This is few seconds away from completing one of many routes in the Euro Shuttle network of Air Berlin.

AIR TRANSPORT: QUARTERLY REPORT NO.12 3rd QUARTER 2006 (July to September)

1. HIGHLIGHTS AND KEY DEVELOPMENTS...... 2

1.1 REGULATORY ...... 2 1.2 CAPACITY...... 2 1.3 TRAFFIC...... 2 1.4 FINANCIAL RESULTS ...... 3 1.5 AIRPORTS ...... 3 1.6 MANUFACTURERS ...... 3 2. SCHEDULED CAPACITY ...... 4

3. AIR TRAFFIC...... 6

3.1 PASSENGERS...... 6 3.2 AIR CARGO...... 9 4. FINANCIAL PERFORMANCE...... 12

4.1 EUROPEAN ...... 12 4.2 OTHER MAJOR WORLD AIRLINES...... 17 5. AIRPORTS ...... 18

5.1 GENERAL TRAFFIC TRENDS ...... 18 5.2 TRAFFIC GROWTH AT INDIVIDUAL AIRPORTS ...... 19 5.3 DEVELOPMENTS IN AIRPORT OWNERSHIP ...... 21 5.4 GENERAL AIRPORT DEVELOPMENTS ...... 21 5.5 REGULATORY ISSUES ...... 22 5.6 AEA DELAYS...... 22 6. AIR TRAFFIC CONTROL ...... 23

SINGLE EUROPEAN SKY ATM RESEARCH (SESAR)...... 23 7. ENVIRONMENTAL DEVELOPMENTS ...... 24

8. AIRCRAFT AND MANUFACTURERS...... 25

9. SPECIAL TOPIC: LCC BUSINESS MODELS...... 27

Cranfield University: Quarterly Report Q3 2006 for DG TREN 1 1. Highlights and key developments

1.1 Regulatory • In July 2006 the Commission adopted a proposal to modernize the Single Market legislation for aviation. The aim is to ensure a consistent application of EU legislation in all Member States, thereby creating equal conditions for all airlines. The new proposed regulation requires that fares quoted should include all applicable taxes, charges and fees, and prohibits price discrimination between passengers on the basis of their place of residence within the EU. It is also proposed that the three existing regulations pertaining to operating licences, the rights to operate air services within the EU and the pricing of such services (collectively referred to as the Third Package) be replaced by a single regulation. The proposal also seeks modifications to the financial conditions that all EU airlines have to fulfill and to the monitoring processes in respect of the revoking or suspension of operating licences, the aim being to ensure consistent and correct application of the rules throughout the EU. Changes to the rules pertaining to Public Service Obligations are also proposed. • In July, the Commission opened a formal enquiry into restrictions to air services to Sardinia, as result of having imposed a set of rules on 2 May 2006 covering sixteen Public Service Obligation (PSO) routes between three airports on the island and several large airports in mainland Italy. The Commission expressed serious doubts as to the conformity of the Italian PSO with the aviation market rules. The investigation will focus firstly on assessing the evidence that the routes are vital to the economic development of Sardinia and check that the obligations imposed do not unduly close the market, secondly on examining the conformity with existing Community legislation of the requirement imposed on tendering carriers to operate two sets of routes (each set comprising two routes), and thirdly on checking the legality of the distribution of routes between Air One, and . • By the end of July, a total of 426 bilateral air services agreements (ASA) between Member States and third countries had been brought into legal conformity. Of these, 342 resulted from the horizontal agreements reached between the Commission and 23 third countries, with the remaining 84 comprising those ASA modified during the course of negotiations undertaken by individual Member States with 40 third countries.

1.2 Capacity • Fifty-three new European routes were started by twelve LCCs in the third quarter of 2006. The of demand on these new routes, and the seating capacity of the aircraft making up LCC fleets, means that a number are served at very low frequencies, down to a single flight per week.

1.3 Traffic • AEA member airlines reported annual passenger growth across their networks at 4.7% in the three month, June to August 2006. There were increases in passenger traffic in all regions, although the North Atlantic showed the weakest growth (up

Cranfield University: Quarterly Report Q3 2006 for DG TREN 2 1%) while significant improvement continued on services to the Asia/Pacific region. Overall, the airlines improved their average load factor slightly to 80%. • IATA reported international traffic (RPK) up by 6.1% for the year to August 2006. European growth was slightly behind this at 5.3% growth. • The two largest European low-cost airlines, and EasyJet reported Q3 passenger traffic up by 21.1% and 9.8% respectively. Easyjet improved its passenger load factor to match Ryanair’s maintained level of 89%. • Air cargo traffic carried by AEA members for January to August 2006 rose 2.3% overall, with the strongest growth (8.2%) between and North Africa/Middle East. Traffic to/from South America declined, as did domestic cargo traffic. Traffic carried by the largest cargo airline, , advanced by 5% and the second largest, Air by 7.5%. The third largest, Cargolux recorded a fall of 6.4%.

1.4 Financial Results • The latest financial results are for April to June of 2006. This was a good quarter in terms of the financial performance of Europe’s major airlines. With the exception of Alitalia, all those reporting quarterly figures recorded profits over the three-month period.

1.5 Airports • June’s passenger traffic at ACI Europe’s airports was 7% ahead of June 2006. For the first six months of the year, the top performing major airport was , up almost 16%. • In terms of passenger throughput, ’s Heathrow was the world’s third busiest airport in the first half of 2006, after Atlanta and Chicago.

1.6 Manufacturers • At Airbus a management review was initiated with the aim of restoring customer confidence in the A380 programme. • Boeing announced first half results with a 65% increase in earnings to $1.4 billion • Embraer announced healthy Q2 figures, with profits rising 67.6% to a record $139.1 million.

Cranfield University: Quarterly Report Q3 2006 for DG TREN 3 2. Scheduled capacity

In terms of new routes and changes to capacity offered on existing sectors, there is little noteworthy change within scheduling seasons among network carriers. The engines of change are found among low-cost carriers. The table on the following page details the fifty-three new routes opened in Q3 of 2006 by twelve European LCCs. One feature of the development of LCC services is the facility these airlines enjoy in initiating air links between city pairs. While the costs of setting up operations involving new destinations might deter traditional, network carriers, LCCs face few such impediments to starting new routes. For a start, many of the airports short-listed for new routes are under-utilised, and the regions they serve may welcome the potential economic boost from new air links. This means that there are unlikely to be problems acquiring landing or take-off slots, and at the same time airports and regional authorities may offer financial and other incentives to underpin new services. Ground-based requirements for LCC operations are less complex, and less costly, than they are for network carriers. By the same token, LCCs find it relatively simple to cut their losses and withdraw from routes which do not develop as well as expected, and switch aircraft and crews to routes with greater potential. There are no considerations involving a route’s contribution to overall network success, because LCCs do not, in general, seek to develop hubs or promote transfers between flights. This creates a situation where LCCs are able to experiment by offering services between novel city-pairs. From the current batch of start-up routes in Q3, that between Akureyri on the northern coast of Iceland and London’s Stansted, offered twice a week by Iceland Express, is an example of adventurous route development. Unsuccessful ventures can have a very short life: Ryanair’s service between Frankfurt Hahn and Rzeszow lasted only four months in 2005/6, while the two-aircraft hub planned by Sterling at was quickly diluted to a single aircraft and disappeared completely between April and August of 2006. Easyjet, too, has had its share of routes withdrawn after only a short period of bad performance, such as the link the airline sought to establish between Berlin and in 2005. Of the Q3 new LCC routes, Easyjet’s contribution to the total almost all involve its UK bases, with four of the routes building up Bristol’s portfolio of destinations. Ryanair concentrated on developing its Italian base at Pisa, with six new destinations offered, and Norwegian added a number of routes to its operations focused on . LCCs are accepting that demand on all new routes is unlikely to warrant daily flights by B737 or A320 aircraft. Quite a number of Q3’s new services operate only as once- weekly or twice-weekly flights. This level of service is unlikely to offer the frequency of service required by business-motivated travellers, and reflects the lack of flexibility in aircraft-size offered by the fleets of LCCs operating in Europe.

