Air Scoop Free issue (June 2008)

8/14/2019 Air Scoop Free issue (June 2008)

1/17

EDITORIAL

Highlights in this IssueThe no-frills approach and environment p. 3

Turbulent Skies? Not Really p. 5

Are European LCCs Doomed? p. 6

SWOT Analysis of Blue Air p. 7

Ryanair and PSO Routes p. 16

Air Scoop - June 2008 www.air-scoop.com

The Low Cost Carriers Analysis Newsletter

The Oil Price Shock and its Effects on the Low-cost

Business Model

Recently, crude oil prices are on an unprecedented rise and

break all-time records almost day by day. Last June one barrel

of Brent crude oil was traded for around 70 dollars, while this

June the price of one barrel exceeded a historical threshold of 130

dollars. Airlines are seriously hit by the current oil price crisis, andthis is especially true for those that follow the low-cost model. Ac-

cording to the International Air Transport Association (IATA), every

dollar increase in the price of oil costs a cumulative $1.6 billion for

the airlines, globally. In this article we try to analyze how the present

situation may affect the business model of low-cost airlines.

High oil prices obviously have a direct impact on the expenses of the

LCCs but the demand side, their potential passengers, is also affected.

First, we discuss how the business model may change due to the rise

in oil prices, after that the effects on the demand will be analyzed.

Fuel accounts for a quarter of the budget of traditional airlines, but

it takes a much more substantial share of LCCs budget. For instance,about 40% of Ryanairs operating expenses are fuel costs. The pro-

blem is that the price of oil cannot be inuenced by the airlines (or

only to a very limited extent); therefore it has to be regarded as an

externally given condition. Those LCCs that have a large operating

eet buy comparatively larger amounts of kerosene. This implies that

their buyer power against kerosene suppliers is slightly higher than

that of small LCCs with few airplanes. In this sense, the big players,

like Ryanair, easyJet, Air Berlin or Germanwings may be better suited

for negotiating more favorable price conditions. This option, howe-

ver, is rather limited since in the oil industry there are relatively few

suppliers while many more customers, thus oil suppliers form an oli-

gopoly-like market.

A potential option, in order to offset the immediate effects of rising

oil prices, is to hedge fuel needs. Traditional carriers have taken this

route. Lufthansa, for instance, hedged 83 % of its fuel requirement

till the end of 2008, while British Airways hedged 65% for the same

period. Even though Ryanair has traditionally rejected this policy, re-

cently it had to choose hedging, too. However, this strategy does not

imply a complete insurance against the steep rise of oil prices but it

denitely reduces business uncertainty and risk.

In general, European carriers (both traditional and low-cost) are better

equipped against the oil shock than their American partners, because

of two basic reasons. First, oil is priced in dollars, therefore Europeanairlines can benet from the strong euro and its appreciation against

the dollar. Second, as New York Times analyst, Caroline Brothers hin-

ted at it recently, European airlines use newer models of Boeing and

Airbus planes, which burn 30 percent less fuel than models from the

AIR SCOOP ANNOUNCEMENTS

A Glimpse of Headlines News!

OIL FEARS OVER LCC MARKET!

Irish airlines downgraded by bank

Aer Lingus and Ryanair have been downgra-

ded from Buy to Sell in a report from invest-

ment bank Goldman Sachs. The report comes

on a day when the price of crude oil hit a newrecord high of $139.89 a barrel in New York

trade, surpassing the previous high of $139.12

dollars set on June 6th.

Easyjets German base may be closed

EasyJet is considering closing its base at Dort-

mund, saying the soaring cost of fuel is making

it too costly. In a further sign of the crisis hit-

ting the aviation industry because of sky-high

oil prices, the budget carrier the second big-

gest operator at Liverpool John Lennon Airport(JLA) says it has begun a 90-day consulta-

tion with staff and crew based at the German

airport.

Germanwings head sees higher ticket prices

due to rising oil prices

Thomas Winkelmann, the Head of Deutsche

Lufthansa AGs budget airline, Germanwings,

reportedly expects passengers on low cost car-

riers will soon have to pay higher prices due to

rising oil prices. Winkelmann said in the futurethere will be fewer special deals and average

ticket prices will rise to compensate for higher

fuel costs.

Fuel cost rise force Flybe to drop Cornish

route

Budget airline Flybe have suspended one of

their new routes due to rising fuel costs. The

service from Newquay in Cornwall to Glasgow

- launched in April - will stop in early August.

Flybe say they have not been carrying enough

passengers to make money thanks to the high

cost of aviation fuel

More on http://airscoop.blogspot.com


2/17

BIRDS EYE VIEW


1970s and 1980s, many of which are still in use by airlines

in the United States.

However, the outcome of the intra-European competition

is not going to be determined by the American carriers.

From the perspective of cost-reduction, one may rightly

claim that those air carriers will be able to survive the oil

shock that use newer, efcient aircrafts and are able to

hedge most of their fuel needs.

Nevertheless, those airlines that y longer routes are more

exposed to the increase in oil prices. Especially those that

serve transatlantic routes are in danger. According to esti-

mates, the price of fuel of a transatlantic ight has quadru-

pled since 2000. It is not surprising at all therefore, that

the recently established Oasis Hong Kong, the worlds rst

long-haul low-cost airline went bankrupt only after 18

months of operation. Some analysts claim that if oil pri-

ces remain higher than 100 dollars per barrel, the low-cost

model is impossible to apply to long-haul routes. This is aserious warning for those European LCCs, like Aer Lingus,

that operate transatlantic ights.

If costs keep rising, another option is to raise the revenues.

Regarding LCCs, this is a sensitive issue, as their competi-

tive edge is provided by offering signicantly lower prices

than the traditional carriers. Therefore, in order to keep

fares low, more and more European low-cost carriers in-

troduce so-called hidden charges that are not included in

the fare price.

The techniques of this are various and practically unlimited

(this may involve for instance the raise of handling charges,credit card charges and baggage charges), but unfortuna-

tely many of them seem to be deceptive to passengers. A

recent European Commission (EC) investigation revealed

that the practice of misleading prices or unfair contract

terms such as missing or wrong language versions, or pre-

checked boxes for optional services were found on half

of the checked websites of European airlines. If this poor

business practice continues, then the EC will have to inter-

vene in order to protect customers.

