Low Cost Carrier Market
Drew Magill
Director
Future Market
Boeing
Commercial
Airplanes
April 2004
Agenda
Global 1. LCC Model Is Sustainable
Perspectives
Business Model
2. LCC model driven by passenger needs
for better service, lower costs
Market
Enablers 3. …enabled by an environment of free
competition via open, liberalized markets
Long Term
Outlook
Preferred
Airplane
Summary
Low Cost Carriers: Thirty Years
of Innovation
VIRGIN
EXPRESS
Eurobelgian
Airlines (EBA)
Go
VOZ
EZY 737-
Nok Air Takes 700s-
over 800s
Go
ASW Air Do
Thai Air Asia GO 737- Skymark
737-
300s GOL 300s Thai AirAsia
Pacific Blue CEB 737- BMA
DC9s 700s 737-
Pacific Blue
Freedom Air
Virgin Intl.
Express 757s AAT 300-
737- 500 EZY One-Two-Go
takes CQT
CQT Lion Air
over EBA DC9s
DC9s 800s 737-
jetBlue 700s Sky Asia
FRO Ted
SWA SWA RYR EBA 737 EZY WJI SWA RYR WJI CQT CQT
737- 737- Song
737- 737- -200/ 737- 737- 737- 737- CQT
CQT 737- 737-
737-
200 300 AAT 200 300 -300 300s 200 700s 800 717s717s 700s 700s
700s
1970’s 1980’s 1990’s 2000’s
Low Cost Carriers In 2000
Flights Per Week: 28,640
Europe
Flights/week: 4,150
N. America
Miles/flight: 490
Flights/week: 23,800
Miles/flight: 540
Asia
Flights/week: 555
Miles/flight: 390
Oceania
Flights/week: 136
Miles/flight: 590
Low Cost Carriers In 2003
Flights Per Week: 42,490 +50%
Europe
Flights/week: 10,060 +140%
N. America
Miles/flight: 520 +7%
Flights/week: 30,100 +27%
Miles/flight: 643 +18%
Asia
Flights/week: 990 +78%
Miles/flight: 470 +20%
Oceania
Flights/week: 1,340 +885%
Miles/flight: 700 +20%
Passengers Drive Airline Strategies
Airlines Are Giving Passengers What
They Want – More Frequencies And
Nonstops
Index 1980=100 Air Travel
300 Growth
275
250
Frequency
Passengers 225 Growth
prefer more
nonstops and 200 Nonstop
more frequency
Markets
175
choices
150
125 Average
Airplane Size
100
75
1980 1985 1990 1995 2000 2003
…And Lower Fares
Yield Trends
Real Yields (adjusted for inflation)
25
In real dollar 20
terms the price
of air travel
decreases over
time 15
10
1983 1987 1991 1995 1999 2002
…Which Results In Fewer
Complaints And Increasing
Market Share
•Direct flights
Low Cost
Carrier
•Fewer delays
Short Haul
•Multiple
Carrier
frequencies
Global
•Lower and
Network
consistent
Carrier
pricing
0 0.2 0.4 0.6 0.8 1
•Note: US Market.
Europe / Asia model Passenger Complaints / 100,000
evolving.