Cranfield University: Quarterly Report Q3 2006 for DG TREN 4 New LCC routes started in Q3 2006

Airline Route Start date Flights / week easyJet London LGW Marrakech 04-Jul 7 Glasgow 07-Jul 7 Glasgow Malaga 07-Jul 7 Bristol Toulouse 21-Jul 7 Olbia 23-Jul 7 London LTN 01-Aug 7 Bristol Krakow 21-Jul 4 Bristol La Rochelle 21-Jul 4 Bristol 22-Jul 3 Bristol Rijeka 22-Jul 3 Mahon 22-Jul 2 EastMidlands 15-Jul 1 Flybe Southampton 11-Sep 12 Newquay Edinburgh 14-Jul 4 Germanwings Berlin SXF Zweibrucken 15-Sep 14 Cologne/Bonn 02-Sep 3 Helvetic Zurich Reggio Calabria 12-Sep 2 Zurich Bari 13-Sep 2 Iceland Express Akureyri London STN 28-Sep 2 MyAir Bergamo Istanbul 07-Jul 3 Milan Bergamo Palma 21-Jul 2 Norwegian Warsaw 14-Sep 7 Warsaw Malaga 13-Jul 4 Warsaw 13-Jul 4 Warsaw CIA 01-Aug 4 Warsaw Milan MXP 14-Sep 4 Stockholm Krakow 15-Sep 4 Warsaw Alicante 13-Jul 3 Warsaw Girona 13-Jul 3 Stockholm Wroclaw 14-Sep 3 Warsaw Athens 15-Sep 3 Warsaw Dublin 15-Sep 3 Ryanair Pisa Trapani 14-Sep 7 Pisa Valencia 14-Sep 7 Pisa Doncaster 15-Sep 4 Pisa Karlsruhe/Baden 15-Sep 4 Glasgow PIK Wroclaw 01-Aug 3 Pisa Friedrichshafen 14-Sep 3 Pisa Torp 14-Sep 3 SkyEurope Orly Salzburg 15-Sep 3 Sterling Aalborg 18-Sep 18 Aalborg London LGW 18-Sep 6 Copenhagen Krakow 19-Sep 3 Billund Rome CIA 14-Aug 2 Aalborg Malaga 18-Aug 1 Bilbao Paris CDG 13-Jul 7 Valencia 18-Sep 7 Madrid Santiago 18-Sep 7 Santiago Paris CDG 18-Sep 7 Katowice Cork 14-Jul 3 Budapest Targu Mures 14-Jul 3 Katowice Doncaster/Sheffield 19-Sep 3 Katowice Oslo Torp 19-Sep 3 Budapest Eindhoven 19-Sep 3 Budapest Saeve 23-Sep 1

Cranfield University: Quarterly Report Q3 2006 for DG TREN 5 3. Air traffic

3.1 Passengers

3.1.1 Scheduled Passengers carried by AEA members in the three-month period to August 2006 totalled just short of 93 million, of which almost a quarter were carried on international flights within geographical Europe. However, in terms of passenger- kms, European services contributed far less, with the North Atlantic the top traffic generator representing 28% of the total. Although traffic increased by 5% overall, measured as year-on-year passengers carried in the three months, there was much stronger traffic growth on routes to some regions than on others. International flights within Europe and services across the South Atlantic exhibited higher than average growth, overshadowed by increases of 11% to the Asia/Pacific region. In the domestic markets load factors improved as capacity was cut back and passenger numbers grew, perhaps as AEA member airlines reacted to competition from low-cost competition.

Scheduled services of AEA members, June to August 2006 Passengers ASK RPK Load factor thousands millions millions % Domestic 27,386 21,231 15,333 72% Geographical Europe 44,841 64,148 48,214 75% Europe / N Africa Mid East 3,000 11,874 8,639 73% North Atlantic 8,211 64,987 56,058 86% South/Mid Atlantic 2,876 27,193 23,065 85% Europe/rest Africa 1,963 15,893 12,748 80% Europe /Far East, Australasia 4,632 46,544 38,361 82% Other 50 86 67 78% TOTAL 92,960 251,957 202,485 80%

In fact, the domestic market was the only one where AEA carriers cut capacity. Capacity increased on the important North Atlantic routes at a much higher rate than passenger demand, resulting in deteriorating average load-factors.

Scheduled services of AEA members, June to August 2006, growth over 2005 Passengers ASK RPK Load factor (% points) Domestic 1.7% -0.8% 2.6% 2.5 Geographical Europe 7.0% 4.4% 7.0% 1.8 Europe / N Africa Mid East 2.5% 11.2% 7.1% -2.8 North Atlantic 0.9% 2.5% 1.0% -1.3 South/Mid Atlantic 6.9% 3.1% 5.4% 1.8 Europe/rest Africa 3.3% 1.4% 1.8% 0.3 Europe /Far East, Australasia 11.1% 8.0% 8.6% 0.5 TOTAL 4.8% 4.0% 4.7% 0.5

Cranfield University: Quarterly Report Q3 2006 for DG TREN 6

Of the ten AEA carriers featured in the following chart, Alitalia and SAS were the only ones recording a reduction in capacity (measured in ASK) compared with the same three-month period in 2005. This was reflected in increases in load factor for both airlines of around one (SAS) and two (Alitalia) decimal points. Of the other eight airlines Virgin, Austrian and Turkish recorded deterioration in load factor, in all cases increases in capacity were recorded. BA and managed to increase capacity and load factor.

Scheduled service RPK: selected AEA members, June to August 2006, and 2005

AF

LH

BA

KL

IB

AZ 2006 VS 2005

SK

TK

OS RPK (m illion) 0 5,000 10,000 15,000 20,000 25,000 30,000 35,000

Source: AEA

IATA reported the smallest monthly increase in world-wide international passenger traffic (RPK) since the end of 2003 for the month of August 2006. The 4.8% year-on- year growth in international passenger traffic represents the fourth consecutive month of declining growth in passenger demand. International freight traffic rose 4.7%, rebounding from 3.7% growth recorded in July, but below the historic long-term average growth of 6.0%. For year to date figures, 2006 is 6.1% ahead of 2005, with European airlines recording growth of 5.3% in international RPK.

Year on year growth, January to August 2006

RPK ASK passenger FTK ATK Growth growth load-factor growth growth Africa 8.4% 9.6% 67.8 7.9% 6.8% Asia Pacific 5.7% 3.1% 74.8 5.2% 3.6% Europe 5.3% 4.3% 77.3 2.1% 3.9% Latin America -0.6% -1.8% 73.5 3.0% 1.4% Middle East 15.7% 14.7% 74.1 16.8% 16.0% North America 5.8% 4.8% 81.2 6.2% 6.8%

Industry 6.1% 4.7% 76.4 5.2% 5.3%

The average passenger load factor for August remained near record levels at 79.4%. North American carriers were ahead of all regions with a load factor of 82.7%, and

Cranfield University: Quarterly Report Q3 2006 for DG TREN 7 Europe in second position at 80.4%. For the first eight months of the year, passenger demand grew by 6.1% and freight by 5.2% over the same period in 2005. Average load factors for the period stood at 76.4%.

3.1.2 Low cost carriers

Selected LCCs: traffic, July to September 2006 (Q3) Passengers Load factor (%) Change thousands % change (%) (% points) Ryanair 11,480,000 21.1 89.0% 0 easyJet 9,325,000 9.8 89.0% 1 Air Berlin 4,820,206 14.4 85.3% -0.3 Germanwings 1,975,733 26.1 84.8% 0.4 Norwegian 1,503,141 58.7 84.7% -1.3 SkyEurope 991,216 46.2 83.8% -2.6 FlyNordic 314,290 0.5 FlyMe 215,200 174 66.2% 10

Since the last quarter Germanwings has been added to the list of regularly reporting low-cost airlines. Like FlyNordic which is a subsidiary of , Germanwings is also a subsidiary, in this case part of Eurowings in which Lufthansa has a controlling interest. The third quarter is traditionally the peak season for LCCs including as it does the main summer holiday season. As a result the top two, Ryanair and easyJet, managed booked load factors of just under 90%. All other reporting LCCs with the exception of FlyMe reported load factors in the mid-80 percent range, similar to the same period a year earlier. The smaller carriers such as Norwegian and SkyEurope continue to show the greatest growth in percentage terms though both suffered slight decline in load factor as a result of significant capacity growth. It is worth observing that Ryanair’s growth of just over 20% represents an increase of 2 million passengers, more than the total number carried by Germanwings or Norwegian. FlyMe’s dramatic growth in scheduled traffic is explained by the addition of new international scheduled services from Gothenburg in the summer season replacing charter flights.

