Long-haul LCCs: what has changed from Laker Airways times?

26th of April, 2018 Long Haul LCCs exhibit some common features in their operating model, product characteristics and cost structure

Common features for Long Haul Low Cost Carriers (LH LCC)

Network-Fleet Model . Decentralized network with focus on point-to-point routes with an average stage length > 3,000 km . Homogeneous long-haul fleet focusing mostly on wide body aircraft . Standalone with no/not extended codeshare or affiliation

Product Characteristics . Focus on all passenger groups including recurring business travelers . High seat density compared to traditional airlines . Economy/ Premium economy/ Business class service with included amenities (meals, entertainment, etc) . Lowest ticket price

Cost Structure . Young and fuel efficient fleet . Preference for secondary airports (i.e. Level’s hub is at Paris-Orly, WOW Air connects Reykjavík–Keflavík Airport with New York (EWR) . About 30% lower cost base than legacy carriers

1)Paris-Orly Airport 2) Reykjavík–Keflavík Airport

Long-haul LCCs: what has changed from Laker Airways times? 3 In 1977, Laker Airways pioneered the LH LCC concept, launching “no frill” air services between LGW and JFK for £59

Laker Airways estimated route network map out of main hubs

First transatlantic routes Other routes

. Laker Airways was founded in 1966 and became the . In its last year of operation, Laker Airways carried over 2 second company which operated on low-cost, long-haul million PAX, almost half of which was across the Atlantic “no frills” business model in 1977 . Laker Airways ceased operations on February 5th 1982 . In 1977 Laker Airways made £1M profit and by 1980 it was due to recession of US and UK in the early 1980s and stiff carrying one in seven transatlantic PAX competition from other airlines which cut their rates . The company utilized a fleet of 20 aircraft: 14 WB1 and 6 . Sir Frederick Laker started a new airline in Bahamas 10 NB2 as of 1982 years later based on the same business model . It connected Orlando with Glasgow and Manchester but went bankrupt in 1998

Source: NY Times, The Telegraph Note: network estimations are based on various open sources and are not exhaustive, 1 – wide-body jet, 2 – narrow-body jet.

Long-haul LCCs: what has changed from Laker Airways times? 4 Although LH LCC is not a new phenomena, the trend has been growing over the last years, with new comers and major airlines establishing their own subsidiaries

Development of LH-LCC airlines

Asia Europe 2013 Americas Australia Air Canada sets up its LCC subsidiary, Air Canada rouge to compete on EU, US and Caribbean routes 2017 2012 Establishment of 1956 1989 2007 Singapore Airlines Level and Joon to starts SkyExpress AirAsia X starts its establishes Scoot to 2014 serve competitive its operations was founded operations to mainly cater demand on Establishment of Azul, LCC routes with focus in serve Asian market low-fare travel Jin Air, Thai AirAsia X on young people

1956 1966 1989 2000 2010 2012 2013 2014 2015 2018

1966 2006 2012 2015 2016 Laker Airways is Development of Norwegian begins Start of WestJet Establishment of founded to serve first JetStar to serve Asia its operation with 2013 and Lion Air WOW Air and LH routes Pacific routes in focus on Development French Blue response to market transatlantic routes of Cebu entry of Virgin Blue Pacific

Note: out of those companies on the timeline, only Laker Airways went bankrupt in 1982, and Virgin Atlantic remains the oldest of them with, however, negative profit margin of -1.8% as of 2017. It enjoyed almost 20 years of no competition on long-haul market prior to Wizz Air establishment

Long-haul LCCs: what has changed from Laker Airways times? 5 LH LCCs which are affiliated with an airline group are also operating short- and medium-haul routes thus having a large share of narrow body fleet

LH LCC pax and operating margin evolution LCC current fleet composition

Traffic evolution, Mpax Order A330 B787 Condor SunExpress Narrow Body B767 B757 AirAsia X Scoot 7.4 WOW Air Thai AirAsia X 6.8 50 7.3 48 43 6.8 76 5.8 4.7 5.5 6.1 19 3.8 25 1.3 2.1 3.9 1.2 0.5 0.7 1.3 2.2 2.9 1.3 0.9 0.0 0.6 2.9 24 1.2 1.9 1.9 0.4 1.3 0.5 1.8 0.2 1.3 0.8 1.1 6 16 18

2012 2013 2014 2015 2016 2017 40 11 25 Operating margin, % 22 16 7 3.1% 2.1% 1.1% 19 16 1.7% 4.4% 4.8% 13 3.6% 3.7% 4.1% 4.5% 3.4% 2.2% 7 7 0.9% 1.1% 2.1% 0.9% 3 Condor AirAsia X WOW SunExpress Scoot Thai Air -0.8% -1.0% Air AirAsia X Canada Norwegian -3.8% -5.4% -5.9% rouge Condor -7.0% . Scoot has on order 39 narrow body jets (A320 NEO) -11.0% AirAsia X and 4 B787 Scoot -16.6% . Wow Air put an order for 6 A330-900 NEO 2012 2013 2014 2015 2016 2017 . AirAsia X expects to receive 66 A330-900 NEO and 10 Source: Flightglobal, Annual reports of the companies A350-900