Regarding the newly introduced measures and hidden char-

ges, Ryanair is one of the most creative of all LCCs. Theairline introduced baggage charges for checked-in baggage

in May 2006. The fee for the rst bag for a one-way ight

since then has increased from 6 euro to 10 euro, while for

the second and third checked-in bag Ryanair charges an

additional 20 euro each. The company has also introduced

charges for those passengers who prefer to check-in at the

airport instead of checking-in online. The airport check-in

fee for a one-way ight is 5 euro. However, those who carry

an extra bag must check-in at the airport, this way they are

charged for both the bag and the airport check-in. Credit

card charges for booking a single ight has also increased

from 3 euro to 4 euro, while there are various additional

charges for extra services like priority boarding. The fee

for excess weight is also remarkably high, Ryanair charges

15 euro per each kilogram exceeding the 15 kilogram limit

of checked-in baggage.

To take an example, a passenger who books a return ight

and besides the hand luggage carries one extra bag which

weighs 17 kilograms each way (2 kilograms of excess wei-

ght) has to pay a total of 98 euro above the ight price

(10 euro each way for the checked-in baggage, 5 euro each

way for airport check-in, 4 euro each way is the credit card

charge and 30 euro each way for the excess weight)! These

extra charges sometimes may well exceed the total cost

of the return ticket, including taxes and charges. Taking

into account that Ryanair ies exclusively to regional and

secondary airports, the costs for the passenger can increase

even higher if the destination is relatively far from the

airport he or she ies to. From this perspective, ying with

Ryanair may not be as cheap as it seems at rst sight, un -

less the passengers nal destination is near the airport and

he carries a hand luggage only (maximum 10 kilograms),

thereby can choose the on-line check-in, which is free of

charges.As a spokesperson of Ryanair revealed, charges would

continue to rise until the airline would reach the aim of

half of all passengers checking-in online and carrying hand

luggage only. This policy, provided it becomes successful,

may substantially lower operating costs. First of all, baggage

handling expenses will decrease if less checked-in luggage

will be carried. Second, the aircraft will y with a lower

total weight, thus fuel can also be saved.

The other ultra-low cost airline, Wizzair has been fol-

lowing suit. The Hungarian LCC has recently increased

the fee for checked-in luggage from 3 euro to 7.5 euro.However, Wizzair is somehow more generous than Rya-

nair as the weight limit is 20 kilograms and the charge for

excess weight is only 10 euro per kilogram. Nevertheless,

the airline introduced a measure in March 2008, which

triggered widespread protests among Hungarian passen-

gers, although Ryanair follows the same policy. The custo-

mer service number of Wizzair now can be called for a fee

of 1 euro per minute (the same applies to Wizzairs major

market, Poland), which is outrageous, given that the fee for

a local call on a xed phone does not exceed 10 eurocents

in Hungary.The above examples reveal that rising oil prices trigger

similar responses from low-cost carriers: they attempt to

introduce further cost reduction measures and raise hid-

den charges. Another trend is that although more routes

are being served but less frequently. Remaining at the two

airlines used as an example in this analysis, in 2006, Rya-

nair operated 8.7 weekly ights on a single route, whe-

reas in 2008 this gure dropped to 6.3. The same is va-

lid for Wizzair, the number of weekly ights on a single

route decreased from 5.2 to 4.5. The reason for this is quite

straightforward: rst, it is easier to ll the planes on a less

frequently served route, and the higher load factor brings

higher revenues, second, operating expenses may be lowe-

red when decreasing the frequency of ights.


3/17

BIRDS EYE VIEW


By Janet Maughan and Callum Thomas

Centre for Air Transport and the Environment,

Manchester Metropolitan University, UK

email [email protected]

Could the no-frills approach emerge as the most environmentally sustainable model?

Over the last 20-30 years, civil aviation has undergone very

signicant change and enormous growth, both driving andbeing driven by the Global economy and society and most

recently by the low cost and no frills revolution. Today,

demand for air transport remains strong and is growing.

This growth has brought about signicant social and eco-

nomic benets including; the creation of direct and indi-

rect employment in both the aviation and aerospace indus-

tries; the facilitation of trade with the rest of the world and

the promotion of inward investment by enhancing regional

competitiveness; and enabling travel for leisure, education

and the maintenance of social and family networks in an

increasingly disparate society. The dramatic decline in thecost of air travel has brought considerable social benet by

enabling an increasing proportion of the population to ac-

cess the services offered by aviation and hence the benets

identied above.

This growth has, however, come about at a cost, both

socially and environmentally, principally the disturbance

caused by aircraft noise and the implications of engine

emissions for Global Climate Change (GCC). In the UK

the Stern review, published in 2007 noted that the scien-

tic evidence of GCC is overwhelming, but provideda positive assessment of the issues we face and the fact

that if we act internationally there is still time to avoid

the worst impacts. The review fundamentally proposes

a pro-growth strategy to tackling GCC and estimates the

cost to avoid the worst impacts to be around 1% of global

GDP each year. The implications of this for the aviationindustry are centred around many issues - carbon pricing,

for example, is likely to increase ticket prices and possibly

relate them more closely to distance own. In addition,

technology, will play an important role with step changes

required perhaps a return to hydrogen powered aircraft

and some thought must be given to biofuels (produced in

a sustainable manner) and whether they can provide more

than just a short term stop gap solution. Finally the role of

public engagement will be an integral factor, since as more

and more people become aware and educated about the

impact of climate change there may be a change in attitu-des to aviation with a knock on impact upon demand.

In the context of increasing concern amongst the general

public about climate change, environmental NGOs are fo-

cusing attention on greenhouse gas emissions from avia-

tion and seeking to characterise the low cost revolution as

encouraging frivolous use of air transport (for example

for weekend breaks in other European cities). They argue

that air travel is too cheap, given its environmental impacts

and that price is promoting unsustainable growth of the

industry. But is the low cost sector the real culprit? Thedramatic decline in the cost of air travel has brought consi-

derable social benet by enabling an increasing proportion

of the population to access the services offered by aviation

and hence the benets identied above.

All things considered, the changes in the business model

may affect passenger demand as well. First, high oil prices

pose a burden on peoples budget; therefore the overall de-

mand for travel may decrease. Moreover, passengers may

become more price sensitive, therefore the lowest fares

may be even more preferred. This may be a good piece of

news for LCCs. However, given the introduction of and

the increase in hidden charges in the LCC market, the pri-

ce difference between ying with a low-cost carrier and a

traditional one may become lower as well. In essence, low-

cost carriers might lose from their competitive advantage

over traditional carriers. One has to bear in mind that, as

it was discussed earlier, LCCs are more exposed to high

fuel prices than traditional carriers. A possible consequence

of this therefore may be that the average price of a ight

offered by LCCs and traditional carriers may converge to

a certain extent.

In sum, it is rather difcult to tell what the future is going

to bring for the low-cost air carrier market both in terms

of the expected market demand and the business model of

low-cost airlines. A possible scenario is that smaller LCCs

will be driven out of the sector or will be acquired by big-

ger players. It is also possible that the low-cost model may

not be sustainable at all above a certain level of fuel price.