3.1.3 Regional airlines At the end of September, to coincide with its annual general assembly in Barcelona, the ERAA published figures for the first half of 2006 which showed that intra- European traffic carried by its members was up 8.2% on the previous year. ASK growth was 5.9% on the same period in 2005. The average scheduled load factor for the half year was up 2.4 percentage points to 62.2%, the highest recorded figure in the organisation’s history. ERAA announced a campaign to improve transparency of air fares on airline websites and promoted a new “plain fares” logo which requires airlines to not only clearly state taxes and charges (or fully inclusive fares) and also to clearly state any credit card fees which apply when booking online.

Cranfield University: Quarterly Report Q3 2006 for DG TREN 8 3.2 Air Cargo

3.2.1 European airlines Air cargo traffic carried by AEA members increased by 2.3% overall for the eight month period to the end of August 2006.

Air Freight Traffic of AEA carriers by region, Jan-August 2005 vs Jan-August 2006

Jan - Aug 2005 Jan - Aug 2006 change TFTK (millions) TFTK (millions) Domestic 88.2 84.3 -4.4 Geographical Europe 502.5 484.9 -3.5 Europe / N Africa Mid East 717.5 776.1 8.2 North Atlantic 6,523.1 6,666.6 2.2 South/Mid Atlantic 2,501.9 2,402.7 -4.0 Europe/rest Africa 1,916.3 1,979.5 3.3 Europe /Far East, Australasia 10,741.9 11,150.1 3.8 Other 24.6 1.1 TOTAL 23,015.9 23,545.3 2.3

Traffic on the North Atlantic was up by 2.2%, with the fall on Mid- and South Atlantic routes (most of it coming from South Atlantic routes), offset by a 3.8% growth on routes to/from Asia and the Far East.

Air Freight Traffic of largest AEA carriers, Jan to May 2006 and 2005

Lufthansa

Air France

Cargolux Jan-Aug 06 Jan-Aug 05 KLM

British Airways

Virgin

Alitalia

Swiss

Iberia

SAS

0 1,000 2,000 3,000 4,000 5,000 6,000 FTKs (million)

Source: AEA

Traffic out of Asia is growing stronger than volumes into Asia, with upward pressure on yields for traffic from the region. Traffic carried by air within Europe accounted

Cranfield University: Quarterly Report Q3 2006 for DG TREN 9 for only 2.4% of the total FTKs, most being trucked to the European hubs. Intra- European and domestic air traffic declined by 3.6% for the latest eight months. Looking at the major AEA carriers over the same eight month period, Lufthansa’s traffic rose by just over 5%, while Cargolux experienced a fall of 6.4%. Air France grew strongly by 7.5% in contrast to its wholly owned partner, KLM, whose traffic was only 0.8% higher. Together they accounted for 30% of total AEA FTKs. British Airways advanced by 3.6% (experiencing slower growth over the past three months), with the smaller Alitalia’s drop of 10.9% indicating retrenchment and cost cutting.

3.2.2 Integrators FedEx International Priority (IP) revenue grew 17% for the quarter ending August 2006, as IP revenue per package grew 11%, primarily due to fuel surcharges, an increase in package weights, a higher rate per pound and favorable exchange rates. IP average daily package volume grew 6%. U.S. domestic express package revenue increased 5%. U.S. domestic revenue per package increased 7%, driven by higher fuel surcharges. U.S. domestic average daily package volume declined 2%, reflecting revenue management actions. DHL reported 4.7% higher revenues for their Express Corporate Division for the first six months of 2006, reaching €9.2 billion of which 63% was from Europe, 24% from the Americas and 13% Asia Pacific. Their European express division experienced 1.9% higher revenues, impacted by disposals of companies in the UK and and tougher competition and price cutting in the German market. UPS’s international package volume increased by 16.5% in the three months to June 2006, the same rate as over the first three months of the year. US export volume increased 6.5% and non-U.S. domestic volume was up 23.6% aided by acquisitions. Operating profit and volume growth were constrained by three fewer operating days in Europe compared to the same quarter last year. During the quarter, the company began direct air service from Shanghai to Europe and adding new flights connecting Shanghai to the U.S. and a new flight between Qingdao and Incheon, Korea. UPS reported an increase in international air cargo FTKs of 10.5% for the first five months in 2006, with strong growth of 13% on the Atlantic routes. However, their trans-Pacific operations still acounted for their largest share of international traffic (60%) in this period, also growing by 13% over the five months. FedEx carried 2,429m international FTKs over January to May 2006 compared to UPS’s 1,580m; together they accounted for 51% of total US carrier international FTKs. FedEx carries almost double UPS’s traffic on the North Atlantic. In terms of US domestic FTKs, FedEx had a 52% share of the total in this period, followed by UPS with 27% and ABX Air (owned by DHL) third with only 4%. This shows the dominance of the integrators within the US. Total domestic air traffic was little changed from the same quarter in 2005.

3.2.3 Other world regions Freight traffic for IATA member airlines increased by 5.2% in the first eight months of 2006 compared to the same period of 2005. The Middle East was the area of strongest growth, up 16.8% over the same period in 2005, followed by Africa with 7.9% growth and North America with 6.2%. Airlines based in the European region

Cranfield University: Quarterly Report Q3 2006 for DG TREN 10 exhibited the slowest growth with only 2.1%, while Asia/Pacific carriers advanced by 5.2%. Freight traffic for the Association of Asia Pacific Airlines members (17 international scheduled airlines based in the Asia/Pacific region) increased by 4.8% in the first eight months of 2006 compared to the same period of 2005 (in terms of freight tonn- kms). Their freight load factor improved by 1.1% points to 65.4%. August 2006 traffic was up by just over 5.5% suggesting continued growth of air freight markets to/from and within this region. Figures published for the 15 largest US airlines (including the integrators discussed above) for January to August 2006 gave growth of cargo tonne miles of 5.7% compared to the same period in 2005. Their international air cargo traffic increased by 8.0% for the two months, with domestic traffic up by only 3.3%. Trans-Atlantic traffic for the same US carriers for January to May 2006 was up by 6.1%, Pacific up by 6.8% and Latin America up by 4.3%, all compared to the first five months in 2005. Their total international traffic increased by 6.3% for the first five months, so growth has been stronger for the three months to August.

Cranfield University: Quarterly Report Q3 2006 for DG TREN 11 4. Airline financial performance

4.1 European Airlines Results for the second quarter of calendar year 2006 were available for the majority of larger EU airlines, and are shown in the table below. This quarter includes Easter and the first part of the peak summer period. Even taking this into account, British Airways’ 9.1% operating margin was remarkably good (close to their year round target of 10%), as was that of Swiss which has achieved a significant turnround. Air France-KLM and Lufthansa reported similar margins to Swiss. All these margins were reasonable given the pressure from higher fuel costs, and it will be hard to maintain them for over their full 12 month financial years. Iberia’s and SAS’s margin was lower, but still positive, and Finnair and Austrian only just exceeded breakeven.

Financial performance of major EU carriers for April to June 2006 April to June 2006 Revenues Operating Net result Op.margin Net margin ($m) result ($m) ($m) % % Air France-KLM 7,375 522 310 7.1 4.2 Alitalia 1,600 -4 -68 -0.3 -4.3 Austrian Airlines 883 8 -5 0.9 -0.6 British Airways 4,260 388 276 9.1 6.5 Finnair 638 7 1 1.1 0.2 Iberia 1,839 63 45 3.4 2.4 Lufthansa Group 6,612 488 233 7.4 3.5 Ryanair 720 174147 24.2 20.4 SAS Group 2,460 121 76 4.9 3.1 Swiss 1,304 93 90 7.2 6.9 Total above 26,387 1,860 1,105 7.1 4.2

Air France-KLM and Lufthansa Group returned much better operating results in US dollar terms than for the previous first quarter, with British Airways up by a smaller percentage. SAS, Iberia, Finnair and showed worse operating results in absolute terms. Alitalia improved but was still unable to operate at above breakeven, even though it achieved 8% growth in revenues, while Austrian showed a 15% increase in revenues but only generated a small operating profit, and net loss for the quarter. Lufthansa Group’s improvement included a similar trend in their passenger airline results: revenues in euro terms up 16%, from 1.6% better passenger yields and traffic up 1.2%. The passenger load factor was 0.7% points up, with unit costs (including fuel costs) only 1.2% higher. SAS Group results were influenced by an operating (EBIT) loss for their ground support businesses. This includes ground handling catering and cargo and accounted for 21% of group turnover. SAS airline achieved an excellent EBIT margin of 11% for the latest quarter helped by progress towards its tough unit cost and productivity targets, as did its hotels division. Its subsidiary airlines made a 6% EBIT margin and a healthy SEK209 contribution to the group’s EBIT.

