Workshop 3 Workshop 3 – Starting an Airline and Starting an Airline and … east aviation...

Workshop 3 Workshop 3 –– Starting an Airline and Starting an Airline and returning profit for your shareholdersreturning profit for your shareholders

Workshop 3 - Abu Dhabi 111

returning profit for your shareholdersreturning profit for your shareholders

March 2008

www.capaconsulting.net

STATEMENT OF CONFIDENTIALITY

This document is proprietary to CAPA Consulting and the information contained herein is confidential.

Without CAPA Consulting prior written permission, this document, either in whole or in part, must not bereproduced in any form or by any means or disclosed to others or used for purposes other than its evaluation. Itmay not be disclosed to any third party even for the purposes of evaluation, except as expressly authorised byCAPA Consulting in each case.

Where we have mentioned our Clients by name we stipulate that no contact be made with any such Client withoutour prior written approval in each case.


our prior written approval in each case.

Whilst care and attention has been exercised in the preparation of this document, it remains subject to contract andall warranties whether express or implied by statute, law or otherwise are hereby disclaimed and excluded.

These limitations are not intended to restrict continuing business discussions between CAPA Consulting and

American Express.

Workshop teamCAPA has a team of highly skilled consultants. We propose using the following coreteam of consultants for this assignment, all of whom have worked in the aviationindustry:

Andrew Miller - Chief Executive Officer and Principal of CAPA Consulting

Andrew has extensive experience and understanding of airline strategy, route systems and service development, particularly in the low-cost sector and legacy airlines restructures.

Barry Parsons - Managing Consultant


Barry Parsons - Managing Consultant

Barry, a Managing Consultant with CAPA Consulting, is a highly experienced ProjectDirector with a strong record of achievement in commercial, operational andtechnology project management and audit and risk management achieved inAustralia and offshore. He is particularly strong in the establishment, execution andreview of high profile enterprise wide projects and the achievement and quantifieddelivery of their expected benefits.

Adam Kirkpatrick

General Manager Commercial Operations and Consultant

Adam is CAPA’s General Manager Commercial Operations focusing on business development. He is a qualified legal counsel and IT professional, providing consulting services in relation to airline IT systems and distribution strategies

Introductions

• Who are you?

- Name

- Title

- Company

- Location


- Location

• Why are you here today?

• What do you expect to get a better

understanding of today?

CAPA Consulting’s LCCexpertise

• 8 LCC startups/feasibility studies in the past 3 years

• Covering Africa, Middle East, Asia, India, Oceania

• Actively involved in 3 current projects


• Actively involved in 3 current projects

• CAPA Consulting provides an A to Z product:

Feasibility studies

Strategy development

Business planning

ImplementationPost

implementation support

A sample of our airline and airport clients


A sample of our investor, government and supplier clients


Introducing CAPA Consulting

WHAT SETS US APART:

Leading aviation consultancy with global reachIn-house expertise and know-how

Proven track record both as consultants and in aviation management positions

Team of consultants with a unique blend of


Team of consultants with a unique blend of international and Asian experience

Dedicated client contact throughout the projectQuick turnaround times

Tailored strategies that will transform your business

In-depth business analysis across the entire operation

8

Global Aviation Drivers


Drivers

The aviation environment is themost positive for many years

Robust economic, trading conditions

IncreasingLiberalisation

Strong market, yield growth


High airline profitability

Development of new,existing routes

Investment in fleet, capacity

Aggressivepricing competition

New product development

Serviceinnovation

Substantial growth planned by Emirates, other ME carriers

4.9

9.4

13.815.6

17.6

27.9

24.6

22.5 20.0

25.925.2 25.7

20.0

3.3 2.7 1.9 2.95.0

5.6 2.4

6.9

4.4

19.8

5.3

0.0

5.0

10.0

15.0

20.0

25.0

30.0

SIA

Thai

MAS

Cathay

Qantas/BA

Other

EuropeanMiddle East

Middle Eastairlines build19.8% share of Australia-Europe market


0.0

2000 2001 2002 2003 2004 2005 2006 2007

0

10000

20000

30000

40000

50000

60000

70000

80000

90000

2000 2001 2002 2003 2004 2005 2006 2007 2011

Qatar

Gulf Air

Etihad

Emirates

113% growth in weekly seats by ME carriers toAustralia 2007-2011

Set to growsubstantially by2012

Source: IATA, CAPA Consulting

Scenario if all

existing rights

taken up

MiddleEast

QF/BA,

EmergingChinaOption

Within next five years, the Middle East may take over as dominant “kangaroo route”


EastQF/BA,

Asian 6th

freedom

3.7% Average Annual Growth in Aust-Europe Weekly Seats, 2000-2007

Source: IATA/CAPA Consulting

Airline share of Average Weekly Seats Australia-Europe by Region of Origin

0

20000

40000

60000

80000

100000

120000

140000

160000

180000

200000

2000 2001 2002 2003 2004 2005 2006 2007

Middle East

Other Europe

Asian 6th freedom

BA/Qantas

12

Which Airports will be the dominant hubs?

