air scoop december 2007
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EDITORIAL
Highlights in this IssueBattle for Subsidies: LCCs in the Storm p. 2
Analysis of the Bulgarian LLCC Market p. 3
SWOT of Germanwings p. 5
Which Perspectives for Air Berlin? p. 14
LCC Websites Under Investigation p. 17
Air Scoop - December 2007 www.air-scoop.com
The Low Cost Carriers Analysis Newsletter
Subsidies, Investigation and Consolidation!
In their Business Model, Low-Cost Carriers need to get the lowest
cost at all cost. We know well ancillary revenues and hidden
fares increases (Air Scoop October 2007), but we are less aware
of subsidies received by LCCs. In our last issue, we analyzed the
relationship between carriers and French airports, uncomfortable
with these subsidies (Air Scoop November 2007). Subsidies from
airports or local authorities are in the center of LCCs business,
especially Ryanair. The Irish carrier usually wont pay more than 5
Euros, up to 10 Euros some times, to land in an airport; therefore it
has set up a system to get some money back without being caught
by local or European competitive authorities. The whole system is
unstable as currently under investigation of the European Commis-
sion. Conclusions of these investigations could have a direct impact
on LCCs activities and financial results (p. 2). From one investiga-
tion to another, carriers websites are also under the spotlights as
they are accused of misleading customers. Airlines have to change
the way prices, as well as terms and conditions, are displayed ontheir websites. Even if the risk is very low, if airlines fail to comply
with the EU directive, they could face fines or the closure of their
sites. As websites are now the primary way passengers in Europe
book tickets, such a closure would affect carriers dramatically (p.
17).
Germany has known an unprecedented consolidation of his air-
line market. Air Berlin, the third European LCC, has absorbed its
competitors DBA, LTUand Condorto become a strong challenger
for Lufthansa. However, some experts expressed skepticism about
this new acquisition, pointing out the fact that integrating these
three companies in a few years is a tough operation. The stockmarket reacted cautiously to the announcement of the deal: the
Air Berlinshare lost 5% the following day, and remains quite low
since then. In November, the share was weaker than its 12 Euros
issuing price in 2006 (p. 14). To face Air Berlin, Germanwings
stands alongside with Lufthansa, its legacy mother. What are the
strengths and weakness of the carrier? What are the main opportu-
nities to seize or the biggest threats to fear? To find out, we realized
a complete SWOT of the carrier (p. 5).
AIR SCOOP ANNOUNCEMENTS
Air Scoop, 2 Years Already!
Launched in January 2006, Air Scoop has
already two years. Air Scoop Team has brou-
ght the best of LCCs analysis on hottest is-
sues (subsidies, ancillary revenues, business
models...). We have provided you with exclu-
sive interviews of top executives and reports
from main low-cost carriers events (World
Low Cost Airlines Congress, the Low Cost
Air Transport Summit, French Connect...).
Through our news portal weblog (airscoop.
blogspot.com), you are kept updated with
fresh and most important informations of the
market. Each month, a new carrier is deeply
analyzed in a SWOT matrix (read under),
and a Central and Eastern market is rigorously
studied from a LCC point of view (Hungary,
Slovakia, Romania, Czech Republic...).
These different services make today Air
Scoop Newsletter, a reference for European
low-cost carriers information and analysis.
We would like to thank all our customers and
partners for their confidence and their sup-
port!
Air Scoop Team
SWOTs AVAILABLE ONLINE
SWOT of European LCCs Market
SWOT ofRyanair
SWOT ofAir Berlin
SWOT ofeasyJet
SWOT ofVueling
SWOT ofSkyEurope
SWOT ofGermanwings
SWOTs COMING SOON SWOT ofFlybe
SWOT ofWizzAir
SWOT ofclickair
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It seems that the competition between the rival carriershas been taken to a totally new level: level of litigations and
legal actions. The aggressive and fast expansion ofRyanair
has posed a threat both to large airlines and other low-cost
carriers. In their attempts to at least partly drive the Irish
airline out of business other carriers brought several cases
of airport subsidies before courts and the European Com-
mission to make the competition at the secondary airports
fair and open.
Subsidies are of course not given in cash. Usually airports
provide the carrier (in this case Ryanair) with a standardservice package at reduced price. That is, the carrier gets
lower landing fees, cheaper ground handling and mainte-
nance. This form of support is logically illegal and contra-
dicts the EU Competition Law. Ryanair has reportedly
tried some other types of commercial agreements in Fran-
ce which were then ruled as concealed subsidies by the
French Civil Aviation Authority. To find a loophole in the
law the carrier, for example, made contracts for media and
advertising services with airports either itself or through
its subsidiary: Airport Marketing Service. However, the
two contracts concluded by Ryanairs Airport Marketing
Service, Ryanairitself and the French Chamber of Com-
merce of Pau-Bearn which operates the Pau Airporthave
already interested the EC. The Commission is going to
investigate and examine the contracts to make sure that
they do not make for illegal advantages and benefits for
the carrier. Seemingly, the investigation seeks to bring the
needed certainty in the sector by distinguishing legal and
illegal forms of financial support.
Ryanairs run-ins with the European Competition Law be-
gan in 2003 with the BritAir case. Air Frances subsidiary
filed complaints to the EC for subsidies and unfair compe-tition on London-Strasbourg route. A year later, Ryanair
was ordered to repay about 3 mln Euros it had got in illegal
subsidies from the Charleroi Airport. The decision taken
by the EC was welcomed and upheld by other carriers.
OLeary in turn referred to it as a disaster for passengers
and small airports. In response to the decision the airline
cancelled its flight on London-Charleroi route as unprofi-
table. EC too checked the terms of deal between Ryanair
and the City of Derry airport which was questioned about
the public money it had given to the carrier in return to a
five-year obligation to bring passengers to the airport. Notonly national carriers seek to charge Ryanair. Air Berlin
too took a legal action against the Irish airline and its deal
with the airport of Luebeck in Augist 2006. Given that
about 20% of Ryanairs traffic depends on the publiclyowned airports, the reveal of further cases of illegal subsi-
dies might influence ticket prices.