Air Travel Consumer Report, January – December, 2003
Agenda
Global
Perspectives
Business Model
Market
Characteristics
Long Term
Outlook
Preferred
Airplane
Summary
Low Cost Carrier Business Model
Disciplined Stay with the plan
execution and Relentless pursuit to reduce cost/complexity
focus Hands on management
Instilled corporate culture
Significant Distribution
cost Product
differential Operational
− Utilization
− Point to Point
− Secondary Airports
− Demand stimulation: Europe/Asia
Low overhead
Brand Simple value proposition
awareness Consistently setting and meeting expectations
and presence
Unit Cost Advantage Is Derived
From Many Factors
Unit costs
High Labor ($ / ASK)
Productivity
>>NOT “cheap” labor 35%
to
50%
High Airplane
Utilization
>>NOT “cheap” airplanes
Network Distribution Product OperationalOverhead Low
carriers Direct sales design Airport Cost
No CRS Seat density charges Carrier
No One class Crew costs
commission No catering Aircraft
No FFP utilization
Single Fleet
High Airplane Utilization And Crew
Productivity Is Essential
More Flights
On-time,
Reliable
Service
Fewer Aircraft
/ Other Assets
Needed
Internal Business Culture Drives High
Productivity
Agenda
Global
Perspectives
Business Model
Market
Enablers
Long Term
Outlook
Preferred
Airplane
Summary
Key Low Cost Market Characteristics
• Ability to compete: open
liberalized/liberalizing markets
• 30% to 35% lower fares /
lower cost opportunity
• Sizeable and balanced traffic flows
• Underserved markets
LCC Are At Different Stages Of Maturity
80%
Early Deregulation Australia
Numerous Opportunities
70%
SE Asia
60%
Growth Rate ('03)
50%
Liberalization
40% Continues
Europe
30%
20%
10% Head to Head
NE Asia N America
0%
0% 5% 10% 15% 20% 25% 30%
Market Penetration
Air Travel Markets Have Unique
Characteristics
North America Europe Asia Pacific
• U.S. Deregulation 1978 • Deregulation staged: 1997 • Various stages of regulated
• Canadian deregulation markets and government.
complete in 1988 ownership/influence.
• 20% population & 24% GDP in • Large geographic dispersion
• 1/6 population density of 7% of territory of population centers
Europe • Congested airspace and • Significant portion of travel
• U.S. & Canadian airports requires flying
population centers are on
• High speed subsidized rail
opposite sides of the
is a direct competitor • Underutilized regional
continent
Rail is a minor competitor; Airports
• Majority of Canadian autos compete for short
population lives within 100 distances
miles of the U.S. border • Except for Japan, less
competition from other
• Airspace and airports • Lingering loyalty to national transportation modes
relatively open carriers: link to culture
• Mixed loyalty at most
• Rail is a minor competitor; • Vertically-integrated charter national carriers
autos compete for short • Prices becoming transparent • Very little charter
distances • Single currency adopted • Closely held pricing,
• No loyalty to flag carriers • More leisure time generally
(just $ and ff miles) • Generally low but rising
• Very little charter average income levels in
• Price transparency many countries
North American Low Cost Carriers
Southwest North America
supplies two- Southwest
thirds of
available AirTran
seats in North
ATA
America LCC
market WestJet
jetBlue
Frontier
Spirit
0 1,000,000 2,000,000 3,000,000
Scheduled Available Seats per Week
Aug-03 OAG
Air Travel Markets Have Unique
Characteristics
North
UnitedAmerica
States Europe Asia Pacific
• •Deregulation
U.S. Deregulation
1978 1978 • Deregulation staged: 1997 • Various stages of regulated
• Canadian deregulation markets and government.
complete in 1988 ownership/influence.