30

40

50

60

70

80

Pas

sen

gers

(m

illio

ns)

Capacity vs Throughput2010 estimate:

60 million pax


Source: Airport websites, CAPA Analysis. Bangkok and Kuala Lumpur include domestic traffic

0

10

20

Dubai Singapore Kuala

Lumpur

Bangkok Hong Kong

Pas

sen

gers

(m

illio

ns)

Throughput Capacity

However, Dubai World Central will have a capacity of 120 million by 2017

Who has the premium market?

10%

12%

14%

16%

Pe

rce

nta

ge

of

Pre

miu

m S

ea

tsProportion of Premium Seats


Source: OAG 2008 schedules, International flights

0%

2%

4%

6%

8%

10%

Dubai Singapore Hong

Kong

Bangkok Kuala

Lumpur

Pe

rce

nta

ge

of

Pre

miu

m S

ea

ts

Is there a longhaul vsshorthaul differential?

60%

80%

100%

Longhaul vs Shorthaul


0%

20%

40%

60%

Dubai Singapore Kuala

Lumpur

Bangkok Hong Kong

Longhaul Shorthaul

Source: OAG 2008 schedules, International flights

What is the low cost airline model?

• For the same fixed capital costs, LCCs can significantly reduce the costs of putting a seat in the air through differentiated:

• product

• distribution systems

• utilisation


• utilisation

• work practices

• This allows LCCs to reduce fares in the marketplace and generate cashflow to fund capacity expansion

• The impact is market stimulation/capture and expansion

The growth of LCCs and market penetration

LCC flights as a proportion of total flights

Workshop 3 - Abu Dhabi 171717Source: OAG, CAPA Analysis

Over time, new DNA has been added to the LCC model

Simple Complex

Ultralite © Lite © Legacy Lite © Legacy


Lowest Cost

Index: 40Index: 60 Index: 70

Highest cost

Index: 100

Basic product Hybrid productValue added

product

EconomyEconomy /

Economy Plus

Economy/ Economy Plus/

Business

© CAPA Consulting

The cost waterfall

5 US c/ASK

10 US c/ASK

Around 60% of the cost reduction comes from more seats and better

aircraft utilisation


Market formula: half the costs, half the fares and double the size of the market between 3 and 5 years depending on capacity/availability

Source: CAPA Analysis

The pricing principles

• Simple, transparent fare buckets

• Fare types are named/personalised

• Value adds and fare rules are easy to understand


• Simple for LCC to control

• Ringfences use liquidity rather than restrictions of legacy models

• Internet access gives consumer control/comfort

• Fare hierarchy

“Linking up the dots” –2 pricing approaches

MEL/SIN Carrier Fare*

LCC (Ultralite ©)via Darwin

Tiger $364

Legacy Qantas $1,100

SYD/KUL Carrier Fare*

LCC (Lite©) Jetstar $528

Legacy Malaysia $779


Legacy Malaysia $779

* Fares are lowest internet fare available for one way travel on 4 December 2007, including taxes and surcharges. Source: Airline websites© CAPA Consulting

Still to come – AirAsia:•LCC type development•Secondary airports – OOL, NTL? AVV?•New routes/markets•At 75% - 80% of fares

Jetstar/Qantas substitution on new, thinner, lower yielding markets (leisure)

Constraints on the LCC medium haul model vs LCC shorthaul

Benefits on seat density

↓↓20%Benefits on

selling/ distribution

↓↓50% (brand/reach/ direct selling)

Benefits on labour

practices

about 50% ↓ ↓ (overnights, legal limits)


Benefits on utilisation

same (depending on

geography)

Bigger upside on

selling onboard

Examples:•Seat density TR A320 180 seats vs NZ A320 152 seats•S&D – Jetstar selling in Japanese markets – lose benefits of direct selling in Australia, fare differences less significant

It’s not all plain sailing

Look at:

• India – LCCs dominate market, all LCCs loss making

• Australia – good for Qantas and Jetstar but where does that leave Virgin Blue and Tiger?