The most recent cases show that subsidies do not guaran-
tee Ryanairs presence at the airport. Thus, two Croatian
airports of Pula and Zadar were basically deceived by Rya-
nair. Having received more than 500.000 Euro per year
and having promised to operate flight all the year round,
Ryaianr decided to terminate its contracts with the end of
the tourist season. The same happened in Poiters, Rodez
and Biarritz where the carrier just closed some of its flightswith winter approaching.
The concern about illegal subsidies prompted further in-
vestigations in Germany and Finland. Several small airports
were checked whether there were cases of too favourable
deals between the airports and the LCCs, especially Rya-
nairand easyJet, which could be regarded as illegal subsi-
dies. Upon the results of the investigation it was revealed
that both Ryanairand easyJetenjoyed some marketing
grants from the airports. OLeary of course had a good
case. He accused the biggest rivals, namely Lufthansa,
Air France-KLM, of having received illegal subsidies from
their respective governments and airports.
The situation with subsidies around the Ryanairbrought
about much confusion and suspicion. Thus, Ryanairs arri-
val at Malta caused a huge argument between the Minister
for Investment, Industry and IT, Austin Gatt and Michael
OLeary. Whilst the former ran down the carrier which
he believed breached the Competition Law and the very
law of business by asking subsidies, the latter told he had
never sought for any subsidies. Subsidies not only prevent
consolidation in the market but obviously detract fromother LCCs reputation as well. The taxpayers too seem to
be annoyed knowing that that money went to Ryanairs
pocket and are vividly discussing the issue on some online
forums, especially in relation to the Galicia case where
more than 7 ml Euros of public appeared to have been
spent to promote Santiago and Galicia routes operated by
Ryanair.
Battle for Subsidies: LCCs in the Storm
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Together with Romania, Bulgaria is the youngest member
of the European Union, as the country gained its mem-bership status on 1 January, 2007. The 7.7 million (2006)
large population faces the future with confidence: the
economy has been rapidly growing in the past couple of
years and recently, foreign investors are also crowding into
the country. At the same time, Western European tourists
have begun to discover the natural beauties of Bulgaria and
many of them are considering of buying a property there.
Sofia is the cheapest living destination in the EU and the
property prices, in spite of the booming market, are still
comparatively lower than in other Central and Eastern Eu-
ropean EU members.
All of these factors contribute a great extent to the stea-
dy growth of the commercial air transport market of the
country, in which low-cost carriers play an increasingly im-
portant role. There are three international airports in Bul-
garia, which are served by LCCs. Two of them, the seaside
cities of Varna and Burgas, are popular holiday resorts in
the summer. For this reason, passenger turnover shows
high seasonality at these airports, which is also reflected in
the lower number of destinations offered by LCCs in the
winter season (Figure 2).
Currently, there are 15 low-cost carriers that operate in
Bulgaria, but in spite of this relatively large number, themarket seems rather concentrated. According to the win-
ter flight schedule of 2007/2008, 81 routes are served by
low-cost carriers. However, the three biggest take half of
the routes, while the first seven is responsible for almost
90% of the total routes (Figure 3).
This relative concentration of the market becomes really
striking if one takes a look at the distribution of destina-
tions among countries. While this year, in the summer
season, 22 countries were served with 71 destinations, low-
cost carriers currently fly to 18 countries and to 63 destina-
tions. However, the United Kingdom and Germany alonerepresents 20 and 17 of them, respectively (Figure 4). This
means that these two states are responsible for 58% of the
destinations, which implies that Bulgaria is a preferred tra-
vel location especially for German and UK citizens. In this
sense, it is not surprising that low-cost carriers of Germany
and the UK are the LCC market leaders in Bulgaria, with
the single exception of Hemus Air, which is the local, Bul-
garian low-cost carrier.
The further expansion of Hemus Air may be restricted,
however, because of several factors. First, German and UK
passengers have a limited knowledge of the Bulgarian low-
cost carrier, moreover, the incumbent LCCs, like Thom-sonfly or Germanwings have already established reputation
and raised customer awareness in their domestic market.
This is a natural consequence of being a first mover and
Analysis of the Bulgarian LCC Market
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this is the reason why it is hard for new players to enter
into the competition. Even though passengers from the
UK represent a huge share of the Bulgarian LCC market,
it is quite surprising that the two biggest European low-cost companies are not present there. EasyJet serves only
one single route (Sofia London-Gatwick), while Ryanair
does not fly to Bulgaria at all.
This implies that once profitable routes with a significant
passenger demand are occupied, it may be hard for new
entrants either from the domestic or the external market
to challenge the positions of those players which enjoy the
benefits of being first-movers. Nevertheless, Bulgaria is a
growing market; therefore it is most probable that LCCs
will continue to offer new destinations for passengers. The
Russian and the Turkish market are particularly underser-
ved from this aspect. Given the traditionally good histori-
cal relations between Bulgaria and Russia, and considering
the fact that the Turkish minority is still estimated to reach
10 % of the population, it may be worth considering for
LCCs to start serving those markets. Wizz Air has already
taken the first step and introduced a flight between Ismirand Sofia.
All things considered, the Bulgarian LCC market is one of
the most promising in Central and Eastern Europe, espe-
cially due to its attractiveness for those Western European
citizens that are concerned about the way of spending
their holiday budget. As the awareness of Bulgaria grows
in Western Europe, more demand for flights can be expec-
ted. The booming property market of the seaside resorts
and of the capital of Bulgaria is already a certain sign of
further growth in the air transport sector, including the
low-cost segment as well.