Cranfield University: Quarterly Report Q3 2006 for DG TREN 12 Of the carriers doing worse, SAS, Iberia and Finnair all achieved good gains in passenger load factor, but only Finnair had a significant improvement in passenger traffic carried. The exchange rate was not a factor in the results for the past quarter, with the $/€ rate that falling very slightly from $1.261 to the €, averaged over the second quarter of 2005, to $1.256 for the same quarter in 2006. The UK pound rate against the US dollar was similarly hardly changed. Latvia’s recently privatized Air Baltic has returned to the black in the first half of this year, posting a profit of €1.4 million compared to the €4.5 million loss recorded in the same period in 2005. Revenue during the six month period ending 30 June increased a third to €72.4 million, while passenger numbers rose 44% to 635,000. Air Berlin revealed a second quarter net profit of €30 million and expects to post a full year profit. EBIT for the quarter rose from €8.8 million in the second quarter last year to reach €44.8 million for the three months ending 30 June 2006. Revenues for the period jumped €70 million for the quarter to €401 million, and are up almost 15% over the first half to €625 million The profitable second quarter in part offset losses incurred in the first half. Air Berlin halved interim operating losses to just under €13 million and cut net losses from €43 million for the first half last year to just €1 million. EasyJet has increased its full-year guidance following a strong revenue performance for the three months ending 30 June 2006 and now expects pre-tax profits to grow by 40-50% compared to 2005. Unit revenue during the three-month period ending 30 June grew 17% year-over-year, partially as a result of the timing of the Easter holiday. The airline expects passenger revenue per seat to be up 3% to 4% for the full year, and expects growth in ancillary revenue per seat to be around 30%. However the airline announced that it estimated is costs would rise by £4 million as a result of heightened anti-terrorist security measures introduced in August 2006. FlyNordic is assessing possible cuts to its winter schedule after the carrier turned in a first-half operational loss. FlyNordic passenger numbers were up by 10% at the beginning of the year, the airline has suffered a first-half operating loss. Owner Finnair has not disclosed the extent of losses but says that profitability improved in the second quarter. Ryanair recorded an 80% jump in net profit in the first quarter ended 30 June on the back of continuing growth and improved yields. Net profit increased to a record €115.7 million from €64.4 million in the same three months of last year. Revenue increased 40%, to €566.6 million from €404.6 million. The strong earnings “reflect a much stronger yield environment despite substantially higher oil prices”, although it does not expect yields to remain so healthy through the rest of the year. It carried 10.7 million passengers during the period, or 25% more than in the same three months of last year. Yields increased 13% while ancillary revenues were up 31%. Unit costs excluding fuel were reduced 2%, while they were up 6% when fuel is included. The airline has hedged its fuel requirements for the fourth quarter at an average of $73, slightly lower than it had anticipated. Ryanair raised its fiscal full-year net profit guidance to around €335 million, representing an 11% year-on-year increase compared to 2005. SkyEurope Airlines poor financial situation continued with third-quarter operating losses worsening by 15% to €14.8 million on 62% increased revenues for the three-

Cranfield University: Quarterly Report Q3 2006 for DG TREN 13 month of €44.6 million. Its introduction of its first (of five new) Boeing 737-700 aircraft led to an increase in capacity of 50%, far exceeding a passenger traffic rise of 37%. But the airline says that the reduction in load factor from 81% to 75% was “more than offset” by a “very strong” increase in yield. Fuel accounted for 28% of the carrier’s operating expenses, which increased by 47% to more than €59 million overall. The carrier has just sealed an agreement whereby a private investment fund will inject new capital into the airline, and the airline is to direct a “strong focus” on achieving profitability.

Key developments and announcements- network carriers Cost reduction: In July 2006, Austrian Airlines accused the fuel supplier, OMV, of abusing its dominant market position by inflating the price of fuel, and called upon Austria’s competition authority to investigate the company’s abuse of its dominant position and inflating the price of aviation fuel. The complaint was endorsed by the Association of European Airlines. ‘In the view of Austrian Airlines Group, there is reason to suspect that OMV has abused this position of domination of a market in the form of price abuse…as well as abuse of its distribution structure through the employment of other international oil companies as middle companies, creating the false impression of competition,’ the carrier said in a statement. Jet kerosene prices were little changed over the three months to August 2006, averaging 216.5 US cents per US gallon in August. This price was 15% higher than the same month of 2005. August 2006 was 29% above the average price for the whole of 2005. Austrian Airlines Group announced in July 2006 that it is to axe its Australian services as part of an overhaul that will involve strengthening its product offering, in a shift of emphasis from quantitative to qualitative growth. Labour costs: There both encouraging and disturbing signs on the European airline labour front. Austrian Airlines announced in July 2006 that it was seeking more flexibility in its labour agreements to help counteract the seasonal nature of the aviation business, and provide a ‘stronger correlation’ between salary and the group’s performance. In this regard it had begun exploratory talks with staff representatives and the trade union over new collective agreements. Austrian’s previously-announced revamp of its organisational structure, establishing a new streamlined, merged network and sales department, is also designed to support the shift in emphasis. British Airways announced on 18 July that it hoped to generate annual savings of £13.2 billion ($24.1 million) after striking a deal covering work practice changes with unions representing its 1,800 London Gatwick-based cabin crew. The new agreements with the T&G and Amicus unions bring together the two previously separate cabin crew operations for short and long-haul. On the other hand, in late September 2006, cabin crew at ’ Swedish division were planning to start industrial action on 5 October should a fresh round of arbitration talks over working conditions fail. The HTF union, which represents around 1,000 of the Swedish division’s 1,200 cabin crew, will begin an initial round of arbitration talks today.

Cranfield University: Quarterly Report Q3 2006 for DG TREN 14 Furthermore, a number of Alitalia unions had called a 24 hour walkout for 29 September 2006 as they continued to protest over the company’s continued financial difficulties and additional restructuring initiatives aimed at securing its turnaround. These are reported to include the sale of part of its ground services division Alitalia Servizi, a plan hotly opposed by unions. The strike was called off after securing a meeting to discuss their concerns with Italian Government ministers. Finally, two unions representing Iberia flight attendants had called three days of strike action later in July 2006, adding to the woes the Spanish national carrier is already facing from a planned seven-day strike by its pilots. Both unions were concerned that job losses would result from Iberia’s involvement in Catair, which is scheduled to launch operations from Barcelona in October. The pilot’s strike did take place over three days in July, and was estimated to have cost the airline €15m. Barcelona Airport came to a near-standstill on 28 July when Iberia ground handlers unexpectedly abandoned their posts and congregated on one of Barcelona’s runways to protest the loss of the Spanish national carrier’s handling contract at the airport. The protest followed Spanish airport operator Aena’s decision not to renew Iberia’s Barcelona handling contract and instead award licences to rival companies through a public auction process. Industrial action was called off when AENA tentatively agreed to allow Iberia to carry out future handling activities for its own flights as well those of its regional feeder and planned low-cost start-up . Product development: A number of European airlines face delays in their A380 delivery schedules, which have been reported as being ‘up to two years’. Air France-KLM had expected to receive their first A380 at the beginning of 2008, and is in negotiation with Airbus over compensation. The delay will mean it has to operate some B747-400s longer than planned, with some additional costs. Austrian Airlines rolled out in September 2006 the first part of its plan to shift emphasis from quantitative to qualitative growth with the introduction of its new business class service. The carrier is in the process of reconfiguring nine Boeing 777 and 767 aircraft with its new business class suite, which includes 49 lie-flat sleeper seats. In September 2006, the French government announced its intention to implement its new airline quality label, which it has named ‘Horizon’, with initial audits planned for November. This is a voluntary certification scheme aimed at helping tour operators and travellers to judge carrier reliability and safety. Overseen by the national committee for security, quality and transparency in leisure travel (CNTT), the plan to create a list of audited operators was spurred by the Egyptian Flash Airlines Boeing 737 crash in 2004 which killed a number of French tourists. Privatisation: The Irish government announced its intention to sell part of its holding in Aer Lingus on 28 August 2006, to be combined with an offer of 208.4m new shares. A prospectus was subsequently issued and a listing obtained on the London and Irish Stock Exchanges. An indicative price range for the offer was given as €2.10 to €2.70 (subsequently fixed at €2.20), with dealings due to start on 2 October. The proceeds from the sale of the new shares are intended to be used to finance the airline’s fleet expansion, as well as a one-off contribution to its pension fund. After the exercise of the over-allotment option, the government’s stake would be reduced to 28%.

