yield per Pax Mile
        1,6


        1,4


        1,2


          1


        0,8


        0,6


        0,4
            1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000




               1994 Constant Dollars



Innovation & Cost Leadership, 15. November 2004                   13
 DOC Sensitivity vs Price Increases
      Direct Operating Costs (%)




                                   6
                                           300 Seater
                                   5       150 Seater


                                   4

                                   3

                                   2

                                   1

                                   0
                                       0           5       10                15   20
                                                        Price Increase (%)



Innovation & Cost Leadership, 15. November 2004               14
 % Improvement Needed to Get a 1%
 Cash Cost Decrease



    MAINTENANCE
     MATERIAL



    MAINTENANCE
      LABOUR


                                                                              300 Seater
           MTOW
                                                                              150 Seater

             FUEL



                               0,0                5,0   10,0    15,0   20,0           25,0




Innovation & Cost Leadership, 15. November 2004            15
   The Perspective of Time

                            Short
                            term                    Medium term                   Long term

        Today                      1 year                     3/4 years                       10/15 years



               Adaptability                                                  Large flexibility
               of the means
               and resources                      Increased flexibility
                      Very limited
                                                                                          Strategic
        Today                                                                             planning
                              Fair
                Predictability                    Fair to uncertain
                of market and
                environment                                                Very large uncertainty




Innovation & Cost Leadership, 15. November 2004                       16
 Agenda

        Trends In The Aviation Industry

        Low-cost Carriers

        Characteristics Of The Low-cost Business Strategy Of Airlines

        Low-cost Business Strategies In Other Trades

        Summary




Innovation & Cost Leadership, 15. November 2004   17
   Today's Demand Is Triggered
   By Low Fares


                                       For what reason would you fly more often?
                     50%




                     40%
                                                                        41%




                     30%




                     20%


                                 17%


                     10%
                                                                                          11%      11%
                                                              8%                   8%
                                                    6%

                      0%
                               upgrades           schedule   safety   low fares   more    safety   others
                                                             ground               FFP´s   board
                         Source: IATA Online Survey 2003


Innovation & Cost Leadership, 15. November 2004                          18
   Market Share Of LCCs



                    LCCs will have a market share of about 25% in Europe in 2010


                                                   5

                                                                            25
                                                  20                               LCCs

                                                                            15     Charter



                                                  75
                                                                            60

                                                                                   Network Carriers



                                                  2000                      2010

                          Quelle: Mercer Management Consultants 2003




Innovation & Cost Leadership, 15. November 2004                        19
     Impressive Growth Of LCCs
     Within Europe


                                                  PAX numbers of European LCCs

                                                      Avg. growth p.a. 46 %

                          100
                           90
                           80                                                                              90
                           70
       PAX                 60
       (m)                 50
                           40                                                                  47
                           30                                                    39
                           20                                      24
                           10                        17
                                        13
                             0
                                       1999          2000        2001          2002           2003        2004E



                            Source: Analystenreports, Unternehmensinformationen, Monitor Group Analysis




Innovation & Cost Leadership, 15. November 2004                           20
 Growth Generated By ‘New’
 Passengers (Germany 2004)


     Classification of low-cost passengers                              Classification of “new” passengers
                                                  4%       100%                                               8%      100%
       100%                       37%                                   100%
                                                                                                    6%
                                                                                          15%



        75%                                                              75%     71%


                    59%

                                                                         50%
        50%




                                                                         25%
        25%




                                                                         0%
          0%                                                                   Otherwise Otherwise Otherwise Others   Total
                   New     Shift within       No details   Total               would not by car      by rail
                passengers   airline                                              have
                            market                                              travelled

             Source: NFO Infratest, 2002; Monitor Group Analysis


Innovation & Cost Leadership, 15. November 2004                    21
       LCC Routes 2001



Caption:
Ryanair
easyjet
Volareweb
bmi Baby
Hapag-Lloyd Express
Germanwings
Sterling
Skyeurope
jet2




  Innovation & Cost Leadership, 15. November 2004   22
       LCC Routes 2002



Caption:
Ryanair
easyjet
Volareweb
bmi Baby
Hapag-Lloyd Express
Germanwings
Sterling
Skyeurope
jet2




  Innovation & Cost Leadership, 15. November 2004   23
       LCC Routes 2003



Caption:
Ryanair
easyjet
Volareweb
bmi Baby
Hapag-Lloyd Express
Germanwings
Sterling
Skyeurope
jet2




  Innovation & Cost Leadership, 15. November 2004   24
       LCC Routes 2004


Caption:
Ryanair
easyjet
Volareweb
bmi Baby
Hapag-Lloyd Express
Germanwings
Sterling
Skyeurope
jet2




  Innovation & Cost Leadership, 15. November 2004   25
 LCC In Touristic Destinations Example:
 Spain 2002



Caption:
Ryanair
easyjet
Volareweb
bmi Baby
Hapag-Lloyd Express
Germanwings
Sterling
Skyeurope
jet2




  Innovation & Cost Leadership, 15. November 2004   26
 LCC In Touristic Destinations Example:
 Spain 2003



Caption:
Ryanair
easyjet
Volareweb
bmi Baby
Hapag-Lloyd Express
Germanwings
Sterling
Skyeurope
jet2




  Innovation & Cost Leadership, 15. November 2004   27
LCC In Touristic Destinations Example:
Spain 2004



Caption:
Ryanair
easyjet
Volareweb
bmi Baby
Hapag-Lloyd Express
Germanwings
Sterling
Skyeurope
jet2




  Innovation & Cost Leadership, 15. November 2004   28
Market Share Of LCCs In
The European Union




            Source: aviasolutions, May 2004

Innovation & Cost Leadership, 15. November 2004   29
  Increasing Competition Between
  LCCs




 18 LCCs in Germany vs. 2 in                           Norwegian
  2002.

 65 LCCs in Europe vs. 5 in 2000.

 In 2003 German airports reported
  a growth of low-cost passengers
  of 112% making a total of 14
  million passengers.

 Consolidation has started;
  remaining carriers have to grow to
  cover marketes.


 Innovation & Cost Leadership, 15. November 2004   30
   Positioning Of LCCs



                                                                       Price-conscious Quality-conscious
                                                   Non-business                            business
                                                                           business
                                                    passengers                           passengers
                                                                         passengers


                                                                                        Regional
                   Short-haul                                     LCCs                  airlines
                    routes


                                                  Charter

                   Long-haul                                                Network carrier
                    routes


          Source: Mercer Management Consultants 2003


Innovation & Cost Leadership, 15. November 2004                   31
 Agenda

    Trends               In The Aviation Industry

        Low-cost Carriers

        Characteristics Of The Low-cost Business Strategy Of Airlines

        Low-cost Business Strategies In Other Trades

        Summary




Innovation & Cost Leadership, 15. November 2004   32

				
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