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SWOT Analysis of Germanwings SWOT TEAM
Introduction
European LCC market: The continuous growth of passen-
ger numbers masks the fact that the European market for
low fare air travel is radically changing. New airlines, ta-
keovers as well as bankruptcies are reflecting strong com-
petitive pressures within the market and from established
network airlines fighting back to retain their market sha-
res. European low-cost airlines (LCAs) operate with si-
gnificant differences in unit costs and most of them are
reporting marginal profits or losses. Low cost flights now
account for 16% of all flights and 20% of all seats worldwi-
de, compared to 14% and 17% a year ago. Within Europe,
low cost flights account for 22% of the total flight activitywithin this region for September 2007, up from 18% year
on year. Low cost capacity in September 2007 represents
30% of the total seats available within the market, a jump
of 6% compared with September 2006. The LCC market
is expected to increase to 35.7% of European traffic by
2010. A study carried out by the University of Amsterdam
estimated that 75% of the LC market share represents new
customers. The study of the University of Amsterdam fur-
ther provided that 70% of the LC customers are leisure
travelers, of which 20% are holiday markers, 25% are city
trips, weekend trips or visits to family/friends, and 25%are people traveling to their second residency.
German LCC market: Since 2002 there has been a huge
expansion of the low-cost airline market in Germany,
with growth rates in double figures. In March 2001 seats
on low-cost airlines represented only 1 per cent of the to-
tal seat capacity available to/from and within the German
market. In March 2006, this figure had grown to 21%. The
low cost market share of Germany for all international fli-
ghts was 21% in the first half of 2007, an increase of almost
3% over first half of 2006. Similarly, it also saw increasein its local low cost market share from 18.6% in 2006 to
21.4% in 2007. Thousands of cheap flights are now availa-
ble from German airports like Cologne/Bonn, Stuttgart,
Hamburg and Berlin-Schnefeld to almost every region in
Europe.
Low-cost travel in Germany has brought about a trend of
democratization in this once exclusive mode of transport.
Whilst a few years ago, flying was the privilege of middle
and senior management in large companies, the new low-
cost airlines have enabled company staff of all levels to fly
thus saving valuable working time. Even freelancers are
flying at affordable prices on a regular basis; freeing up the
German motorways as people opt to leave their cars in the
garage and choose a stress free journey. Interest in long-
haul holidays, city trips and the eastern Mediterranean is
increasing.
The premium form of the LCC Model: In order to improve
margins and differentiate from the established LCCs many
market participants are re-evaluating the low cost business
model and departing from aggressive low-cost, no-frills po-
sitioning by using service features to offer something more
than just cheap tickets. A new breed of budget airline has
thus emerged thats spurning the golden rules of the tried-
and-true low-cost formula -- such as having a single type
of aircraft and offering point-to-point service only. The
new model introduces paying perks, such as lounges, lea-
ther seats, extra leg room, speedy boarding and frequent-flyer miles as a way of differentiating from competitors
and sweetening the margins. An example of such an airline
is the legacy daughter ofLufthansaGermanwings.
We think the first phase of low-cost is over. ... We believe
that the landscape is changing and some of the basic rules
of the low-cost model are not being respected anymore,
said GermanwingsMD Thomas Winkelmann. The new
low-cost carriers are offering amenities to passengers who
are willing to pay for the extra comfort. They are also so-
metimes flying to central, expensive airports, he said.
Germanwings: Germanys premier low-cost airline laun-
ched its first services in October 2002. The airline began
operations in October 2002 as a separate low-cost car-
rier entity but fully belonging to the EurowingsGroup.
Lufthansa(LH) participated with 24.9% of the shares, and
later increased its stake to 49%. Cologne is Germanwings
home base, with Stuttgart as its second base. In the fol-
lowing years it established bases at Berlin Schnefeld
Airport, Hamburg and Dortmund. The Airlines has a fleet
size of about 27 aircrafts - 24 Airbus A319-100 & 3 AirbusA 320-200.
Fleets are maintained by LufthansaTechnik. In compa-
rison to other LCCs, Germanwingshas the advantage of
using Lufthansa training centre that involves both staff
educational training and aircraft maintenance. This and
the extremely strict statutory requirements in Europe en-
sure the highest safety standards. The airline also offers
guaranteed connection flights between some of its destina-
tions (from 20 all inclusive, one-way, to all destinations).
Germanwings also operates one of the most successful
European travel web pages, visited by 2.5 to 3 million users
each month.
In May 2006, the Supervisory Board ofEurowingsAG ap-
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pointed Thomas Winkelmann, previously Vice-President,
The Americas ofLufthansaGerman Airlines as a member
of the Executive Board ofEurowingsAG with effect from
1st September 2006. He simultaneously became Mana-
ging Director of the Eurowingssubsidiary GermanwingsGmbH. Dr. Andreas Bierwirth, previously Managing Di-
rector ofGermanwingsGmbH, became Marketing Ma-
nager of Lufthansa German Airlines in Frankfurt as of
1st September 2006. In this position he succeeded Harald
Eisencher.
Extensive fleet enhancement, hubs close to major cities,
flight operation to more 30 European destinations and
valuable LH experience all these factors helped the
company achieve record passenger numbers: more than a
quarter of a million passengers a day. Lufthansas financialand infrastructural support and Germanwingsposition of
being the first pure German LCC, contributed greatly to
its success.
Awards
According to the survey of one of the leading economic
magazines in Europe, Capital, Germanwingswas awarded
as Discount Airline - 2004. 1200 readers and online users
participated in the survey, which evaluated altogether 20
000 flights. Germanwingsreached excellent results in thecategories of punctuality, safety, onboard comfort and ser-
vice.
In 2004, Germanwings was awarded by frequent flyers
with the First Prize for being the airline with the best ratio
value for money. Around 4000 frequent flyers took part
in the survey conducted by Internet Booking Portal Travel
Channel.