However, if oil prices keep skyrocketing, in that case peo-

ple will be least concerned with the fate of airlines as a

major and deep economic crisis affecting all sectors can

be expected then. This is denitely not what we want to

experience in the future


4/17

BIRDS EYE VIEW


Rising fuel charges, emissions trading and other costs asso-

ciated with the internalisation of the climate change im-

plications of aviation all have the potential to signicantly

increase the price of tickets. In response many airlines wi-

thin the low cost sector are responding to these issues bymaking savings through reducing the level of customer ser-

vice provided to their passengers. The baggage allowance

on many airlines is often in excess of that required by the

travelling public and can lead people overpacking. This

has signicant implications for fuel use and emissions. For

example, 20kgs. of hold baggage plus 5 kgs. hand baggage

for an aircraft with a capacity of 250 passengers represents

an additional weight impediment of 6250kgs. Informing

passengers of the climate change implications of over gene-

rous passenger allowance coupled with charging for bagga-

ge by weight could signicantly reduce unnecessary weight

carried by aircraft as well as fuel costs and emissions.

The IPCC Report Aviation and the Global Environment

(Cambridge University Press (1999).) notes that in ight

entertainment and catering facilities contribute 5-10% of

annual greenhouse gas emissions from the air transport in-

dustry. (A Transatlantic B747 carries with it about 5 tonnes

of catering.) Here too, changing passenger expectations

could generate signicant environmental and economic

benets. Where weight savings translate into nancial

benet it becomes easier to see where savings may be

made.

At a global level, ICAO is promoting technical improve-

ments through its certication process, albeit that advan-

ces in technology are largely driven by airport controls and

market forces. IATAs vision is for carbon neutral growth

by 2020 and carbon free aviation within 50 years. This will

require a massive investment in technology and the im-

plementation of many operational improvements. A key

question in terms of the airlines will be which business mo-

del is able to work with, and respond to these regulatory,

technological and operational challenges. In the contextof increasing environmental constraints upon society and

upon the aviation industry in particular, while the concept

of low cost air travel may become a thing of the past, the

no frills / high load factor business model, could emerge as

the more sustainable option for future airline growth.

Dr Janet Maughan is a Research Associate and Profes-

sor Callum Thomas is Chair of Sustainable Aviation at

the Centre for Air Transport and the Environment. This

group was established to address the challenges of sustai-

nable development and the environmental capacity of airtransport systems through research and knowledge trans-

fer. In addition to the work the centre does with bodies

such as ICAO, IATA and the European Commission, the

UK Government via the Higher Education Innovation

Fund awarded the University 5milliion sterling to bring

together leading universities such as Cambridge, Craneld,

Shefeld and Reading to work with manufacturers (eg Air-

bus, Rolls Royce), airports, airlines and air trafc mana-

gement organisations with policy makers and regulatory

bodies to develop and transfer knowledge this is known

as the OMEGA project.


5/17Air Scoop - June 2008

DOWN TO EARTH

www.air-scoop.com

It seems like a tumultuous time for air travel. If all you

read is the American press, it might appear that the airline

industry is an intractable, untenable muddle of dying di-

nosaurs and ash-in-the-pan startups. Merger mania and

exorbitant fuel prices combined with FAA inspection de-

bacles and deteriorating US airport infrastructure portray

an industry that is indeed in ux.

This is, of course, only one side of the story; there are many

bright spots highlighting the industry both in the US andon the Continent. New aircraft construction is entering a

renaissance, with both American stalwart Boeing and EU

powerhouse Airbus utilizing new materials and global ma-

nufacturing processes to develop the cleanest, most ef-

cient planes we have ever seen. Low cost carriers have

established a new benchmark for successful operating mo-

dels, and even as a few have fallen victim to the oil-price

crisis, LCCs have continued to proliferate and be prota-

ble. Perhaps most poignantly, the EU and the US have -

nally established a comprehensive, sensible agreement go-

verning transatlantic routes and city service with the Open

Skies Agreement.

Though it has garnered precious little attention in the

mainstream press, the Open Skies Agreement is perhaps

the single most important industry-government action

since American deregulation in the 1970s. By allowing any

carrier access to all points within any EU member country

and all points within the US, without restriction, the OSA

has done more to encourage healthy competition and eli-

minate the stranglehold legacies have had on the lucrative

transatlantic market than any accord preceding it. With

the agreement in place, low cost carriers are nally free to

apply their effective business model to long-haul, well esta-blished routes and compete directly with the major legacy

airlines. Since phase one was initiated at the end of March,

a handful of high prole LCCs have announced their inten-

tion to begin transatlantic service, including Ryanair.

There are shortcomings to the agreement, to be sure. Phase

two negotiations, which begin this week ahead of a tenta-

tive 2010 rollout, will center on stickier points of conten-

tion, including still-restrictive US policy regarding foreign

ownership of domestic airlines and unied EU-US emis-

sions standards. There is no guarantee that these points

will meet with swift resolution, though phase IIs provisionshave already demonstrated the potential to spawn a new

wave of consolidations (as evidenced by British Airways

courtship of Iberia ). Despite these challenges, however,

the main objective of the OSA is to rst, ease route and

destination regulation and second, through phase II, libera-

lize investment rules, both of which will serve to expand

opportunities for airlines on either side of the Atlantic.

Perhaps most importantly, the Open Skies Agreement will

allow European low cost carriers unprecedented access to

the potentially lucrative US low cost market. Americans

have consistently demonstrated their price sensitivity; it

can be argued that US consumers demand for ever-lower

fares (facilitated by the rise of internet booking and pricecomparison websites) has contributed to the deteriorating

position of US Legacy carriers. But for LCCs- particularly

European LCCs, who have shown a knack for executing

their unique business model effectively and protably- the

segment of American transatlantic travelers that would be

amenable to unbundled services and reasonable pricing re-

presents an untapped reservoir. The OSA in its rst phase

has generated a way for LCCs to gain market share against

established giants in a real, meaningful way.

Some LCCs, such as Zoom, have had limited transatlantic

success ying to Canada and other North American desti-

nations, and Asian LCCs have begun exploring long-haul

routes, primarily between Southeast Asia and Australia

and India. But with all US destinations now on the ta-

ble, and with all-economy aircraft becoming available, it is

no surprise that the European LCC stars (like Ryanair and

easyJet) are quickly announcing their intention to launch

no-frills service across the Atlantic.

During the rst phase of the OSA, legacies will be in the

best position to exploit the newfound competition on

transatlantic routes. By operating more ights, they can

create new economies of scale particular to the route and

pass savings along to passengers. By expanding existingpartnerships and alliances, legacies are primed to increase

airport presences and favorable schedules almost imme-

diately. Once the LCCs make the necessary infrastructure

investments, however, it wont be long before they too be-

come ardent competitors in the transatlantic market.