Cranfield University: Quarterly Report Q3 2006 for DG TREN 15 Key developments and announcements- low-cost carriers Cost reduction: Low Cost Carriers (LCCs) are the main drivers of aviation growth according to figures from OAG. Capacity on no frills carriers has doubled in the last four years from 22,000,000 seats on 169,000 flights in September 2002 to 46,000,000 seats on 323,000 flights in September 2006. While world air transport grew by 2% last year, the volume of low cost flights worldwide grew by 14%. OAG said LLCs now accounted for 17% of all seat sales and 15% of all flights across the world. It said that about 18% of the flights in Europe and the US were now by LCCs. Product development: Flybe took delivery of the first of its 18 Embraer E-195 aircraft. Flybe is the launch customer for this new jet and have configured it in a single-class 118-seat cabin. The new aircraft will used to replace its fleet of BAe 146s. Ryanair has announced that its entire fleet of Boeing 737 aircraft will be fitted with OnAir's onboard mobile communications solution. It will mean that from mid-2007 (subject to relevant regulatory approval) Ryanair's passengers will be able to call, text and email using their mobile phones, and PDAs at close to international roaming rate. Budget carrier EasyJet introduced in September a checked baggage charge aimed at expediting the check-in procedure at airports while heightened security restrictions are in place in the UK. Ryanair also remains committed to moving ahead with its efforts to reduce the number of passengers checking in bags on its flights, despite recent UK measures temporarily restricting the amount of hand luggage that can be taken on board. Flybe is considering charging passengers who check-in for flights at the airport rather than through the Internet as a means of boosting ancillary revenues.

Consolidation German competition regulators have approved Air Berlin’s acquisition of low-fare carrier DBA, stating that the tie-up will help counter Lufthansa’s domination of the market. Air Berlin agreed to acquire Munich-based DBA in August 2006. Regulator Bundeskartellamt says that the route networks of the two airlines complement one another and that there are only a few, competitively-harmless overlaps.

Key developments and announcements- charter/leisure airlines Further rationalization of Europe’s charter/leisure airlines sector is evident from the decision of the TUI Group to integrate its charter carrier Hapagfly with its low cost scheduled airline Hapag-Lloyd Express. The bookings split of the combined operation between charter and low cost scheduled is expected to be 40:60, reflecting the hybrid nature now of many former charter operators (for example, Monarch Airlines in the UK now has a 50:50 split between these two elements of its activities). Aside from gaining scale economies in combining the two carriers, the elimination of any brand confusion among consumers should also result. The growth of internet booking and the relative ease with which travellers can put together their own holiday packages (dynamic packaging) is a key driver of these developments. MyTravel Group’s and Thomas Cook Group’s half yearly financial results reveal the difficult trading conditions currently being experienced in the UK market. Aside from the increasing encroachment of their traditional short haul markets by low cost

Cranfield University: Quarterly Report Q3 2006 for DG TREN 16 scheduled airlines, key factors which depressed demand in 2006 have included the Football World Cup, good weather in northern Europe and increased concerns about security at a number of tourist destinations. Further evidence of weaker market demand in the UK is shown by the fact that a total of 25 tour operating companies failed in the year up to March 2006, 11 more than in the equivalent period a year earlier and the highest level for the past 10 years.

4.2 Other major world airlines The ten US major airlines together reported an operating profit of US$2.6 billion for the quarter to end June 2006, compared to only $442m in the same period of 2005. However, they made a net loss of $1,143m versus $1,707m in 2005, but the net figure in 2006 included a large amount of restructuring provisions, especially $2.21 billion from Delta Air Lines. Total revenue was up by 24%. All the ten airlines made an operating profit in the latest quarter, with Delta and Northwest moving from losses in the previous quarter. At the net level, Delta and Northwest were the only airlines to be making a loss in 2006, but both took a large hit from Chapter 11 restructuring provisions. Both AMR and Delta produced a respectable operating margin of 8%, with United at 5%. Southwest’s operating margin at 16% was well ahead of JetBlue’s 8%. JAL Group reported an operating loss of Y31.9 billion for quarter to end June 2006, little changed from the same quarter in 2005. It made a net loss of Y26.7 billion, slightly better than the Y38.3 billion loss in the previous year. Revenues were up for international services, with little change in domestic and cargo revenues. Singapore Airlines reported an operating profit of S$273.8m for their quarter to end June 2006, up 8% from the same period in 2005. They made a net profit of S$594.2m, well up from the S$251.4m in the previous quarter. Fuel represented 38.9% of SIA group expenditure, up 6.9% points from the previous quarter. Staff costs were2.5% despite revenue advancing in the quarter by 12%. The passenger operations generated S$190m, SATS S$48m and SIA Engineering S$33m, while their cargo subsidiary made a small operating loss of S$5m. Malaysian Airlines announced an after tax loss of MYR176m for their second quarter to end June 2006, which was better than their previous year’s MYR276m loss. At the operating level the loss was MYR161m, with their cargo division making a MYR38m profit. From 2002, Malaysia Airlines operated all domestic airline services on behalf of PMB, through an arrangement that transferred the financial effects of the revenue and costs of the domestic airline operations to PMB. From August 2006, MAS will operate and take full financial responsibility for 23 domestic trunk routes. Korean Air reported an operating profit of KRW69 billion for the quarter ending June 2006, versus KRW77 billion in the previous quarter. Fuel costs were KRW99 billion or 20% higher, and sales and labour costs up by 9% and 5% respectively. Their net result for the quarter was KRW 15 billion versus a loss of KRW43 billion in 2005, helped by a KRW65 billion foreign exchange gain for the latest quarter. Thai Airways reported a small operating margin of 2.3% (US$25m) for April to June 2006, compared to their loss of $92m in the same quarter of 2005. The Pakistan national carrier, PIA increased its loss from US$17m to $30m in the same quarter of 2005 and 2006 respectively; the 2006 loss was equivalent to a negative margin of 10% of revenues.

Cranfield University: Quarterly Report Q3 2006 for DG TREN 17 5. Airports

5.1 General traffic trends Year-on-year growth of passenger traffic at Europe’s ACI member airports was 7% in the first half of 2006 (compared with the same period in 2005). This level of growth in Europe was above the increase seen over the same period at ACI airports worldwide (5.2%), placing Europe towards the top of ACI’s growth table. Middle East airports lead the growth league at 12.3%, but from a very low base (ACI airports in the region handled under 2.5% of ACI total passenger traffic in the first half of 2006, while the passenger throughput at European airports represented 31% of the total). Strong positive performance in Europe, and at ACI’s Asia Pacific airports (up 9.8%) compensated for North American airports, which recorded a 0.5% growth in passenger traffic. Cargo traffic performance recorded the same ranking among regions. ACI airports worldwide recorded 3.8% growth year-on-year. The corresponding increase in European cargo traffic was somewhat lower than the global figure, at 3.4%. ACI’s North American airports again underperformed the other ACI airports, recording an increase of just 0.2% year-on-year to June 2006.

Year-on-year growth, year to June 2006 v same period 2005 at ACI airports

9.8%

7.0% 7.3%

5.2%

3.8% 3.4%

0.5% 0.2%

Passengers Freight

Asia Pacific Europe North America Total ACI

Source: ACI

The chart below shows the position of European airports among the twenty busiest in the world in terms of passenger throughput in the first half of 2006. The league is dominated by US airports, where traffic is mainly domestic, reflecting the size and economic activity of the United States. London’s Heathrow ranks third, followed by Tokyo Haneda.