In April 2006, Germanwingswas voted best German air-
line, according to a survey by consumer protection groups
from 6 European countries (Belgium, France, Italy, Por-tugal, Spain and The Netherlands) who evaluated more
than 36 000 flights from legacy airlines, charter airlines
to low cost carriers. The 9 000 passengers provided in-
formation on their travel experiences on board in flights
from July 2004 to September 2005. Germanwings, with
an overall rank at the 14th spot, became the best German
airline with highest evaluation. This result was attributed
to the punctuality of its flights, the good relation between
price and performance, the cleanliness on board and the
efficiency of the ground staff.
Skytraxawarded them 3 stars, with it earning good marks
for food, seats and staff.
Overview ofGermanwings
History: Germanwingsis a low cost airline based in Colo-
gne-Bonn airport, Germany. Germanwingsstarted opera-
tions with a fleet of five A320s and brought the total fleetto 43 items in less than 4 years. The low cost carrier was
quick to establish a presence at its flagship base at Colo-
gne-Bonn, where it based its first eight A319s. It had offe-
red fares from 19 one way to each of its 11 destinations
throughout Europe--Barcelona, Berlin, Istanbul, London,
Madrid, Milan, Nice, Paris, Rome, Vienna and Zurich. La-
ter it established bases at Berlin, Hamburg and Dortmund.
It operates a large network from all its bases.
The foundation of Germanwings resulted from the
transformation of the unprofitable charter business of
Eurowingsinto a low cost carrier. Though Lufthansapu-blicly stresses that the relationship is settled only by the
definition of the financial investment through its partici-
pation in Eurowings, Lufthansa supported the creation
ofGermanwingsin the supervisory board ofEurowings.
Prior to this, Lufthansacarried out several studies in exa-
mining the start of an own low-cost carrier, but it conclu-
ded that this could be realized only as a separate entity. At
that time, Lufthansaalso examined the possibility of ma-
king an investment in Ryanair. Germanwingsis conside-
red as the legacy carriers daughter. The interest is both
financially and strategically given, but the influence on theoperating decisions ofGermanwingsis limited.
The organization ofGermanwingsis located in Cologne,
away from the headquarters ofEurowingsin Dortmund.
Partly, the staff and certain departments, like the pro-
duction and network planning and marketing and sales,
have been transferred from Eurowingswhile other func-
tions, such as financing, controlling, revenue accounting,
and IT, are sourced from Eurowings. The autonomy of
Germanwings is moderate to high, only restricted in
terms of investments and basic strategic decisions towards
Eurowingsand Lufthansa.
Growth: The growth of Germanwings since 2003 hasbeen extraordinary. It initially leased its planes and 10%
of its pilots but later placed direct aircraft purchase orders.
During the very first year of operations, Germanwings
became the largest airline to operate from its home base
- Cologne/Bonn airport. Cologne/Bonn is located in the
west of Germany which is the most populated area. More
than 2.4 million passengers traveled on Germanwingsthat
year from this airport. In September 2003, it opened its se-
cond base at Stuttgart. The load factor reached an average
of 77% during this year on all their 23 destinations. Ger-
manwingsalso started operating flights to Athens Elefthe-rios Venizelos International Airport in Greece.
By the end of year 2004, 3.5 million guests flew with Ger-
manwings(plus 44 percent in comparison with the year
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2003), the revenue climbed from 150 to 247 million Euros
(plus 65 percent). A load factor of more than 82 percent
was recorded. Eurowingsand its low cost subsidiary, Ger-
manwings, achieved profits after tax of 6.4 million for
2004, up from 900,000 the previous year.
In June 2005, the German low-cost carrier Germanwings
opened its hub at Berlin Schnefeld Airport. Berlin was
chosen for economic considerations and for its strategic
importance as a gateway to Eastern Europe a focus for
future development. Germanwingsoffered daily flights to
and from four German cities of Cologne/Bonn, Stuttgart,
Munich and Dsseldorf. It also operated weekly flights
from this base to six international destinations namely:
Ankara, Istanbul, Moscow, Stockholm, Split and Zagreb.
It also placed a direct order for 18 A319s as well as op-
tions for a further 12. Deliveries are scheduled from 2006
onwards. During the summer of 2005, the airlines be-
gan flight operations between Cologne and Moscow and
between Berlin and Moscow. Germanwingsbecame the
first west European no-frills airline to operate scheduled
flights at the Vnukova International Airport in Moscow.
In August 2005, the capital of growth, Hamburg, was cho-
sen by Germanwingsto be their fourth base in Germany.
The new Germanwingsdestinations from Hamburg are:
Munich, Istanbul, Krakow, London (Gatwick), Munich,
Oslo, Stockholm, Stuttgart, Toulouse, Warsaw, Zagreb.
The low-cost airline Germanwingscarried 5.5 million pas-
sengers in 2005, a massive 57% increase over 2004 and has
now become market leader in Cologne with a 35% share
and ranks second in Berlin Schnefeld with a 17% share.
In Stuttgart the airline has the highest share of 20% as an
LCC. Germanwingshad, by now developed a broad and
attractive route network to 43 primary destinations in Eu-
rope.
During 2006, Germanwingsexpanded its routes rapidly.
In June it started flights from their Cologne-Bonn base toAlbania and Serbia and Montenegro. In the summer sche-
dule, it operated flights to Saint Petersburg and later in
October, Germanwingsconnected Hamburg to Moscow
and Berlin to Saint Petersburg. On 28th July, 2006 Ger-
manwings took delivery of the first of 18 A319 aircraft
on 14-Jul-06 and announced plans to expand its Cologne
Bonn hub.
Germanwingsenjoyed a successful year in 2006. It wel-
comed 7.1 million passengers on board its aircraft, in-
creasing their number by 31.2 per cent. The passenger loadfactor stood at 82.2 per cent. Adjusted for consolidation
effects (Germanwings) revenue climbed by 7.5 per cent
with a turnover of 560 million Euros.
During 2007, the airline continued expanding its opera-
tions. In March Germanwings announced the launch of
new seaside destinations in Bulgaria like Varna and Burgos
besides the flights to the capital city of Sofia. It also laun-
ched its flights to and from Malta International Airport,operating from Cologne and Stuttgart. Later in the year it
also began operating flights from Cologne/Bonn to Mos-
cows Vnukova airport.