Raphael Bejar is CEO of Airsavings, a group purchasing

and ancillary services rm based in Paris, France. As foun-

der and chief executive of a company that focuses on cri-

tical operational aspects of low cost and mid-sized carriers

on three continents, and with his 15 years of experience inairline nance with European giants Credit Foncier and Jet

Finance, Mr. Bejar is uniquely positioned to comment on

emerging trends affecting the airline industry.

Turbulent Skies? Not Really

By Rapahel Bejar

CEO, Airsavings SA

email: [email protected]



DOWN TO EARTH

www.air-scoop.com

It seems that the perfect storm predicted by OLeary

is about to bring rst casualties. Vueling, SkyEurope,

Germanwings and clickair are facing tough times.

Vueling has already announced 32.4 million euros of

pre-tax losses for the rst quarter caused by skyrocke-

ting oil prices. However, the Barcelona-based carrier

stayed optimistic about the chance to reduce losses

in the third and fourth quarters and to increase pro-

ts in the year 2009. What stays behind the desired

success is a so-called capacity-optimization process

launched by Vueling during the quarter. The process

includes the reduction of eet by 3 aircraft. If the pro-cess goes further on, the Spanish LCC risks ending

up as a seasonal airline operating a limited number of

aircraft.

For many LCCs, gaining prot this year will be im-

possible if the oil prices continue to grow. Ger-

manwings reported a decline in passenger numbers.

First quarter losses resulted in the quasi-merging of

Germanwings and clickair, which have developed a

partnership program aiming at increasing the numberof accessible ights online. That is, passengers will be

able to book selected ights between Germany and

Spain using either airlines website. Browsing through

the website, passengers will be shown ights opera-

ted by both clickair and Germanwings. Thus, passen-

gers looking for ights from Spain to Germany can

choose between destination options served by either

the German LCC or the Spanish LCC. The cross-sale

agreement is seen as an effective marketing tool. The

agreement also marks the rst step towards real mer-

ges in the airline industry. Record oil prices and tough

competition add to the overall pressure in the indus-

try and prompt airlines to take effective measures not

to leave the market. Merging is just one of the ways to

offset the crisis. Germanys Lufthansa, for example, is

said to be in talks with TUI Travel about Lufthansas

Germanwings merger with TUIy. Clickair in turn

holds negotiations with Vueling with a view to form

a united company.

SkyEurope has also reported a drop in passenger num-

bers as well as in load factor. Generally, the carriers

performance was shattered signicantly with the air-

lines load factor fall to 70.7 percent, and the passen-

gers own decline by 4.7 percent. To maximize reve-

nues from ights, the Bratislava-based carrier started

to cut non-protable destinations which resulted in

lower passenger numbers. Nevertheless, the results

for the rst half show that SkyEurope is the only LCC

which had a reduction in costs amidst high fuel prices.

However, the overall revenue growth turned to be

much lower than the expected one.

Assumingly, the only way to stay protable is to raise

ticket prices, which basically undermines the entire

LCCs model. Once fuel prices reach $150 per barrel,

LCC will be forced to pass fuel costs to passengers

whereas travellers are getting ready to change their

holiday plans if ticket prices rise. On the other hand,

long-haul airlines affected by fuel prices might like

to use low-cost airports and terminals to reduce their

own costs which will bring additional pressure to theLCC market. Anyway, LCCs are undoubtedly are

under attack and have to act. According to a study

by Sabre Airline Solutions the most successful LCCS

are so-called hybrid airlines which implement certain

practices of legacy airlines to attract business travel-

lers and to remain competitive by gaining prots from

full-service elements. Yet LCCs have very limited

choice in dealing with major operation losses which

makes experts envisage the end of the low-cost era.

Are European LCCs Doomed?


7/17

BIRDS EYE VIEW


SWOT Analysis of Blue Air SWOT TEAM

Introduction

According to a report presented by Deloitte, air transport

will continue to be an essential inuence on the tourism

industry. Airlines and airports will become part of eve-

ryday life for the millions who until a few years ago had

never own before. The insatiable growth of low cost car-

riers will continue to open new markets and the long-haul

aircraft will provide new supply to far ung destinations.

Research projections show an expected transition from the

extremely volatile swings in demand of the last four years

to a period of stable growth globally. Research indicates

that by 2010, more than 2.3 billion passengers worldwide

would use the worlds airlines for business and leisure tra-vel. Routes in Central and Eastern Europe are expected to

grow at a faster pace than in Western Europe.

However, whilst the above indicators paint a picture of

stable growth, the airline industry in 2008 continues to

be haunted by economy slowdown, rising fuel prices,

lower consumer demand, increasing infrastructural costs

and consolidation (mergers or bankruptcies). There are

approximately 50 low-cost carriers in Europe, with new

ones emerging and old ones dying regularly. The European

LCC industry seems to be slowing down. We can expect

some major overhaul in the LCC segment amongst itsplayers, especially in Europe where LCCs are experiencing

unprecedented challenges. With new market creation that

is reaching saturation and strong reaction from network

carriers and charter airlines alike, what can be expected is

a wave of consolidation among the LCCs, either through

acquisition or the market exit of many start-ups. Accor-

ding to a Craneld University forecast, the low-cost airli-

nes sector in 2015 will be dominated by 2 or 3 large carriers

carrying up to 80 million passengers approximately, ying

250 aircrafts, along with a few niche players.

The Romanian Airline Market: Romania became themember of the European Union (7th largest country) in

2007. Its capital, Bucharest (with 2.6 million people in the

metropolitan area), is one of the largest nancial centres

in the region. Romania is located in between Central and

Eastern Europe. Regarded as a relatively backward tou-

rist destination until the 1990s, Romania recently began

to reinvent itself as a diverse and unique European desti-

nation, boasting of stunning mountain scenery, historical

cultural sites, beach resorts, and medieval towns.

The country is currently enjoying its highest living stan-

dards since Communist times, with foreign investment on

the rise, making it one of the fastest growing economies in

Europe. Romanias economic growth could exceed 7 per-

cent this year underpinned by healthy cash inows from

taxes on products and services, by constructions advance,

plus a slight increase of industry and agriculture, as gau-

ged by Banca Comerciala Romana (BCR), the countrystop lender by assets. The National Forecast Commission

(CNP) estimates GDP to be 6.1 percent in 2009, 5.8 per-

cent for 2010 and 2011 and 5.7 percent for 2012 and 2013.

Tourism is a signicant contributor to the Romania Econo-

my. Domestic and international tourism generates about

6% of gross domestic product (GDP) and 0.8 million jobs.