• Middle East - Population numbers are a concern

• USA – JetBlue/Southwest and the Chapter 11 carriers

One struggles to find 2 or more LCCs who compete on a route and achieve and exceptional rate of return. Most LCC

profitability comes from a “golden triangle” or on near monopolistic supply of capacity

Examples of golden triangle competition

3 3

33

2

United States

NYC/CHI CHI/WAS WAS/NYC

Legacy 4 2 6

LCC 3 2 1


3 3

3

7

74

2

Australia (1)

All 3 routes

Legacy 1

LCC 2

(1) Excluding low capacity consecutive cabotage carriers(2) From November 2007 when Virgin enters NZ domestic marketSource: OAG. RPT carriers offering non-stop flights to all airports at each city

New Zealand (2)

AKL/WLGAKL/CHC

WLG/CHC

Legacy 2 1

LCC 1 1

What keeps LCC CEOsawake at night?

• Aircraft prices are firming (and discounts reducing) longer term

• Legacy carriers are pushing back

• Liberalisation is slower than expected

• Aircraft delivery leadtimes are lengthening


• Narrowbody aircraft technology will not leapfrog

• Fuel prices for all carriers will constrain demand

• Environmental issues are set to constrain demand

• Airport congestion (operational and pricing impacts)

• Access to capital

The


The fundamentals

Concept Evaluation &Development

Feasibility Study: Market & Competitive

Analysis

1

2

Stop

Go

Phase 1


Business/Project Plan Development

Implementation/Launch

4

3

Post-Launch5 Go

GoPhase 3

Phase 2

1. Concept Evaluation & Development – an initial testing

of the concept design and fundamental structure;

2. Feasibility Study: Market & Competitive Analysis – a

comprehensive review of the economic, regulatory and

market/competitive environment, most likely route systems,

fare pricing opportunities, aircraft type and availability and

Phase 1


fare pricing opportunities, aircraft type and availability and

indicative financial (cost versus revenue) analysis;

- Evaluate concept, goals & objectives

- Conduct market analysis

- Feasibility study

- Route study

3. Business & Project Plan Development –

- Organisational structuring

- Strategic/market planning

- Modelling revenue/costs

- Modelling capital structures

- Aircraft fleet plan

Phase 2


- Aircraft fleet plan

- Review distribution options

- Risk mitigation/management plan

- Review technical/operational options for payments system

Project Structure

Marketing

1. Market Research

2. Competitive

Analysis

3. Brand Design

•Philosophy

Project Manager

Network

Planning

1. Route Network

2. Frequency

3. Capacity

Planning

Pricing

1. Fare Hierarchy

2. Price Pointing

Revenue

Management

1. Fare Mix

2. Profit

Maximisation

Operations

1. AOC

2. Other Licensing

3. Pilots

4. Cabin Crew

5. Alternative

Technical

1. Aircraft Selection

& Transfer

2. Reconfiguration

3. Livery

Application

4. Maintenance

Finance

1. Business Case

Development

2. Financial

Modeling

3. Partnerships

4. Transnet Asset

Legal

1. Competition

Commission

2. Unions

3. Procurement

Systems

1. System Section

2. IT Vendor

relationships

3. Short / Medium /

Long term IT

strategy linked to

Steering Com.


•Look

•Livery

•Uniforms

•Signage

4. Product

Development

5. Distribution

Channels

6. Advertising

Launch

7. Communications

5. Alternative

Airport Evaluation

6. OTP / Turnaround

7. Ground Handling

8. Passenger

Facilitation

4. Maintenance 4. Transnet Asset

Valuation

5. Governance and

internal control

frame work

strategy linked to

business goals

Organisational

Establish appropriate culture - business/service/premises

Establish governance framework - incl. internal control environment

Recruit and train management team

Shareholder dynamics (if applicable)

PIR (say 6 months from launch)

The fine balance. . .Get it right the first time!


Commercial

Model creep control

Channel strategy

Systems selection and implementation

Vital sign (e.g. capacity Vs market share/CASK/RASK/headcount) micro-management - incl. benchmarking

New entrant market effect

Complaints Vs compliments

Group Sessions-


Group Sessions-Build your SWOT

Thank you!

Andrew Miller

[email protected]

Barry Parsons


Barry [email protected]

Adam [email protected]

www.capaconsulting.net

Workshop 3 Workshop 3 – Starting an Airline and Starting an Airline and … east aviation...

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