On June 22 Germanwingsopened its fifth base in Dort-
mund. It flew to Vienna, Istanbul, Ataturk, Palma de
Mallorca, Ibiza and Faro from this base, using the A319
aircraft. It later added Ankara, Izmir and Antalya to its des-
tinations.
The Flex Plus offer, which was introduced in Germany inMar-07 for business travelers was later extended to select
international routes to allow passengers to make altera-
tions in travel plans at a short notice or even cancel the
booking, all free of charge.
In September, the German budget airline, introduced for
the first time low-cost connecting flights from Russia.
Ten destinations would be available from Moscow and
seven destinations from St. Petersburg, connecting flights
through the airports of Cologne-Bonn, Stuttgart and Ber-
lin-Schnefeld.
Last year Germanwings served 3.5 million passengers in
Northern and Eastern Europe, Gerdes said. This year the
company expects this number to increase to four million,
and to 4.7 million in 2009.
Current Status: CEO Thomas Winkelmann stated that
the carrier was growing organically and is on its way to
becoming an important player in Europes crowded LCC
market. A sixth German base is expected to come on line
next year. He also stated that, Germanwingswill not be
opening any overseas bases in the near future as there were
plenty of opportunities to expand in its home market. Fol-lowing the sale of dba, Condorand LTUto rival Air Ber-
lin, Germanwingsbecame the only pure low-cost carrier
left in Germany. He also pointed out that Germany had a
population of 80 million. Germanwingscurrently opera-
tes 27 A319s/A320s and flies to 53 destinations. The fleet
will become a pure 42-strong A319 by 2009. The passenger
turnover is expected to cross 8 million this year and pre-
dicted to reach 10 million in 2009.
Lately, there have been rumors from reliable media sour-
ces of a possible merger between Germanwingsand TUIsTUIfly division which would also include Eurowings as
the third partner. Travel giant TUITravel, which is 51 per-
cent owned by TUI, had told in September that it could
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sell TUIfly. But Lufthansa, TUIand Germanwingshave
not made any official comments on a possible tie-up. But
such a merger would definitely strengthen the position of
Germanwingsin the European LCC market.
Issues/Challenges:
1. Would Germanwingsbe able to contain itself to for-
ming bases within Germany or be forced to look outside
with the changing competitive scenario?
2. Will the current stable relationship between Lufthansa
and Germanwingscontinue in the long term?
3. Which is a better strategy for Germanwings? - Organic
growth or growth through mergers/acquisitions or both.
4. What should be the long-term objective? To become
a successful German LCC or a successful European LCC.
Business Model ofGermanwings
The carrier can be called a premium low-cost carrier. The
airline follows the easyJet-type low cost formula, flying
mostly to primary airports and deploying airplanes which
are equipped with leather seats and in-flight entertain-
ment devices. Germanwingsshares flight crews, mainte-
nance and some aircraft with Lufthansaand Eurowings,
who are its owners. Flying to a total of 53 destinations in 20
European countries on nearly 100 routes,Germanwings
is now one of the major low cost airlines in Europe. Their
base is in Germany at Cologne Bonn airport, with other
flight hubs at Berlin Schoenefeld, Hamburg, Stuttgart and
Dortmund airports. In the UK, Germanwings schedu-
led flights operate between: Edinburgh - Cologne-Bonn;
London Gatwick - Hamburg; London Stansted - Cologne-
Bonn & Stuttgart.
The Germanwingsteam of approx. 460 employees, from
check-in specialists to pilots, is trained at LufthansaFli-
ght Training Center in Frankfurt with the objective of
providing a safe and pleasant flight with top-quality ser-
vice.
Germanwingspassengers constitute: 40% business trave-
lers and 30% students and young people. Although the
majority is German, the percentage of foreign bookings
is around 30%.
Innovation has been the hallmark of its business model
which aims to attract and retain business travelers. Mr.
Thomas Winkelmann believes that success lies in the
airlines ability to win over the business customer. In his
words, No low-cost airline can survive without the busi-ness customer in the long term.
Main Innovative features of its business model are:
A319 aircraft: In July 2007 Germanwingsowned a fleet
of 22 Airbus A319 and 3 A320. Seven of the A319 use a
special Germanwingsconfiguration offering 156 instead
of 144 seats. Germanwingshas raised the productivity of
its existing modern fleet of Airbus A319 and A320 aircraft
from 12 to 14 hours per day. Aircraft are used more effi-
ciently and are often only on the ground for 25 minutesbefore they take off again. The average fleet age was 6.9
years in 2006. The new A319s for Germanwingsfeature
a comfortable single-class cabin layout for a maximum
of 156 passengers. Seats are all made of leather and have
30-32 seat pitch between rows, a good legroom for a low
cost airline. The aircrafts would be powered by V2500
engines from International Aero Engines.
User-friendly website: Germanwings operates one of
the most successful European travel web pages, visited
by over 3 million users each month, who along with theairlines partners make it the most visited and attractive
website in the low-cost airline sector. In 2006 the airlines
www.germanwings.com website was the airline portal
with the highest revenue in Germany. Almost 95% of all
the airlines flights are booked through the internet. Its
website offers everything from flight tickets, hotel nights
and rental cars to events tickets and mobile phones.
Virtual tour: Germanwingspresents a virtual tour for its
online visitors giving outdoor and indoor views of the air-
craft A319, accompanied by short explanations about the
products on the carrier. A real impression of the aircraftand its on-board-quality can be obtained at the virtual
guide at its friendly website.
Safety and Security: By the year 2009, Germanwingswill
be having a young fleet of 42 A319 aircrafts with an average
seating of around 150. These aircraft are market leaders in
terms of space, noise protection and energy consumption,
which would be continuously, maintained using state-of-
the-art technology at Lufthansa Technik. The selected
qualified pilots and the crew are further trained at the
LufthansaFlight Training centre in Frankfurt. Thus Ger-
manwingsensures the safety and security of all its flights
by following the above process stringently.