Tourists number in Romania went up 8.2 percent in the

rst two months of the year against the same period in the

previous one, according to a press release issued by the

National Statistics Institute (INS). About 824,000 peo-

ple visited Romania from January 1 to February 28, outof which 79.1 percent Romanian tourists and 20.9 percent

foreign tourists. As many as 1,119,100 foreign tourists ar-

rived to Romania in the rst two months of the year, 59.8

percent more than in the same period in the previous year.

Most of them came from Europe (95.9 percent).

Romania has 17 civilian airports, out of which currently 10

are served by scheduled international ights. Bucharests

Henri Coanda (Otopeni) Airport is the largest and bu-

siest, but its Aurel Vlaicu Airport also elds some ights,

and there is also direct service to Timisoara, Cluj-Napoca,Oradea, Satu Mare, Sibiu (Transylvania), Constanta, Ba-

cau, Iasi, Suceava, Targu-Mures and Baia Mare.

Other smaller international airports are located in Bacau

(with low cost ights to major cities in Italy, plus Barce-

lona and Paris), Arad (ights to Valencia, Verona, Barce-

lona, Stuttgart, Milan), Sibiu (ights to Vienna, Munich

and Stuttgart), Iasi (ights to Vienna), Constanta (various

seasonal ights) and Targu-Mures (one daily ight from

Budapest).

There are three important Romanian airlines:1. TAROM , the Romanian ag carrier, based in Bucharest

Otopeni

2. Carpatair, based in Timisoara, connects this city with

eight Italian and three German destinations, and also has

collector/distributor ights to the following Romanian

airports: Cluj-Napoca, Bucharest, Constanta, Oradea, Si-

biu, Iasi, Suceava, Satu Mare and Bacau

3. Blue Air, the only Romanian low-cost airline, based in

Bucharest Baneasa

Romanian LCC Market: In recent times Romania has be-

come increasingly attractive for low cost carriers. Blue Air

is Romanias rst home grown low-cost carrier which was

created in 2004 and is based in Bucharest and is a strong

competitor to Wizz Air. Blue Air is serving various desti-

nations in Europe from Bucharest (Aurel Vlaicu Airport),


8/17

BIRDS EYE VIEW


Arad, Targu Mures and Bacau airports. Hungarian budget

airline, Wizz Air, introduced direct ights from London

Luton to Bucharest in January 2007. After Romania joined

the EU, the main low-cost air operators present on the

local market - WizzAir, Blue Air, SkyEurope and MyAir- registered a signicant growth of more than 50 percent

in the passenger trafc, whereas regular airliners saw an

increase of just 10-20 percent.

According to the summer schedule of 2007, currently 12

countries and 57 routes are served by low-cost carriers

from Romania. The geographical distribution of the nal

destinations shows a very one-sided nature: 72 % of the

routes lead to Italy or Spain and only 16 of them lead to

other countries. There is also a strong presence of Italian

LCCs in Romania. However, their presence in the country

is not a coincidence, but may be explained by another

substantial factor.

Since its accession into the EU, there has been a huge

ow of outward (labour) migration from Romania. The

main destinations of these migrants were Spain and Italy,

because of already established cultural ties and perhaps

because Spanish and Italian languages are easy to learn for

Romanian native speakers. According to unofcial estima-

tes, more than 1.2 million people left the country and this

strong outward migration is likely to continue in the fu-

ture, too. In essence, the migrants pose a constant, strongdemand for air travel, and this may be the reason why

one can observe the absolute dominance of Mediterranean

routes offered by LCCs in Romania.

In this sense, it is not surprising at all that Wizz Air

considers the country as its most important business

opportunity after Poland. A substantial part of the com-

panys business strategy is to build on the market niche of

migrant workers and their demand for ights between

the home and host countries. This is the reason why Wizz

Airs network is concentrated between Polish cities andthe UK and Nordic countries, as most Polish migrants are

working in this region. Following the same strategy, Wizz

Air has already established a strong presence in Romania as

well posing a great challenge to the local player, Blue Air.

Several others like Ryanair, easyJet, Wind Jet, AlpiEagles

are also operating ights in Romania.

Overview of Blue Air

History: Blue Air Transport Aerian is the rst low-cost and

charter-ight company in Romania. The objective of the

company is to provide affordable and quality services as analternative to the existing land transportation means. Blue

Air as its airline is called is Romanias rst home-grown

low cost airline based in Bucharest. The airline was foun-

ded in 2004 and it commenced operations with a eet of

three B737s (with a seat conguration of 144, 136 and 123)

from capital city Bucharests second airport, Aurel Vlaicu

(formerly Baneasa). The carrier served 14 destinations, in-

cluding one non-stop ight from Transylvanian city Arad

to Spains Valencia. The carrier supplements its incomeby offering charter services to holiday groups. The main

hubs of Blue Air are airports in Bucharest, Arad and Ba-

cau. Its main competitors were Wizz Air, My Air and Sky

Europe.

Their rst destinations from Bucharest were Timisoara,

Milan, Barcelona and Lyon. In 2006, the number increased

to 18 destinations in Italy, Spain, Germany, Belgium, Fran-

ce, Turkey and Portugal. Some of the ights also, start

from the Romanian cities of Bacau, Arad and Cluj-Napoca.

The main shareholder of Blue Air is businessman Nelu Ior-

dache. In August 2005, Blue Air obtained the certication

from the Romanian Civil Aeronautic Authority to trans-

port cargo on its ights. In September, the airlines started a

scheme by which a passenger could purchase plane tickets

and pay for it in 3 instalments using CardFinans AVAN-

TAJ at the Aurel Vlaicu (formerly Baneasa) airport. It

also introduces sale of its air tickets at some Romanian

Post ofces.

By the end of 2006, Blue Air was operating ights from

Bucharest to Italy (Bologna, Milan Bergamo, Rome - de-

partures also from Bacau, Turin - departures also from Ba-

cau), and, to Verona - departures also from Arad, Spain

(Barcelona, Madrid, Malaga, Valencia - departures alsofrom Arad and Cluj Napoca), Germany (Cologne Bonn),

Belgium (Brussels South Charleroi), France (Lyon, Paris

Beauvais), Turkey (Istanbul) and within Romania (Cluj

Napoca). Commencing from the summer of 2006, Blue

Air provided, its own ground and ramp handling services

for passengers on Aurel Vlaicu International Airport (Ba-

neasa).

The airline had 55 employees in the beginning, and in 2006,

it had over 240. In 2005, it carried more than 240,000 pas-

sengers and a little more than 443,000 in 2006. The turno-

ver exceeded 24,000,000 Euros in 2005 and 47,000,000Euros in 2006. The Blue Air eet which consisted initial-

ly of only 3 aircrafts, acquired one more B737 (with seat

conguration of 167), making it 4 by the end of 2006.