Long-haul LCCs: what has changed from Laker Airways times? 6 Most Asian LH LCCs are focused on their home markets while those in Europe and North America have a far reaching route network

Current route network of LH LCCs

Condor SunExpress Air Canada Scoot AirAsia X rouge WOW Air Thai AirAsia X

. As a part of commercial marketing agreement with Air Busan, AirAsia X passengers are allowed to connect to Jeju on Air Busan-operated service with discounted fares . AirAsia X is allowed to operate its long-haul services under a franchise agreement with AirAsia . Air Canada rouge is fully integrated into Air Canada, tickets are sold under AC flight numbers but flights are “operated by Air Canada rouge” . Scoot has a codeshare agreement with Singapore Airlines, SilkAir and Tigerair Mandala as well as entered into a commercial alliance with Cebu Pacific . Condor is in a codeshare agreement with Air Namibia, Thomas Cook Airlines Belgium, Air Seychelles as well as in a commercial alliance with Azul and Laudamotion Note: network with average stage length greater than 4,000 km Source: Flightglobal, IATA Airport-IS

Long-haul LCCs: what has changed from Laker Airways times? 7 The analysis of cost per available seat kilometer (CASK), shows that LH LCC unit cost is on average 30% lower than FSNC and 10% lower than typical LCCs

Relation of CASK from the average stage length of various types of airlines

20 Full service network carriers (FSNC) (CASK: 8.13)

18 Typical LCCs (Average CASK: 6.06) LH LCCs (Average CASK: 5.45 ) 16

14

12

Sun Express 10

8 Air Canada rouge CASK, U.S.CASK, cents

6

WOW Air Condor 4 Scoot

2 Thai AirAsia X AirAsia X 0 0 500 1000 1500 2000 2500 3000 3500 4000 4500 5000 Average stage length, km

Note: top 40 legacy airlines and 20 typical LCCs in terms of pax volume were analyzed Source: Flightglobal, Annual reports of the airlines

Long-haul LCCs: what has changed from Laker Airways times? 8 LH LCCs have several cost saving opportunities, however their cost advantage relative to full service carriers is marginal in some areas

Cost saving potential

Low Fleet utilization High

Distribution Turnaround costs time

Cost saving potential (Secondary) Crew airport charges utilization

Crew costs

Long-haul LCCs: what has changed from Laker Airways times? 9 The ideal LH LCC aircraft should combine long range with high density cabin and low fuel consumption level

Comparison of long haul fleet average characteristics

Ideal LH B737 MAX A321 NEO B787 A350 A330 NEO LCC aircraft Category Narrow body Narrow body Wide body Wide body Wide body ?

Max range 6,595 km 7,400 km 13,220 km 14,875 km 13,000 km ?

MTOW 84 tones 97 tones 245 tones 295 tones 247 tones ?

Number of 2 2 2 2 2 ? engines

Seats 138-230 206-240 242-406 325-387 257-440 ?

Cabin Eco/ Premium Eco/ Business Eco/ Business Eco/ Business Eco/ Business ? configuration Eco/ Business

Fuel 2.9 kg/km 3.3 kg/km 6.01 kg/km 6.55 kg/km 5.7 kg/km ? consumption

Crew factor 2 Cockpit crew/ 2 Cockpit crew/ 2 Cockpit crew/ 2 Cockpit crew/ 2 Cockpit crew/ ? (min) 3-5 Cabin crew 4-5 Cabin crew 5-9 Cabin crew 7-8 Cabin crew 6-9 Cabin crew

Source: Airbus, Boeing, EASA

Long-haul LCCs: what has changed from Laker Airways times? 10 The share of ancillary revenue for LH LCC reaches 16% in total revenue which makes it slightly higher comparing with average legacy LCCs (12%)

Samples of the range of services provided by LH LCCs

. The range of services that LH LCCs are suggesting is similar to typical LCCs: . Baggage/ luggage . Priority boarding . Lounge access . Seat selection . Extra seat space . Meal onboard . Onboard entertainment, including Internet Access . Amenity kits . Dates flexibility . In addition, standard list of additional services is available to purchase along with the flight: . Insurance . Hotels . Car rental, etc.

Source: annual reports, LH LCC airlines websites, Cartrawler

Long-haul LCCs: what has changed from Laker Airways times? 11 Russian aviation market: Is it the right time for LH LCC? Where is the potential for LH LCC development?

. There is no LH LCC airline in Russia yet: could this unexplored market niche provide growth opportunities? . Could the potential lie in the domestic market to Far East? . Could the model be relevant to international destinations, such as India, Thailand or China, for instance?

. According to the international experience, there is a wider flexibility for an airline group to develop LH LCC, i.e. and , Air Canada and Air Canada Rouge: can it be applicable for the Russian market? . To which extent can a standalone LH LCC be developed in Russia?

. What is the role of the authorities to promote this model? . Could PSO* services to Far East be an opener for LH LCC which is spending less money on those route comparing to legacy carriers, thus with less subsidies needed?

Note: PSO – public service obligations/ subsidized services

Long-haul LCCs: what has changed from Laker Airways times? 12 Contact

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Long-haul LCCs: what has changed from Laker Airways times? 13