Cranfield University: Quarterly Report Q3 2006 for DG TREN 18 In terms of growth at the largest world airports, Atlanta recorded a drop of almost 5% - representing around 2 million passengers. Beijing far outstrips the others, yet another indication of China’s rapidly developing economy. Bangkok is in second place on the growth leagues, while Madrid is in top growth position among the European airports included in the world “top twenty”.

Passenger traffic and growth, year to June 2006 at the top World airports

40,000,000

30,000,000

20,000,000

10,000,000

0 Paris CDG Tokyo HND Atlanta ATL Atlanta Beijing PEK Madrid MAD Denver DEN Denver Houston IAH London LHR Phoenix PHX Orlando MCO Chicago ORD Chicago Bangkok BKK Frankfurt FRA Frankfurt New York JFKNew Las Vegas LAS Hong Kong HKG Amsterdam AMS Los Angeles LAX Minneapolis MSP Dallas/Ft Worth DFW Worth Dallas/Ft 25%

20%

15%

10%

5%

0% growth over same period, 2005

-5% IAH IAH JFK ATL ATL LAX LAX LAS LAS LHR LHR FRA FRA PEK PEK BKK BKK PHX PHX DEN DEN HND HND AMS AMS HKG MSP ORD ORD CDG CDG MAD MAD DFW DFW MCO Source: ACI

5.2 Traffic growth at individual airports Average year-on-year growth of passenger traffic in the first half of 2006 at Europe’s top twenty airports was 5.8%, a statistic influence by relatively low growth rates at capacity-constrained Heathrow and Frankfurt. Dublin recorded the highest growth rate at over 15%, while Barcelona and Milan Malpensa increased year-on-year passenger traffic by approaching 12%.

Cranfield University: Quarterly Report Q3 2006 for DG TREN 19 Passenger traffic, year to June 2006 at the top European airports

35,000,000

30,000,000

25,000,000

20,000,000

15,000,000

10,000,000

5,000,000

0 Oslo OSLOslo Paris CDG Paris Milan MXP Palma PMI VIE Vienna Rome FCO Rome Zurich ZRH Zurich Dublin DUB Istanbul IST Istanbul Madrid MAD Madrid Munich MUC Munich London LHR London STN London LGW Frankfurt FRA Frankfurt Barcelona BCN Barcelona Stockholm ARN Amsterdam AMS Manchester MAN Manchester Copenhagen CPH 20%

16%

12%

8%

4%

growth over same period, 2005 0% IST IST VIE VIE PMI PMI LHR LHR FRA FRA STN STN OSL ZRH ZRH FCO FCO BCN CPH DUB ARN MXP MXP AMS AMS CDG CDG MAD MAD MAN MUC MUC LGW LGW

Source: ACI

As in the previous quarter’s report, it is clear that the low-cost impact on traffic distribution around major cities continues, reflecting also the capacity constraints at major hubs. At Rome FCO growth in passenger traffic was 4.5%, below average for the top-twenty airports, while the city’s Ciampino airport recorded a 21% increase. In the north of England, Manchester had low growth at 0.5% while Liverpool climbed 13%. At smaller European airports the impact of low-cost operators continues to be significant. Bratislava passenger traffic increased by 67% in the first half of 2006 compare with the same period in 2005. Basle airport’s LCC activity lifted passenger traffic by one-third, well ahead of 6% increases at Geneva and Zurich. Malta and the Cypriot airport of Larnaca recorded falls in passenger numbers over the same period, perhaps reflecting changes in patterns of tourism and the strong charter component at these airports at a time when travellers are switching to “self build” holidays using low-cost carriers.

Cranfield University: Quarterly Report Q3 2006 for DG TREN 20 Passenger traffic, year to June 2006: selection of smaller airports in the study region

7,000,000

6,000,000

5,000,000

4,000,000

3,000,000

2,000,000

1,000,000

0 LJU BTS BUD WAW OTP LUX Warsaw Riga RIX Ljubljana Budapest Bratislava Sofia SOF Sofia Lisbon LIS Malta MLA Malta TLL Tallinn Athens ATH VNO Vilnius Zagreb ZAG Zagreb Luxembourg PRG Helsinki HEL Helsinki Keflavik KEF Keflavik Larnaca LCA Larnaca 70%

60%

50%

40%

30%

20%

10%

growth over same period, 2005 0%

-10% LIS LIS RIX RIX TLL TLL LJU LJU LUX LUX HEL HEL LCA BTS BTS KEF ATH ATH MLA MLA ZAG ZAG OTP OTP SOF SOF BUD BUD PRG PRG VNO WAW WAW Source: ACI Europe and airports

5.3 Developments in airport ownership Six Portuguese companies have formed a consortium which will prepare to participate in the anticipated privatisation of national airports operator ANA and construction of the new Lisbon airport. The government has plans to privatise part of its stake in ANA over the period 2006-7 and to construct a new airport at Ota. The consortium is led by Banco Comercial Portugues and includes Banco Comercial Portugues, Caixa Geral de Depositos and Banco Espirito Santo, Mota Engil, Somague and Brisa. Macquarie Airports has secured additional shares in Airport. It now holds 53.9% of the company.

5.4 General airport developments Flughafen München, the company that operates Munich Airport, submitted a planning application to the regional government of Upper Bavaria for approval to construct a third runway. Assuming there are no delays to the approval process, the company expects this runway to be fully operational by 2011.

Cranfield University: Quarterly Report Q3 2006 for DG TREN 21 5.5 Regulatory issues The high court in Ireland overturned a decision by the country’s airport regulator to designate as slot coordinated. The judgment claimed that the regulator had not followed the correct procedures as laid down in an EC regulation on slot allocation. The airport will now function as schedules facilitated where reliance is placed on voluntary co-operation with airlines. The consortium which secured the tender to operate Bratislava and Kosice Airports plans to take the Slovak Government to court for blocking the transaction. The consortium, led by Austria’s Flughafen Wien, secured a 66% stake in both airports in February 2006. The Slovak government was reported to have asked one of the consortium members (Penta Investments) to withdraw from the contract. The European Commission called for greater transparency and commonality in the application of security-related airport charges. In a report, the Commission also affirmed that public financing of airport security would not constitute state aid. The European Commission has approved the payment of EUR65.5 million in aid payments awarded by the Irish Government to six of the country’s regional airports. The grants are used to finance up to 90% of safety and security-related investment and up to 75% of the cost of facility expansion and improvement. UK route development support for air links with non-European destinations is to be halted by the European Commission with effect from June next year. Schemes have been in operation in Scotland, Northern Ireland and Wales to assist airports in attracting new international services. The payments are made to airports in order to offset a proportion of the aeronautical charges user costs over a period of time not exceeding three years.

5.6 AEA delays AEA reported their punctuality statistics for the second quarter of 2006. The share of short/medium haul departures on time or within 15 minutes of scheduled time was 79.8%, an improvement of 2.1 percentage points on same quarter of 2005. The average figure masks significant differences associated with airports. The top five worst performing airports all deteriorated compared to the second quarter of 2005: for the latest quarter, AEA airlines at Madrid reported 28.7% intra-European flights delayed by over 15 minutes, with Paris CDG 28.5%, London Heathrow 27.4% and London Gatwick 27.0%. The best results were reported at Brussels (13.8% delayed), Istanbul (14.6%), Geneva (14.6%), Helsinki (15.6%) and Vienna (16.1%). Both Vienna and Istanbul improved since the previous quarter, delays increased at Helsinki, with Geneva and Brussels unchanged.

Cranfield University: Quarterly Report Q3 2006 for DG TREN 22 6. Air Traffic Control

Single European Sky ATM Research (SESAR) US FAA administrator Marion Blakey and European transport commissioner Jacques Barrot signed a co-operation agreement aimed at ensuring that the two sides co- ordinate their efforts to develop future air traffic management systems. Europe is proceeding with the definition phase of its Single European Sky research programme SESAR while the FAA expects to produce a concept of operations this summer for its Next-Generation Air Transport System (NGATS). Participants in the consortium managing SESAR have submitted the first of six deliverable items contained in the project’s definition phase. This first item, a shared industry view of the present air traffic management environment, has been completed on schedule. The study claims that Europe's air traffic management (ATM) suffers from so much inefficiency that it costs €3.4 billion more than necessary to run. It describes the European ATM system as "some 100 main European airport nodes linked together by approximately 600 airspace sector nodes operated by more than 36 air navigation service providers". SESAR estimates the total ATM system unit operating cost at €0.76/km for en-route services, down by 13% from 2003, but still around twice as expensive as that in the USA. The main conclusion is that a new ATM system must be implemented with a service-centric approach within a business framework, and must be able to cope with expected market growth and meet the societal requirements. The target is to deliver a future ATM system for 2020 and beyond which can, relative to today's performance, enable up to a three-fold increase in air traffic movements whilst halving the unit cost and enabling a 10% reduction in the effects aircraft have on the environment. The report notes that, at present, ATM is a factor in 3.6% of all accidents, although there has been no ATM-related mishap since 2003. One of the fundamental aims of SESAR is to improve safety performance by a factor of 10.