In 2007, they expected the turnover to become 80,000,000

Euros, and to carry over 800,000 passengers. In 2006, their

total load factor was 77% and eet number to increase by

one. Till 2006, Blue Air was operating in a less intensive

competitive market as Romania was not a member of the

EU (the open skies policy did not apply). But that was

about to change. The companys net income amounted toaround 105,000 euros in 2006, according to Finance Mi-

nistry data.

The Romanian market for low cost air services was be-

coming potentially vibrant, with a large population (2.4


9/17

BIRDS EYE VIEW


million in Bucharest and the surrounding suburbs), an

inefcient and expensive ag carrier (TAROM) and forth-

coming accession to the European Union in January 2007.

The Romanian appetite for travel was increasing with the

economy showing signs of dynamic growth after years ofunderperformance.

The Year 2007: On January 1st 2007, Romania and Bulgaria

became members of the European Union thus opening up

their skies to airline companies from other EU member

countries. This meant increased demand and competition

for air travel.

During the rst couple of months of 2007, Blue Air ope-

ned an agency in Rome, and introduced a direct ight to

Lisbon, the only such ight from Lisbon to Romania.

As of March 1st, 2007, the Blue Air Company would start

operating ights to Greece, to Thessaloniki and Athens.The airline also introduced a new service - ticket reser-

vations with payment in 72 hours and started operating

ights to Fiumicino, Romes main airport. It moved its Ba-

cau-Rome Ciampino and Bucharest Baneasa- Rome Ciam-

pino routes to Romes Fiumicino airport on March 25. It

had also leased an ex-Blue Panorama Airlines (BV/Rome

Fiumicino) B737-400 for meeting the requirements of the

new routes. Starting with the summer schedule passengers

would also be able to travel from Cluj Napoca to Bar-

celona. Starting from May 1st 2007 a shuttle bus service

between Brussels South Charleroi Airport - Lille and re-

turn was started.

The number of low-cost airline operators was rising do-

mestically. Besides the already present companies, Ger-

manwings entered the market on March 25, by introducing

a Bucharest-Kohl route, whilst Spanish airline company

Click Air launched a Bucharest (Otopeni) Barcelona (El

Prat) direct ight in May.

On account of the maintenance works that took place at

the International Airport Aurel Vlaicu (Baneasa) between

May and August 2007, Blue Air operated ights from the

International Airport Henri Coanda (Otopeni) during that

period.Starting from June 1, 2007, Blue Air introduced new faci-

lities for its passengers. The passengers could change the

route (for destinations within the same country) and the

name written on the ticket at least 3 hours before take-off.

They would be able to make these changes through one

of the 6 Blue Air Call Centers, at the Blue Air ticketing

points and in the airports where the company operated.

Name changes could be made against a fee of 35 EUR/

ight segment. Route changes (for destinations within the

same country) could be made against a fee of 35 EUR/i-

ght segment, plus a possible difference between the tariffpaid for the initial ticket and the tariff available at the time

of the change. These changes are allowed for all the tariff

classes except for Promo and OnlyTaxes categories.

Later Blue Air opened 2 new ticketing agencies, one in the

International Airport Valencia (Manises), at the Arrivals

Terminal, and one in Bucharest at the Phoenicia Hotel.

In June 2007, the contract for the fth aircraft was also

signed. Blue Air would purchase a new airplane, typeBoeing 737 series 400, with a capacity of 162 passengers,

which would be delivered in November 2007. Whether

this order was too late too little only time would tell! On

19th June, Blue Air celebrated its achievement of carrying

1 million passengers. Blue Air had by then issued 1,245,000

bookings.

In July the airline announced two new routes to Stuttgart

from Arad and Bucharest and to London Stansted from

Bucharest starting in the months of September and Octo-

ber respectively.

In August, Blue Air introduced the Corporate Package forcorporate travellers. With the Corporate Package a com-

pany save up to 50% if it chose to buy the tickets in ad-

vance to any Blue Air destination or could benet from

special prices for instalment payments.

In September 2007, British budget carrier easyJet launched

ights to Romania, ying from Baneasa Airport to Milans

Malpensa; ights to London Gatwick and Madrid Barajas

followed in October. The airline said it hoped to carry

255,000 people in its rst year of operations.

In September Blue Air had negotiations with Greek air

carrier Aegean Airlines so that the latter could acquire a

stake in the former. According to Nelu Iordache, founder

and owner of the company, the price asked for Blue Air

topped 30 million euros. However, talks with the Greek

company were halted and the companys representatives

stated they were still considering oatation on the stock

market. Similar talks had been held with Wizz Air of Hun-

gary and failed. Maybe it might become third time lucky

in 2008. All it needed is a new business partner.

In December, the airline had moved its Bucharest Baneasa-Brussels route from Charleroi to National airport in Brus-

sels last month.

In 2007, the company went beyond initial forecast of the

80 million Euros turnover, by registering a rst-time prot

of above one million Euros and succeeded again in doubling

sales. We believe last years prot ranges between one and

two million euros, said Gheorghe Racaru, the companys

manager. He also specied that during the winter period

the rm had registered additional costs of between 70,000

and 90,000 euros because of the bad weather conditionsthat caused ight delays.

Throughout its 3 years of its operations, Blue Air has fol-


10/17

BIRDS EYE VIEW

Air Scoop - June 2008 www.air-scoop.com0

lowed a strategy of operating most of its ights on specic

lucrative routes, only increasing and decreasing the fre-

quency depending on the seasons. Blue Air became the

low-cost leader in Romania, offering ights to 29 Euro-

pean destinations of 7 capitals and 22 cities operating witha eet of 5 aircrafts. The Romanian market was certainly

growing quickly, with approximately 1.73m passengers

served in 2007 and Blue Air enjoyed a 33% market share

of the budget ight market.

Current status: The operator has budgeted 120 million-

euro turnover for 2008, with gures for 2007 being around

95 million Euros. It has anticipated that its growth pace

will slow down to 30% from the 100% level that it had

registered in the past three years. The reason for this low

growth target has been due to the entry of strong low costplayers in 2007 like Wizz Air, Germanwings ad easyJet.

Adding to this was the entry of Europes biggest low-cost

carrier, Ryanair this year. However, Blue Air representati-

ves stated that the new operators could only have a posi-

tive impact over the market.

Competition is not harming us as theres room for every-

body on the Romanian market. Competition is just brin-

ging passengers better and more diversied products, said

the companys representatives. For 2008, we project an

average occupancy rate of 83%, similar to last years level,

the companys representatives also said. By yearend, BlueAir will reach 100 weekly ights, from 80 at the moment,

with the new destinations including Berlin and Larnaka.