Germanwings Credit card: As a holder of the Ger-
manwingscredit card one can withdraw cash at any lo-
cation in the world with no handling charge. Card holders
also enjoy increased baggage allowance; ten kilos, giving
you a total baggage allowance of 30 kilos. Furthermore
one can use it to book a Germanwingsflight online wi-
thout any handling fee. One can purchase it at just 19
p.a.
Smart Connect: The airline recently introduced low-costconnecting flights from Russia. The company has intro-
duced over 500 new destinations, which can be accessed
through the airports of Cologne-Bonn, Stuttgart and Ber-
lin-Schonefeld. The system, called Smart Connect, allows
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passengers to order stop-over flights indicating only the fi-
nal destination and showing the total price, which is lower
than the cost of two separate flights. One of the major
advantages was the short time of about 90 minutes requi-
red for changing flights. The company gets the advantageof entering new markets and new clients.
Flex Plus Tariff: A special Flex Plus tariff, which was pre-
viously only available for business travelers on routes wi-
thin Germany, has been extended to selected internatio-
nal routes to allow passengers to make alterations at short
notice or cancel the booking, all free of charge. This free
Flex Plus tariff can be booked at a fixed price of 169
Euros, and offers all customers full flexibility, in planning
business trips. Flex Plus tickets are also eligible for dou-
ble points, as part of the airlines Boomerang Club loyalty
scheme. Over 40% ofGermanwingspassengers are busi-ness travelers, representing the single largest group of cus-
tomers.
Automated check-in: Passengers will be able to save a con-
siderable amount of time by checking in at home or at the
office before they fly: meaning there is no need to queue
to check in and passengers can proceed directly to the gate
when they arrive at the airport. In combination with the
GermanwingsCredit Card, which guarantees early boar-
ding, Germanwingsfrequent flyers can now take the fast
lane.
Rail&Fly scheme: Flying with Germanwings starts right
from the customers doorsteps. Using the Rail&Fly sche-
me, the budget airline now covers the whole of Germany.
Customers will be able to travel to the airport by train for
19 Euros by booking Rail&Fly online for all flights to and
from Germany at www.germanwings.com. Each of the
Germanwingsbases can be reached within two hours.
Before You Go: It is the name of the new and innovative
newsletter which, in addition to providing information
about the latest saving offers for hotels and car rentals, gi-
ves passengers a free travel guide to the holiday destinationof choice. Germanwingspartners such as HRS, comple-
ment this perfect all-round service for passengers. Custo-
mers can save valuable time searching for a suitable hotel
as the best offers will be sent to them by the airlines. In
order to ensure the accommodation offers from HRS are
always up to date for the newsletter, Germanwingsauto-
matically checks the best prices for each destination in
real-time. The offers which exactly match the customers
requirements are then compiled and sent to the customers
conveniently by email 14 days before departure.
Travel Agents Internet Portal: The premier low cost car-rier is promoting travel agents as a sales channel. A sepa-
rate portal has been created for travel agents on Germanys
most successful airline website: www.germanwings.com/
reisebuero. Group enquiries can be submitted directly via
the portal to which Germanwingswill answer within two
working days. The new travel agents channel also offers
agents important and useful information at their finger-
tips, a newsletter specially designed for travel agents with
attractive prize giveaways and regularly discounted flightoffers for travel agent employees. Germanwingsadverti-
sing packages can also be ordered via the website.
Corporate Flex: This program is exclusively for corporate
customers. Companies who wish to participate can regis-
ter on the website under the section business travel. It has
flexible boarding prices starting from 49 Euros plus taxes,
fees and other charges. It offers full flexibility and allows
free rebooking, reservation changes and cancellation until
2hrs. prior to departure.
Boomerang club: Their frequent flyer program, called
Boomerang, allows members to accumulate miles and re-deem them against free flights. The main elements of this
program are:
One can register as member by filling in a registration
form available on the website, pay a processing fee of 5
and immediately earn 1000 Boomerangs.
An award flight is gifted after every eighth return flight or
a collection of 24000 Boomerangs
Boomerangs are allotted on every Germanwingsflight.
3000 Boomerangs are earned for every return flight and
1500 points for a one-way flight.
As a member of the Boomerang Club one can also col-
lect Boomerangs with the club partners ofGermanwings,
such as HRS, Sixt, Lindner Hotels.
A Boomerang club member becomes automatically eli-
gible for the Germanwingscredit card with pre-boarding
function.
Exclusive Boomerang offers are often announced on cer-
tain flights through which a passenger has the opportunity
to earn double Boomerang points on just one flight. Infor-
mation about all the offers can be obtained either on their
website or in the Boomerang newsletter.
Other facilities: These include: reasonably prized qualityfood, fast & efficient baggage handling, attractive travel
packages, special care for babies and the disabled and on-
board entertainment like journals, music and videos
Ancillary Sources of Income:
Baggage: The free check-in baggage limit is 20 kg, but a
maximum of 50kg per person is allowed for a fee. There is
no weight restriction on hand luggage of just one item only
with maximum dimensions of 56x45x25cm. Babies under
2 years old get no baggage allowance. Excess baggage costs5/kg per flight. Sports equipment charges are from 14-
17 per item, but skis are carried free on selected routes.
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Ticket Booking: The earlier one books, the cheaper are the
tickets. No tickets are issued; only the Booking Reference
number has to be presented for check-in. A credit card
payment charge of 1 pp. per flight is added to the fare.
Babies under 2 years travel for a fixed fee of 10 Euros. Seats
cant be reserved at the time of booking or checking in, but
there is priority boarding for the disabled and for parents
with small children.
Flight Changes: Date changes can be done online for
17/25 pp. per flight plus any fare increase for interna-
tional flights. The rebooking charges within Germany are
29.75 Euros. Changes by telephone cost an additional 5/7
pp. per flight outside Germany and +8.33 Euros(incl. 19%
VAT) within Germany. Destination or passenger name
changes are not possible. No refunds for missing or can-celing a flight.