• 1/6 population density of • 20% population & 24% GDP in • Large geographic dispersion
•Europe
1/6 population density of 7% of territory of population centers
Europe centers are on
• Population • Congested airspace and • Significant portion of travel
•opposite
U.S. & Canadian
coasts airports requires flying
population
• Airspace andcenters
airportsare on
• High speed subsidized rail
opposite sides
relatively open of the
is a direct competitor • Underutilized regional
continent
• Rail is a minor competitor; Rail is a minor competitor; Airports
•autos
Majority of Canadian
compete for short autos compete for short
population lives within 100
distances distances
miles of the U.S. border • Except for Japan, less
competition from other
• •No loyalty and
Airspace to flag carriers
airports • Lingering loyalty to national transportation modes
(just $ and open
relatively ff miles) carriers: link to culture
• Mixed loyalty at most
• •Very
Rail little chartercompetitor;
is a minor • Vertically-integrated charter national carriers
autostransparency
• Price compete for short • Prices becoming transparent • Very little charter
distances • Single currency adopted • Closely held pricing,
• No loyalty to flag carriers • More leisure time generally
(just $ and ff miles) • Generally low but rising
• Very little charter average income levels in
• Price transparency many countries
There Are Two Major Competitors
In Europe
Ryanair and Ryanair
easyJet have
accelerated
growth using easyJet
acquisitions
and large Air One
numbers of
airplanes Europe
DBA
Ryanair has
the largest BMIBaby
market
presence Virgin Express
with 20%
more 0 100,000 200,000 300,000 400,000 500,000
available
seats Scheduled Available Seats per Week
Aug-03 OAG
The European Arena Is Crowded With
Low Cost Entrants
lite
Wizz Air
SmartWings AIR POLONIA
Low Cost Carriers Have Differing
Market Strategies
Pure Low Cost
Carriers Optional
• Year round business:
traffic hot meals,
Business
• Independent lounges,
Branding
travelers papers
• Balanced Branded
directional flows meals
• Grow the market Main
• Single airplane Cost Airports
type Low-Fares
High-Frequency
Hybrid Models
• Mix of business
and leisure
• A la carte
services
• Compete in
some charter amenities
markets
Air Travel Markets Have Unique
Characteristics
North America Europe Asia Pacific
• U.S. Deregulation 1978 • Deregulation staged: 1997 • Various stages of regulated
• Canadian deregulation markets and government.
complete in 1988 ownership/influence.
• 20% population & 24% GDP in • Large geographic dispersion
• 1/6 population density of 7% of territory of population centers
Europe • Congested airspace and
• U.S. & Canadian • Significant portion of travel
airports requires flying
population centers are on
• High speed subsidized rail
opposite sides of the
is a direct competitor • Underutilized regional
continent
Rail is a minor competitor;
• Majority of Canadian Airports
autos compete for short
population lives within 100 distances
miles of the U.S. border • Except for Japan, less
• Airspace and airports • Lingering loyalty to national competition from other
relatively open carriers: link to culture transportation modes
• Rail is a minor competitor; • Vertically-integrated charter • Mixed loyalty at most
autos compete for short • Prices becoming transparent national carriers
distances • Single currency adopted • Very little charter
• No loyalty to flag carriers • More leisure time • Closely held pricing,
(just $ and ff miles) generally
• Very little charter • Generally low but rising
• Price transparency average income levels in
many countries
In 2003, There Were Few Competitors
Virgin Blue Virgin Blue
and AirAsia
have
recently Cebu Pacific
expanded
to regional
operations AirAsia * Asia and Australia/NZ
Air Do
Skymark
0 50,000 100,000 150,000 200,000
Scheduled Available Seats per Week
Aug-03 OAG * Estimated
Many New LCCs Are Emerging In Asia
Thai AirAsia
Tiger Airways
Tony Fernandes
Chief Executive Officer, AirAsia
“Our aim is to fly to every
airport in Malaysia that can
handle a Boeing 737
aircraft.”
Brett Godfrey
Chief Executive Officer, Virgin Blue
"And they’ve come
because they’ve wanted to
work in a company that’s a
little bit different."
737 - Airplane Of Choice For LCC Market
Global
Perspectives
Business Model
Market
Characteristics
Long Term
Outlook
Preferred
Airplane
Summary
Low Cost Carriers Will Account
For A Significant Portion Of
Delivery Demand
Smaller regional jets
Single-aisle
Twin-aisle
747 and larger
$1.9T
Dollars
24,300
Units
Low Cost Carriers Will Account
For A Significant Portion Of
Delivery Demand
Smaller regional jets
Single-aisle
Single-aisle LCC
Twin-aisle
747 and larger
7%
Of Addressable
Delivery Dollars
10%
Of $1.9T
Addressable Dollars
Units
24,300
Units
Low Cost Carriers Are Here To Stay
LCC Model Is
Sustainable
LCC growth
driven by
passenger
preference for
better service
(more non stops,
more freq) AND
lower costs
LCC emergence
is enabled by free
competition in an
open, liberalizing
environment