Blue Air announced on January 17 that it would commen-

ce ights from Bucharest to Berlin Schnefeld Airport.

In February, the Boeing Company announced an order

from Blue Air Transport Aerian, for two B737-800s and

purchase rights for two more. The aircraft will join the

Blue Airs all-Boeing eet to provide extra capacity in a

fast-growing market. The order is valued at approxima-

tely USD150 million at list prices.

We have doubled our passenger trafc every year sincestarting our operations. Looking toward the future, the

Next-Generation 737-800 is the most capable airplane on

the market with a proven and impressive track record.

It is the right airplane for our forecasted growth in this

region, said Gheorghe Racaru, General Manager of Blue

Air. Blue Air will commence operating a B737-800, acqui-

red through a lease agreement, later in 2008.

During the last week of March, BlueAir, the largest low-

cost operator on the Romanian market, introduced ights

from Arad to Barcelona which made it four foreign desti-

nations from Arad including the ights to Valencia, Vero-na and Stuttgart. BlueAir had also been operating its only

domestic route, Bucharest-Arad, since the beginning of

this month. Weve had 400-450 passengers a week since

the introduction of the domestic ight on March 12, and

expect to have 24,000 passengers on this route by the end

of 2008, said Catalin Ilie, deputy general manager of Blue

Air. Arad is also the airport where the biggest low-cost

airline in Europe, Ryanair, began operating ights in April.The company entered the Romanian market with ights

from two less costing airports in Arad and Constanta. In

April, Ryanair launched ights from Arad in Transylvania

to Milan and from the coastal city of Constanta to Pisa.

In April, Blue Air the low-cost airlin reached 50% of TA-

ROMs revenues on the Romanian market within three

years, which it achieved through its many Spain and Italy

routes, placing it on the top in the market since its esta-

blishment. Flights to Italy have generated around 36% of

revenues so far, while those in Spain around 20%, said

Gheorghe Racaru, the manager of Blue Air, whose busi-ness reached 95.7 million euros last year.

Blue Air, a company held by businessman Nelu Iordache,

has therefore become the largest private airline held by

Romanians, leaving behind Carpatair, whose main share-

holder is Nicolae Petrov. Carpatair ended last year with

turnover worth around 82 million euros. TAROM car-

ried 1.9 million passengers last year, while Blue Air car-

ried 900,000 people. A large number of Italian companies

operate in Romania, including many in Timisoara, a city

in the west of the country 60 km from Arad.

Blue Air intends to maintain its leading position, althou-gh other players such as Wizz Air and Italys MyAir are

vying for precisely the same spot. Wizz Air concluded last

year with business worth around 30 million Euros and an

estimated trafc of 415,000 passengers, close to MyAirs

420,000.

The number of airports in Italy amounts to seven and the

number of weekly ights to destinations in this country

has reached about 40% of the total. We are still looking

to boost the ight frequency to Spain and Italy, where

we are tempted by 1 or 2 more destinations. The minimal

occupancy rate that makes a ight to Italy protable is

72-75%, while in Spains case, to which ights take aboutthree hours, we need a minimum occupancy rate of about

80%, Racaru explained, adding that no other country had

such a high potential at present.

Besides the existing routes to France and Germany, they

are also looking at countries like Switzerland or Scandina-

via for future destinations, as well as to the SE European

region, to countries such as Ukraine, Croatia, Slovenia and

Macedonia as stated by Blue Airs manager. In April Blue

Air announced a new destination departing from Cologne

Bonn to Sibiu (Hermannstadt) starting from June 18th.

It also was starting from the 1st of June 2008, a seconddomestic route, Bucharest - Sibiu - Bucharest. Blue Air

was going to offer the only direct connection Brussels

Constanta from 29th of July 2008.


11/17

BIRDS EYE VIEW


During April and May, Blue Air cancelled many ights on

almost all the important routes important routes commen-

cing at Bucharest to major cities like Berlin, Stuttgart, Bo-

logna, Paris, Madrid, Milan, Cologne, Verona and Valencia

between April 1st & 25th and again between May 7th &12th. Earlier in February it had cancelled but rescheduled

some ights, but this time there was no rescheduling of

ights. There was no concrete reason stated. But it seemed

that the high fuel costs and increasing competition was cat-

ching up!

Blue Air operates on three other airports outside Bucha-

rest in Romania, Bacau, Arad and Sibiu, and is also see-

king entrance on the Northwestern airports (Satu Mare,

Baia Mare, and Oradea). Despite rapidly rising passenger

numbers, 2008 may not be an unqualied success for all

airlines. Wizz Air CEO Jozsef Varadi has warned that theincrease in fuel costs caused by rising oil prices would put

the squeeze on less competitive rms.

Issue

The main challenge facing Blue Air is to overcome the

combined onslaught of many factors this year like rising

fuel costs, increasing competition and reduced consumer

spending.

Business Model

The low-cost concept perfectly ts the conditions existing

in Romania, where prices of tickets are still high and no

complete network of connections with the big European

cities is offered. The aim of the Blue Air Company is to

transform air transport into a service accessible for all ca-

tegories of passengers. The objective of our company is to

provide affordable and quality services as an alternative to

the existing land transportation means.

At present, the Blue Air Fleet consists of ve modern air-

crafts, two Boeing 737 series 300, with a capacity of 144

seats (registered under YR-BAA) and 136 seats respecti-

vely (registered under YR-BAC), a Boeing 737 -500 aircraft

with a capacity of 123 seats (registered under YR-BAB) and

two Boeing 737- 400 with a capacity of 167 seats (registe-red under YR-BAD) and 162 seats respectively (registered

under YR-BAE). It has also placed an order for two B737-

800s with Boeing this year. The shortest ight on Blue Air

is 00:10 hours from Bucharest to Bacau.

During 2007, Blue Air also got involved in social respon-

sibility programs with the Cristian Chivu Football for

Children Association, Baneasa Airport, and the Federation

of Airport Unions in Romania, with a project for giving

awards to talented young Romanians. The project sent to

Disneyland 54 Romanian children with top results in scho-

ol, athletics, or sports.

Some of the few important features of its business model

are explained below:

Booking Tickets: Blue Air offers three modes for booking

tickets namely: online, call centres and agents. It offers 12

categories of tariff or ticket fares for which changes in name

and destination is permitted (Promo category is an excep-

tion) at certain rates and with some constraints. It does not

issue any ticket but only a conrmation number at all itsbooking centres. Pre-assigned seating is not provided.

