Basic requirements and future prospect for the business development of both traditional and low cost airlines in China

October 2014 CONTENT

 The performance of two business models within the same airline group

 The basic requiremnets of two business models within the same airline group

 Future prospect of two business models within the same airline group

China 南航战略转型办公室Southern Airlines 2 The performance of two business models within the same airline group

1. Why full-service carrier set up a low-cost unit?

Competitive Pre-emptive response to LCCs market entry

其他

Market Force down cost Segmentation expansion

其他 China 南航战略转型办公室Southern Airlines 3 2. How does full-service carrier set up a low-cost unit?

Dual Brand Hybrid其他

Set up a subsidiary Low-cost in the with a new brand to run short-haul routes, the low-cost business, and full-service in while operating the the long-haul and full-service business hub-based routes in in the parent airline the same airline with the original brand. with the same brand.

China 南航战略转型办公室Southern Airlines 4 3. Current performance

• LCC Subsidiaries closed down because of high cost 1.USA • No LCC subsidiaries of full service airlines in USA now • But most of the domestic routes are operating in low-cost ways

Current Performance • Subsidiaries developed • LCC sub-brands of but failed around 2000 Qantas, Singapore Airline, 3.Asia- 2.Europe Thai International, Korean • Re-develop LCC sub- Airline Pacific brands against with LCCS • Fast growth • Enormous potential of Chinese Market

China 南航战略转型办公室Southern Airlines 5 Dual Brand Strategy in USA and Europe

LCCs Parent Airline Foundation Status Continetal Lite Continental Airlines 1993 Closed down in 1995 1994 Closed down in 2001 Delta Express Delta Airlines 1996 Closed美 down in 2003 MetroJet US Airways 1998 Closed down in 2001 Delta Airlines 2003 Closed国 down in 2006 United Airlines 2003 Closed down in 2009

LCCs Parent Airline Foundation Status Go British Airways 1998 Sold by BA in 2001 Buzz KLM 1999 Sold in 2003 Germanwings Lufthansa 2002 Active欧 Bmibaby BMI 2002 Closed洲 down in 2012 Snowflake SAS 2003 Closed down in 2004 Flynordic Finnair 2004 Sold in 2007

China 南航战略转型办公室Southern Airlines 6 Booming Dual Brands in Asia-Pacific

LCCs Parent Airline Foundation Status Jetstar Qantas 2003 Active Jetstar Asia Qantas 2004 Active Tiger Airways Singapore Airlines 2003 Active Nok Air Thai International 2004 Active Firefly Malaysia 2007 Active Air Busan Asiana 2007 Active Jin Air Korean Air 2008 Active Jetstar Pacific Vietnam Airline/Qantas 2008 Active Peach ANA 2011 Active Jetstar Japan Japan Airlines/Qantas 2011 Active

China 南航战略转型办公室Southern Airlines 7 Conclusions

3

2 No American Full 1 Service Airlines Full of risks run dual-brands and challenges； Great potential now, but they run for LCC； most of the Independent and Industry trend domestic routes in cooperation with of two business Low-cost way just parent airline for models； like Low-cost LCC subsidiary A long way to go carriers. for airlines

China 南航战略转型办公室Southern Airlines 8 CONTENT

 The performance of two business models within the same airline group

 The basic requirements of two business models within the same airline group

 Future prospect of two business models within the same airline group

China 南航战略转型办公室Southern Airlines 9 The basic requirements of two business models within the same airline group

Cost Structure of full service airlines

Controllable Uncontrollable Items Items

• Selling cost • Fuel • Overhead • Landing fees • Staff Salary • Maintenance • Meals • Ownership • …… • ……

Source：2013 Annual reports of CA&CZ&MU

about 30% about 70%

China 南航战略转型办公室Southern Airlines 10 The major challenges

Internal External其他

• High cost per seat • High tariffs • Low direct-sales ratio • High aviation and airport • Low ancillary revenue charge • High overhead • No LCC service standard

airline’s market management environment

China 南航战略转型办公室Southern Airlines 11 1. Internal requirements

 Change to high seating density

 Strengthen direct selling

 Develop ancillary revenue

 Create the LCC culture

China 南航战略转型办公室Southern Airlines 12 Higher seating density

Airbus 320(158 seats) premium class: 8 seats economy class： 150 seats

30 rows 180 seats

No first class or business class full economy class

China Southern南航战略转型办公室 Airlines 13 Strengthen direct selling

Develop social media and improve the interactions.

official website、 sales counter、 call center +

APP、Microblog、 WeChat、blog forum、 message board

China 南航战略转型办公室Southern Airlines 14 Provide personalized services to attract more fans

Traditional Ticket Agencies Customers and Followers

OTA

China 南航战略转型办公室Southern Airlines 15 Create ancillary revenue

 At present, airlines are difficult to get profit from the traditional transport business, but they are profitable from the ancillary revenue.