Other Sources of ancillary income: This includes fuel sur-
charge (12 euros), Germanwingscredit card fees, Boome-
rang club registration, the Rail&Fly scheme, sale of food
and entertainment, online advertising and direct marke-
ting revenue etc.
SWOT Analysis
The main advantage that Germanwings has had over
other lesser successful legacy daughter airlines is the hi-
gher degree of freedom it enjoys in managing its network,
the overheads, and its fleet.
Strategic goal ofGermanwings is to emerge as a leading
low-cost carrier in terms of market share and prices at all
its hubs, while a short-term goal entails achieving a mi-
nimum market share of 30% in all airports where their
aircrafts are stationed.
Fly high pay low is the motto ofGermanwings.
Their claim: you fly to the highest standard at an attractive
price.
Recommendations
1. Germanwings should not restrict its bases within theGerman market for the following reasons:
- Germany is becoming intensively competitive with
many low cost players wanting a share (70% of the mar-
ket is shared almost equivalently between Air Berlin, Ger-
manwings, Ryanairand easyJet).
- It already has five bases in important cities that are stra-
tegically located to attract maximum number of travelers.
More bases could lead to overlapping of routes and dou-
bling of costs.
- Long term goal for any big player is to be able to expand
internationally which will ensure its survival and success.
2. The continuance of the current strategic relationship
between Lufthansa and Germanwings is very critical
for the progress of the daughter for achieving its stated
objectives. But history has been a witness to breaking up
of many such relationships profitably or otherwise. This
occurs due to several incompatibilities that arise in course
of the journey such as: cannibalization between business
models; implausibility of the communication concept; in-
crease in organizational complexity to mention a few. So
the sustainability of this relationship will depend on the
extent of fulfillment of the basic purpose, for which thiswas initialized and the value generated.
3. In order to be successful, any organization has to expand
its operations as far as possible at a reasonable pace to keep
ahead of the competition. The rule is: You beat the com-
petition or the competition eats you. In the LCC market,success can be achieved organically or through mergers
and acquisitions or both. When Germanwings expands
into markets that are not travel savvy and are extremely
price sensitive, the better option would be to go for a mer-
ger or acquisition or collaboration.
Conclusion
The success of Germanwings can be attributed to two
major factors: Its innovative business model and the wide
economies of scale enjoyed by it from Lufthansa. It has
managed to integrate and reinforce the quality image of its
parent within the low cost framework. The key challenge
for Germanwingsis to be able progress rapidly under the
strategic protection of its parent in a market which is in-
creasingly changing from a growth market into a displa-
cement market.
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If one man believes in consolidation in the European sky,
its him! After buying two of his challengers, DBA andLTU, in less than one year, Joachim Hunold, Air Ber-
lins CEO, announced in September his intention to pur-
chase the Thomas Cook affiliated charter airline Condor
in 2009. This old German company, created in 1955 and
operating 35 planes, is currently detained by both Tho-
mas Cook (75.1%) and Lufthansa(24.9%). Air Berlinwill
first receive Thomas Cooks shares, in February 2009, and
then Lufthansas ones. In return, Thomas Cook will get
120 million Euros in cash, plus 380 to 475 million Euros of
Air Berlinshares (29.9% of the airlines capital). Air Berlin
and the travel group Thomas Cook also signed a long-term
commercial partnership.
Condorcarries 8 million passengers yearly to more than
70 destinations, including many exotic places like India,
Kenya, Egypt, Thailand, the Caribbean, South America,
Florida... Its network has many common points with LTUs
one, the other German charter airline Air Berlinbought in
2007. After this merger, yet to be approved by the German
cartel office in 2008, Air Berlin will carry more than 30
million passengers yearly on more than 160 planes, not in-
cluding those ordered. The company consolidates its third
position on the European LCC market: EasyJet has about170 planes and Ryanairabout 200. Air Berlinmay even
begin to threaten Lufthansa, even if the German leader,
with 400 planes and 50 million passengers yearly, is still
out of reach: Lufthansadid not even try to block the sale
of its 24.9% ofCondorshares to Air Berlin.
With this new takeover, Joachim Hunold sticks to his
strategy of growing as big and as fast as possible. He also
confirms his ambition to expand on long-haul flights, some-
thing never done by a European LCC before. Up to 2008,
the airline will launch flights from Dsseldorf to the USAand China under the brand Air Berlin, with an improved
business class, which makes long-haul flights so profitable.
The takeover ofCondorwill also provide Air Berlinwith
important slots in Munich and Frankfurt. This intercon-
tinental strategy, together with other factors - mid-level
fares, low ancillary revenues, frequent flyer program, etc -
is also a sign of the growing normalization ofAir Berlin
compared to genuine LCCs like Ryanairand EasyJet.
But there is no certitude Hunolds coup will succeed. Even
if his consolidation strategy is expected to generate im-portant synergy savings, it costs Air Berlin a lot of mo-
ney. Some experts expressed skepticism about this new
acquisition, pointing out the fact that integrating three
companies - DBA, LTUand Condor- in a few years is a
tough operation. The stock market reacted cautiously tothe announcement of the deal: the Air Berlin share lost
5% the following day, and remains quite low since then. In
November, the share was weaker than its 12 Euros issuing
price in 2006.
For some analysts, Air Berlincan even remind the Swissair
frantic investing strategy in the 1990s, ending with a trau-
matizing bankruptcy in 2002, which had important conse-
quences on the European air transport market. Big does not
mean rich in the air industry... Of course, Swissairs huge
investments in about ten international companies, and the
tremendous debts that followed, were far more important
than Air Berlins purchases. But the more Air Berlin in-
vests the less financial elbow room it has. Its 2007 financial
results are quite deceiving. The airline has to hope that no
important crisis will occur in the European sky, and that its
promises of improved financial results in 2008 will come
true.