Cranfield University: Quarterly Report Q3 2006 for DG TREN 23 7. Environmental developments

A number of reports were published in the quarter. The European Parliament adopted a resolution that proposed the application to air transport of a combination of measures: these supported the application of the emission trading system to the aviation sector so that airlines that exceed the limits of emissions would be able to buy emission credits from those who stay below their designated limits. Parliament also called for improvement of the air traffic management which can save fuel and reduce emissions. This would allow the airlines to shorten waiting times before departure and time spent in the sky before landing when the airport is congested. MEPs also urged the imposition of a tax on jet fuel used on domestic and intra-EU flights to ensure that other kinds of transport can compete fairly with aviation. The UK Parliamentary Environment Audit Committee published its report on aviation in August calling for government to raise taxes (VAT) on domestic flights and work with other governments to do the same to international flights within Europe. It acknowledged the significant potential benefits of including aviation within the EU ETS, but said that there remained very considerable uncertainties to be resolved before it could have confidence that such benefits would actually be realised. It suggested that the Air Passenger Duty should be raised to slow the growth of aviation and stabilise its absolute level of emissions, but noted that it was a "blunt instrument" that did not differentiate between the relative carbon-efficiency of different flights. Its response to this was that APD could be levied per flight, rather than per passenger. There were also announcements of further studies being commissioned. In the UK, the government funded a study looking at the ‘opportunities for meeting the environmental challenger of the growth in aviation (Omega)’ that will be undertaken by a number of universities (including Cranfield) together with industrial partners including Airbus, Rolls-Royce, British Airways and Manchester Airport. At the Farnborough air show, a seven year programme to speed up the entry into service of ‘greener’ aircraft (Clean Sky) was signed up to initially by seven EU aerospace companies. The €1.6 billion programme is to be part funded by the EC under Research Framework 7. This will validate the future technology designed to meet long-term goals of cutting noise and reducing emissions set by ACARE. Eurocontrol proposed the incorporation of environmental charges into its route charging system, as an interim measure while the introduction of an emissions trading scheme is pursued by the European Commission. This was included in its latest business plan, published in August 2006. One idea was to vary charges according to flight level, using three-dimensional navigation technology. This recognises the variation in environmental impact from aircraft emissions at different altitudes. Boeing and GE announced they expect to meet noise reduction targets for the B747-8, designed to meet London airports’ quota count (QC2) target. The B747-8 is planned to give a reduction in noise levels of around 10 dB compared to the B747-400, putting it below ICAO Chapter 4 standards. It is expected to be 15% more fuel efficient than the B747-400. The first delivery will be to Cargolux in September 2009.

Cranfield University: Quarterly Report Q3 2006 for DG TREN 24 8. Aircraft and manufacturers

Airbus The quarter began with the continuing problems with the A380 haunting both EADS and Airbus. On 2 July the resignations of Noel Forgeard (co-CEO of EADS) and Gustav Humbert (CEO of Airbus) were announced, their replacements being respectively Louis Gallois (then head of the SNCF, formerly head of Aerospatiale and SNECMA) and Christian Strieff (former deputy CEO of Saint Gobain). In addition new management and reporting lines within Airbus were announced. Within two weeks, the Farnborough Air Show presented Christian Strieff with an opportunity and the challenge of setting out the current status of both the A380 and proposed A350 programmes. With regard to the A380, a management review was initiated with the aim of restoring customer confidence in the programme and also to review the whole supply chain management. On the A350, Airbus effectively relaunched the aircraft as the A350XWB (extra wide body) a design which incorporated some radical over the previously announced A350 which had attracted some criticism from potential customers (not least ILFC). The changes included a move away from the traditional Airbus wide-body cross section used on the A300/310/330/340), a new wing, new engines and new avionics. While the relevant governments had made commitments to provide launch aid these offers would not be taken up until Airbus made a firm decision to launch the type, then set for October 2006. On 27 July, EADS’ Airbus division announced that they were on track to deliver a total of 430 aircraft in 2006. In the first half of the year they had delivered 219 aircraft (compared with 189 in the same period in 2005). In terms of orders received, 117 firm orders had been received in the first half of the year with another 90 announced at the Farnborough Air Show. The total revenue received by Airbus had increased by 17% to €13.15 billion, however, increased expenditure on the A380 had offset much of the cost reduction initiatives within the company and the earnings posted only rose by 3% to €1.49 billion. On 6 September the BAE Systems board formally approved the decision to sell its stake in Airbus and a week later its CEO was claiming that further delays in the A380 were expected, however, at that stage Airbus would not confirm this.

Boeing Boeing announced their first half results with a 65% increase in earnings to $1.4 billion – following an increase of revenues of 26% to $14.2 billion. The quarter’s results were dented by the impact of legal issues surrounding defence contracts and the Department of Justice. At that time Boeing were predicting that the annual delivery figure for 2006 would be 395 aircraft. It had secured orders for 311 aircraft in the last quarter and held a backlog of orders totally a record $142 billion. On July 26 Boeing delivered the 2,000th Boeing 737New Generation aircraft, this is seven years’ earlier than all previous aircraft which have achieved this level of success. At that date Boeing held 1,365 unfulfilled orders for the aircraft, of which

Cranfield University: Quarterly Report Q3 2006 for DG TREN 25 399 were received in the year to that date, making up nearly 80% of the total commercial aircraft orders received by Boeing.

Bombardier The Canadian manufacturer continued to suffer from the downturn in demand for regional jets and admitted that it was relying more and more on business aircraft orders. On 5 September it announced that it had suffered a drop in deliveries of 15 regional jet aircraft on previous year down to only 16 CRJ900s, while its revenue fell by almost a half to $58 million. Deliveries for the full year were still tentatively forecast to be 75 aircraft, though it was felt that the production rate would have to be cut if aircraft demand did not pick up shortly. As a sign of the shift of emphasis, only nine of the 67 orders placed in the second quarter were for commercial aircraft.

Embraer Embraer announced healthy Q2 figures on 14 August, with profits rising 67.6% to a record $139.1 million. During the quarter deliveries will up from 30 for the same period last year to 36. However, the company admitted that the “learning curve” of the E-190 and 195 aircraft and the appreciation of the Brazilian Real had an impact on its gross margin with this dropping from 31.4% to 28.2%. On 1 September, Embraer delivered the first E-195 to flybe, the UK based regional low cost airline. Equipped with 118 seats the aircraft will help the airline to replace its ageing BAe 146 aircraft and help it to expand its network. In some ways this is a similar approach to that of JetBlue, the US-based LCC which operates a two aircraft type fleet, the A320 and E-190, while flybe will operate their larger E-195s alongside its smaller Q400 turboprops.

ATR The Franco-Italian turboprop manufacturer announced at the beginning of August that some ATR42 and 72 manufacturing work will transfer from to Romaero’s facilities near Bucharest in Romania, ultimately this could create up to 200 jobs.

Cranfield University: Quarterly Report Q3 2006 for DG TREN 26 9. Special topic: LCC business models

Industry analysts seem to agree that the three largest so-called low-cost scheduled airlines operating in Europe are Dublin-based Ryanair, London-based easyJet and Berlin-based Air Berlin. Latest traffic statistics for these three airlines show that between them they have carried over 87 million passengers in the last 12 months at a load factor of better than 80%. Classifying these airlines together as ‘low-cost’, however, disguises the fact that all three have, in many respects, very different business models.