Data source：IATA , 2014 China 南航战略转型办公室Southern Airlines 16 Great potential for Ancillary revenue:

Travel insurance、Priority boarding、Seat assignment、Baggage fees、Food & Drinks、Hotels and Car rental and so on. Ancillary Composition

Car Rental

Destination Car Insurance Ads Lounge Spa Treatments 〈 Access Seat Mobile Airport Food & Upgrades Phones Transfers Core Golf Drinks Products Seat Assignment Travel Reservation Safety Airport Insurance Changes Scratch Car Parking Cards Schedule Priority Baggage Fees Gambling Cruises Boarding Reliability Unbundled Priority Products Seat Security Hotels Exit Express check-in Tourist Excess Baggage Attractions 以内 House Insurance Internet WiFi Foreign Currency Commission-based Theatre, Concerts and Events Tickets ancillaries

Resort and Theme Park Bookings Source: O’Connell 2011

China 南航战略转型办公室Southern Airlines 17 Create the LCC culture, strengthen cooperation between the two business units

Parent Airline

• Reduce employees per aircraft Aim to • Improve labor productivity maximum profit of the Group

LCC Subsidiary

China 南航战略转型办公室Southern Airlines 18 2. External requirements

 Tax and Tariff

 Aviation charge

 LCC service standard

China 南航战略转型办公室Southern Airlines 19 Tax and tariff supports：

For and Airbus 320

Foreign airlines almost 0 Tariffs China airlines 5%

China 南航战略转型办公室Southern Airlines 20 Lower the Aviation Charge

The proposed： LCC terminals： • Tokyo-Japan • Clark- • Copenhagen-Denmark Philippines • Liverpool-UK • Bordeaux-France Domestic: • Zhengzhou • Singapore • Xiamen • Kuala Lumpur-Malaysia • Chengdu • Shenyang • Osaka-Japan • ……

• Melbourne-Australia

Reduce aviation charge, encourage Airlines to carry more pax to push the development of local aviation ,culture and economy.

China 南航战略转型办公室Southern Airlines 21 Set up LCC service standards

Passenger’s Complaint • Advocate new • Less on-board consumption concept service • Less free service • Policy support • Seat and food • Consumption charge habits changed Standards for Cost-cut LCC and ancillary revenue

China 南航战略转型办公室Southern Airlines 22 CONTENT

 The performance of two business models within the same airline group

 The basic requirements of two business models within the same airline group

 Future prospect of two business models within the same airline group

China 南航战略转型办公室Southern Airlines 23 1. Market outlook

 1) The expected growth of domestic market would slow down but will still maintain nearly 10% .

 2) The per capita disposable income will increase.

 3) Air traffic massification will be a great potential market.

China 南航战略转型办公室Southern Airlines 24 Air-passenger traffic growth faster than the GDP growth

 The passengers’ number is expected to keep a growth of 9.4-10.1% in the next 5 years.

air-passenger traffic growth rate / GDP growth rate Avg.: 1.35:1

ChinaSouthernAirlines南航战略转型办公室 25  In China ,the per capita disposable income will increased further, which would boost the development of self-funded travel and LCCs.

26955

739

China 南航战略转型办公室Southern Airlines 26 Air travel becoming more and more popular for the masses, and it is a great potential market.

self-funded travel DOM. market

outbound tourism INT. market

China 南航战略转型办公室Southern Airlines 27 2. Future prospect for the two business models

 1. The competition between airlines in China will be more pluralistic, and more and more masses will travel by air.

 2. Low-cost business will be more viable in the short- haul International routes.

 3. It is a long way in China for the carrier to take Dual Brand Strategy.

China 南航战略转型办公室Southern Airlines 28 Pluralistic competition & Air traffic trend

 pluralistic competition

 air traffic massification …… …… Full service LCCs

A large number of LCCs will be set up, then expand market and compete with Full Service Carriers in the further.

China 南航战略转型办公室Southern Airlines 29 Low-cost business will be more viable in the short-haul International routes

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China 南航战略转型办公室Southern Airlines 30 It’s a long way for us in China

Dual Brand Hybrid Strategy Strategy

Full-service for Full service Hub-based or long-haul routes + + LCC Low-cost for the others

China 南航战略转型办公室Southern Airlines 31 The low cost carriers will grow fast in China, and the traditional airlines will also consider to take both full service and low cost business, but it will be a long way.

We believe that, under the leadership of the CAAC, airlines will make every effort to find a way to develop both two business models in China, meet the needs of the different travel demands of different kind of passenger.

Thank you！

China 南航战略转型办公室Southern Airlines 32