While concentrating on mergers and intercontinental ex-
pansion, Air Berlinalso loses battles: in October, the airline
suppressed its UK domestic routes from London-Stansted
to Belfast City, Manchester and Glasgow, officially due to
rising taxes. The Belfast route had just been opened oneyear before. At the same time, Ryanair just begins to fly
from Belfast City, and EasyJet announces new routes from
Belfast International! Is Air Berlins withdrawal in the UK
a strategy - with its mid-fare profile, the airline may not
be interested anymore in challenging the aggressive Islan-
ders on their own British battlefield - or a clear defeat ?
From a German point of view, the purchase of Condor
could mean the end of the consolidation. After the an-
nouncement of the Condortakeover by Air Berlin, rumors
said in November the two remaining German LCCs, Ger-manwingsand TUIfly, could also merge. Both are too small
to compete on the European market, and TUIfly, created
earlier in 2007 from the merger of HLX and Hapagfly, is
in quite bad economic health. As Germanwingsbelongs
to Lufthansa, the German market could soon become a
duopole : Lufthansawith Germanwingsand TUIfly on
the one side, Air Berlinwith DBA, LTUand Condoron
the other side. But then, who will offer aggressive fares to
the customers?
After the Takeover of Condor, Which Perspectives for Air Berlin?
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EVENTS
French Connect 2008April 9 to 11 in Courchevel
Air Scoopis proud to be part of the 5th French Connectin Courchevel.
For the 5th consecutive year, CEOs of French airports and European low cost airlines will gather for 3 days of debates
and networking.
French Connect, the only professional forum dedicated to low cost air traffic development in France, will take place in
Courchevel, French Alps from 9th to 11th April 2008. Created in 2004 to respond to the specific needs of French airports,
French Connecthas become, in just a few years, a must-attend meeting and debating forum for French airports and low
cost airlines.
For 3 days, decision-makers will gather from over 20 low cost airlines and 50 French airports together with representa-
tives from regional, national and European political institutions. French Connect2008 is hosted by Grenoble-Isre and
Chambry-Savoie Airports, two airports managed by VINCI Airportsand Keolis Airportson behalf of the Conseils G-nraux (County Councils) of Isre and Savoie. Innovation and dynamism are the key words for next years event, which
will be an exceptional opportunity to understand the issues of low cost air traffic development in France.
To have more informations about last edition ofFrench Connectin La Baule, read the full coverage in Air Scoop May
2007.
For more information on French Connect2008, visit www.frenchconnect.net
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 flash 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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terms and conditions, making it one ofRyanairs leading
ancillary revenue streams. Other LCCs have engaged in
similar tactics. If the EU has found that Ryanairor other
LCCs have improperly displayed terms and conditions,
then it could expose those carriers to considerable penal-ties. If restricted in these ancillary product offerings, LCCs
will likely see slower growth in this revenue stream, since
a significant percentage of ancillary revenue is generated
from customers who unwillingly purchase the product.
Moreover, as LCCs know, price is everything, and some
carriers may have been deliberately slow to transition to
all-inclusive pricing. With a lumbering EU bureaucracy,
carriers that continue to advertise fares without taxes
dont have any immediate threat of sanctions, and so if
they can make their fares appear cheaper than their com-petitors for a few more months, it helps them gain a com-
petitive advantage.
Its probable that LCCs that operate in more countries
and which have more complex Web interfaces are more
likely to be subject to penalties. Therefore, I suspect that
easyJet and Ryanairare most likely to have violations.
EasyJet currently automatically selects and prices a custo-
mers flight with a hold bag and travel insurance included.
Customers must remove these items to receive the price
of their ticket only, something the EU prohibits. EasyJetwill need to change this practice in the near future to
avoid penalties. Ryanaircurrently advertises flights on its
home page with taxes and fees included, but when a cus-
tomer goes to book that flight, he or she may see a price
much lower than that, as low as .01 EUR. Ryanairthen
adds the taxes and charges on the following page, possibly
misleading customers who thought that the flight cost .01
EUR, and a potential violation of the EU policy.
The Potential Effects on LCCs
Obviously, a Web site shutdown would have disastrous
consequences for any airline, not just an LCC. Since many
LCCs do not offer tickets through travel agencies, passen-
gers would have either the option of booking via phone
or booking at the airport, neither of which are very con-
venient or desirable for either airlines or passengers. If its
Web site closed, an LCC would quickly lose market share
and money, as it could not arrange bookings for enough
passengers to fill its airplanes.
The effects would be immediate and dramatic, and even
with a temporary site closure, the effects could last for
months: A carrier could see lower load factors months af-
ter a Web site closure. Moreover, the airlines reputation
for quality would likely suffer if its site closed, leading tosuspicions about other areas of the airlines operation.
Yet the possibility of an airlines Web site being taken
down is very real, even if a rogue hacker succeeds where
the EU doesnt, and needs to be taken more seriously by
carriers. As the expression goes, Dont put all your eggs
in one basket. LCCs put all their eggs in one basket in a
number of facets of their operations, including fleet ma-
keup (since many LCCs operate only one type of aircraft,
and most operate no more than two) as well as distribu-
tion method (since many LCCs sell virtually all of theirtickets through their Web sites).
Putting their eggs in one basket has led to enormous ef-
ficiencies; however, consolidating baskets also increases
risks for carriers if their basket breaks, leaving carriers
exposed and vulnerable. In this ultra-competitive mar-
ketplace, just a few things have to go wrong to lead to di-
saster. The EU probe will likely succeed in forcing LCCs
to make the necessary changes to their Web sites to make
their sites more transparent, easy-to-use, and consumer
friendly. These changes will cost LCCs some ancillaryrevenue, but they will also help make LCC sites more
attractive for consumers, helping to build brand loyalty
and strengthening the ability of LCCs to generate repeat
business.
Remarks, questions Join Samon his website to com-
ment this article http://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.