Baggage: Each passenger has the right to maximum two

checked-in baggage having a total weight of maximum 25

kilos and the sizes of maximum 100x 80x30cm, the carria-

ge thereof being included into the price of the ticket. The

checked-in baggage in excess of 25 kilos shall be charged

with EUROS 6 per kilo. A passenger is also entitled to have

only one carry-on baggage which should not exceed 7 kilos

and size of 55 cm x 40 cm x 20 cm. In addition, one can also

carry take a laptop, the size of which should not exceed 55

cm x 40 cm x 20 cm. The total weight of (checked-in andcarry-on) baggage should not exceed 32 kilos.

Blue Air Corporate: Under Corporate Package a company

could save up to 50% if it chose to buy advance tickets or

it could have negotiated prices on plane tickets under ins-

talment payment. This package of exible tickets entails

allows the customer to have an account opened at Blue

Air, a personal sales consultant and a lot of freedom of

movement. Besides having the freedom of time and mo-

vement, plane tickets could be disposed of in any other

manner deemed suitable by the customer. For example, it

could keep them for business meetings, or use them when

in search of new clients, or offer them to employees for

training travels or as a reward trip.

Customer Loyalty Program: BLUE AIR has launched the

loyalty programme MY BLUE AIR in which a customer

could open an account and BLUE AIR would repay him/

her with points for every ight with them. The points will

offer discounts to the tickets and, if gathered could win

them even free tickets.

Also, the competition Get off from the Blue Air plane

straight into a Brand New Logan is another monthly sche-

me used by the airline to repay its customers loyalty with abrand new car, a Dacia Logan which can be won in a lucky

draw. Any person buying a plane ticket from one of the

sales agencies in the country or abroad, from any agency

working with Blue Air, by means of the Blue Air Call Cen-

tre or website, is automatically registered in the database

destined for drawing the prize.

Other notable services are: Cargo service, ticket reserva-

tions with payment deadline of 72 hours, online car rental

service and hotel reservations.


12/17

BIRDS EYE VIEW



13/17

BIRDS EYE VIEW



14/17

BIRDS EYE VIEW


Conclusion

Blue Air can denitely survive these difcult times if it is

able to nd a strategic regional partner to avoid being run

over by the strong competitors surrounding it and the ever-

rising fuel prices. Growth and rapid expansion need largefunding for which any dynamic company would eventually

go to the capital markets. But the current volatility in the

stock markets does not bode well for such a move. There is

immense scope for the airline to become a strong regional

airline providing both charter and low cost ights.

The increasing competition coupled with rising operating

costs could mean that small players may nd it extremely

difcult to keep their prices low and therefore need to

adapt new strategies to survive in the long term. There is

no doubt that the current volatile economic environment

will denitely test the mettle of many airlines to surviveand sustain. The end result could only be the survival of

the strongest.

EVENTS

World Low Cost Airlines 2008September 23 to 24 in London

Air Scoopis proud to be media partner of the World Low Cost Airlines 2008.

Plans are starting to take shape for the World Low Cost Airlines Congress 2008.

Earlier this year over 650 of you joined us in London for an action packed two days. To remind yourself of the day (or to

see what you missed!) we have put together a short video of the highlights. To see it simply visit our homepage. (Youll

need to have ash installed on your computer.)

Dont miss out on next years event.

To have more informations about last edition of the World Low Cost Airlines, read the full coverage in Air Scoop Oc-tober 2007.

For more information on the World Low Cost Airlines 2008, visit www.terrapinn.com



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BIRDS EYE VIEW

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Subscription to Air Scoop: 290 euros for 1 year (10 issues)

Copyright 2006-2008 - Unauthorized distribution or reproduction is forbidden.

( l )

Dublin-Kerry route, OLeary said If unjustied subsidies

are available, then Ryanair is right to apply for and win

them. We have reduced the subsidy on the Kerry routeby over 40% from 9m to just over 5m, saving the Irish

tax payer almost 4m.

Ryanairs management doesnt care about consistency of

opinion, or even public policy in general. The company

cares about the bottom line, and the extreme moves that

the carrier has taken, such as its rash of ancillary charges,

and bizarre workplace requirements that prevent em-

ployees from charging their phones at work, demonstrate

that management is focused on making as much money

as possible. Unlike politicians, business executives arent

held to the same standard of accountability. While this

has drawbacks for consumers, its a reality in the world

we live in, and Ryanairs management routinely exploits

the medias lack of desire to do fact checking as a way of

changing its position on issues whenever its advantageous

for the company, while still maintaining its image.

Adverse Effects of PSO Programs

Unfortunately, PSO programs across Europe distort the

market. By offering subsidies to operate certain routes,

PSO programs reward carriers that have close connectionsto government; one of Ryanairs key complaints against

Alitalias involvement in Italys PSO program. (The Ita-

lian government is a major shareholder of the carrier). As

governments try to deregulate the airline business, the

operation of PSO routes creates another stumbling block

for low-cost carriers that operate without government in-

tervention. OLeary is right about one thing, the subsidies

used for PSO routes could be used for other, more pres-

sing, needs.

Moreover, PSO programs encourage the propagation ofair routes that are environmentally unsustainable. Most

PSO routes are for very short ights, less than an hour and

a half in length, where, in most cases, passengers can take

busses or trains. Even though these forms of transport

take longer, both are more environmentally friendly than

air travel. While some PSO routes are critical lifelines to

individuals on isolated islands, many PSO routes, inclu-

ding the Dublin to Kerry route, are merely redundant and

unnecessary.

Will the route succeed?

Ryanair will operate three daily ights on the Dublin-Kerry route, substantially increasing the number of seats

available. The ights will be very short, and Ryanair will

be able to use an aircraft to do quick turns, allowing the

carrier to increase aircraft utilization. Since Ryanair already

has operations at Dublin and Kerry, the marginal costs of

starting this route will be rather low, and at a time when

the airline is desperately trying to conserve cash, this will

be more advantageous than a longer route to a new des-

tination. While the load factors will likely be lower than

the Ryanair system-wide average, the carrier has proven

successful at generating trafc where there currently is

very little. With Ryanairs success at generating ancillary

revenues, they should be able to make money on the rou-

te. However, with fuel costs rising quickly, Ryanairs costs

will rise too, and this could impede the carriers protabi-

lity on the route. While Ryanair believes that it can make

money here, it remains to be seen whether the carrier

can remain true to its word and protably operate with a

reduced subsidy.

Remarks, questions Join Sam by email (samsellers@

gmail.com) or on his website to comment this articlehttp://www.airlinebulletin.com.

Sam Sellers provides analysis and commentary on the

airline industry at his website, www.airlinebulletin.com,

and is the author ofTake Control of Booking a Cheap

Airline Ticket, an ebook for travelers in the United States

who are interested in purchasing cheap airline tickets.

Air Scoop Free issue (June 2008)

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