Origins All three airlines had quite different beginnings with Air Berlin actually being the oldest. Its origin as an airline can be traced back to the late 1970s and for many years it operated as a traditional charter airline, primarily serving the package tour market to Palma in . Only in September 2002 did it start operating what might be considered low-fare scheduled services under the City Shuttle brand name. Since then it has continued to operate and provide capacity for German tour operators to destinations around the Mediterranean but has focussed the majority of its growth on the scheduled point-to-point market between various major European cities. Ryanair began life in 1985 as a less than successful regional airline operating a full- service product (including business class) between the UK and Ireland. Only in the 1990s under the leadership of Michael O’Leary did it start to evolve into the no-frills, low-fare, pan-European airline inspired by Southwest that we know today. easyJet is the only one of these leading airlines that was actually started as a true no-frills airline right from the start. Its business model focussed on cutting out travel agents and dealing directly with customers. However, in 1995 when the airline began, the internet was in its infancy as a commercial tool and so the airline operated a large call centre and painted the telephone number in large characters on the side of the aircraft.

Network strategy Each of the airlines has adopted a slightly different approach to its network strategy. This is influenced by its business model and just how determined the airline is about keeping costs low. Ryanair’s absolute devotion to cost minimisation means that it has focussed on developing routes between secondary airports across Europe, many of which had few scheduled airline services before Ryanair. However, there is a price to pay for the airports in that the revenue they earn from Ryanair is low. Instead the airport has to rely on the volume of passengers to generate revenues in other areas such as airport parking and retail. Although London Stansted is now a major airport with over 20 million annual passengers when Ryanair first shifted operations there from nearby London Luton, it was an airport with few scheduled services and a brand new passenger terminal which airport owners BAA were keen to see put to good use. Ryanair’s recent bases have included Nottingham East Midlands, Pisa and Bremen all regional and relatively uncongested airports with spare capacity. However, its most recent base announcement of Madrid Barajas breaks this pattern as the airport serves over 40 million passengers and appears not to offer the type of fast, efficient and low- cost service that other airports do. With growth currently running at over 20% per annum the airline is constantly launching new routes. Increasingly, though, the airline

Cranfield University: Quarterly Report Q3 2006 for DG TREN 27 is finding it harder to find markets that can sustain daily flights between so many secondary airports across Europe. As a result many of the airline’s newest routes are being operated at frequencies of between three and four flights per week, making it difficult to capture much in the way of business traffic. easyJet’s network development has focussed much more on primary airports and connecting major cities or catchment areas. As a result average frequencies on easyJet routes tend to be higher than on Ryanair routes. Although easyJet prefers to operate from secondary airports that serve a major catchment area (such as London Luton and Berlin Schőnefeld) it also has bases at primary airports such as Milan Malpensa, Paris Orly, Geneva and Madrid. However, there is a price to pay for operating from these airports. They tend to be more expensive and operationally more congested leading to more costly and less efficient operations. Air Berlin’s strategy for its scheduled business has been to focus primarily on a few major European cities. Initially it served London from a number of German regional airports but has since developed its network to include Amsterdam, Barcelona, Copenhagen, Milan, Rome, Paris, Vienna and Zurich. It has even developed a hub at London Stansted and operates UK domestic services to Belfast, Manchester and Glasgow which connect to a range of German destinations. Its charter network has a major hub at which it feeds from around 20 airports in and elsewhere. It then offers onward connections to nearly 20 cities in Spain and Portugal. It also operates a mini-hub at Nuremberg in Germany. This network strategy goes very much against the grain of the traditional low-cost point-to-point network philosophy.

Aircraft type Since its re-invention as a pure low cost airline Ryanair’s fleet has relied exclusively on the Boeing 737 and its various derivatives. Having started with the smaller -200 series Ryanair became the first major European low-cost carrier to order the -800 with 189 seats on board. It now operates over 100 of these aircraft with over 200 more on order. easyJet also began life with older Boeing 737s before setting on the -300/-700 series with 148/149 seats. When it acquired Go in 2002 it inherited more of the same kind of aircraft. However, in what was seen at the time as a bold decision it placed a large order for new aircraft with Airbus whose A319 offers just over 150 seats. This means that for several years the airline will operate with a mixed fleet, something once considered taboo for a low-cost airline. Air Berlin too has shifted from an all-Boeing fleet to a mixed fleet involving both Boeing 737s and Airbus A320s. On some routes where the airline wishes to offer higher frequency to appeal to business passengers it even operates some smaller, wet- leased Fokker 100s.

Service quality This is where the real difference between these airlines can best be seen. Ryanair offers nothing for free and expects passengers to pay for all food and drink and is now charging for all items of luggage that are put in the hold. It even tried charging for in- flight entertainment but this proved a rare business failure for the airline. Seats are not assigned and if flights are significantly delayed, cancelled or diverted the airline

Cranfield University: Quarterly Report Q3 2006 for DG TREN 28 makes little attempt to help passengers, even where these are significantly inconvenienced. easyJet also offers nothing for free on board its flights but is currently only charging for luggage when passengers have more than one item. Seats are not assigned but boarding priority is based on how early the passenger checks-in. Customer care and concern is considered higher on easyJet’s services. Air Berlin is much more like a full-service airline with assigned seating at check-in and some complimentary food and drink on board. It also offers a frequent flyer programme.

Ownership Since Air Berlin completed its IPO earlier this year all three airlines are now listed on various stock exchanges across Europe. Ryanair and easyJet have consistently reported profits in recent years with Ryanair’s margin of over 20% amongst the best for any airline in the world. Air Berlin’s recent financial performance has been moderate but is now showing signs of improvement as it develops its network strategy by acquiring dba, the German domestic airline. Meanwhile Ryanair has launched a bid to buy recently privatised Irish rival Aer Lingus. easyJet saw off a potential takeover by the Icelandic FL Group (which owns Icelandair) which had acquired a 20% stake in the airline. Ultimately FL Group sold its stake for a handsome profit instead thus ensuring that, for the time being, easyJet remains untroubled by takeover or acquisition concerns.

Unit costs and fare levels These different service levels are reflected in the airlines’ unit costs and their pricing policy. According to analysis by ABN Amro Air Berlin can legitimately claim that its unit costs per available seat kilometre are 20% lower than easyJet’s but this reflects the fact that at over 1500km Air Berlin’s average sector length is more than 50% longer than easyJet’s. Therefore easyJet’s cost per passenger is actually 30% lower than Air Berlin’s on a like-for-like basis. However, given their cost and service characteristics it should come as no surprise that in markets where these airlines compete against each other Ryanair is nearly always the cheapest, followed by easyJet and then Air Berlin. Ultimately consumers will decide what they are willing to pay for and what risk they are willing to take if things do not go according to plan. There are no markets where all three airlines compete head-to-head on the same airport pair, but they do compete fairly directly in a couple of markets. These are between London and Berlin and also between London and Glasgow. This last market also has competition from traditional airlines British Airways and bmi. To better demonstrate the differences in airline fares data was collected on 4 November for a day return flight between London and Glasgow for a fortnight period starting on Monday 6 November. The results are shown in the chart below.

Cranfield University: Quarterly Report Q3 2006 for DG TREN 29 Comparison of day-return fares as of 4 November 2006 for selected airlines

£400.00

Ryanair (STN-PIK) easyJet (LTN-GLA) £350.00 easyJet (STN-GLA) easyJet (LGW-GLA) Air Berlin (STN-GLA) £300.00 BA (LGW-GLA) BA (LHR-GLA) bmi (LHR-GLA)

£250.00

£200.00

£150.00

£100.00

£50.00

£0.00 06 Nov 07-Nov 08-Nov 09-Nov 10-Nov 11-Nov 12-Nov 13-Nov 14-Nov 15-Nov 16-Nov 17-Nov 18-Nov 19-Nov Source: Airline websites as of 4 November 2006

Ryanair consistently offers the lowest fares though easyJet remains competitive across all three of the London airports it serves. It also serves the more convenient Glasgow International airport rather than the more remote Glasgow Prestwick. Air Berlin is always priced above easyJet but below BA and bmi. Fares for returns on weekend days were not available for Air Berlin as at that time the airline only operates a single daily flight. BA and bmi demonstrate rather more erratic pricing which is well above the level of any of the LCCs. There is little difference between BA and bmi pricing and for close-in travel on this route their fares at nearly £400 return (including all charges and taxes) are around four times higher than those of easyJet and around five times higher than Ryanair’s. The British consumer is thus presented with a wide range of options in terms of fares, service quality and airport pairs.

Cranfield University: Quarterly Report Q3 2006 for DG TREN 30