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The Low Cost Carriers Recipes

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Beyond the Low Cost Carrier Model - The Blue Ocean strategy applied to the airline industry

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The Low Cost Carriers Recipes

  1. 1. P R O P R I E TA R Y I N F O R M AT I O N 0© 2014 1BlueHorizon Group - www.1bluehorizon.com All rights reserved1BHG | THE LOW COST CARRIER RECIPES P R O P R I E TA R Y I N F O R M AT I O N LCC MODEL RECIPES RECIPES TO FOLLOW FOR BUILDING A DIFFERENT BUSINESS MODEL… March 2014 Updated 1BHG, the ‘idea factory’ thinking ahead strategies www.1bluehorizon.com Comfort Pricing X BLUE PAPER       
  2. 2. P R O P R I E TA R Y I N F O R M AT I O N 1© 2014 1BlueHorizon Group - www.1bluehorizon.com All rights reserved1BHG | THE LOW COST CARRIER RECIPES O On a previous 1BlueHorizon Viewpoint (BLUE PAPER) ‘Beyond the Low Cost Carrier model’ we developed ‘1BlueHorizon understanding to consider the Low Cost Carrier Model more than a philosophy to approach the airline industry than just a matter of cost... O The purpose of that document is to develop some Recipes to build or transform an existing business under the LCC Spirit, what we call ‘1BlueHorizon Low Cost Carrier Cookbook’… O As the Aviation is a very competitive industry, keep everything confidential and avoid talking about your project until you are very close to start operations… because you will find a lot of ‘sharks’ looking to make money and don’t take everything for granted… O Keep in mind a few advises before to open the Airline venture door because even you have the best operational model or an unique market opportunity (niche), only once the operations start you will know the truth… O If you are giving the right kind of segmentation strategy and good execution, there will be enough room in the market for multiple service offering…. Obviously, the future performance of your project will depend on the strength of the selected business model and the focus going forward… O Last but not least, the maxim ‘How does a Billionaire become a Millionaire? is not just an old and famous joke within the Aviation industry but need to be considered very carefully by anybody thinking to launch an airline… O Welcome to the world of ‘1BlueHorizonLow Cost Carrier Recipes’ to develop successfully your business by thinking ‘1BlueHorizon’… FOREWORD TO THINK ‘1BlueHorizon’
  3. 3. P R O P R I E TA R Y I N F O R M AT I O N 2© 2014 1BlueHorizon Group - www.1bluehorizon.com All rights reserved1BHG | THE LOW COST CARRIER RECIPES The low cost phenomenon has penetrated global aviation starting in the U.S. in 1971 – but now the LCC sector is crowded ‘(Red) Horizon’ Industry pioneers SouthWest (1971) Ryanair (1985/1991) Early Adopters Late Adopters e.g. AirTran (1992), West Jet (1996) e.g. Norvegian (1993), EasyJet (1995) e.g. Air Arabia (2003), Nasair (2007), Fly Dubai (2009)  Southwest  AirTran  Jet Blue Airways  West Jet  ...  Ryanair  EasyJet  Norvegian Air  Germanwings  FlyBe  BMI  Helvetic  Niki  SkyWork  ...  IndiGo  AirAsia  Bangkok Airways  Kingfisher Red  Air Blue  FlyScoot  ...  Virgin Blue  Freedom Air  Tiger Airways  ...  AirArabia  Bahrain Air  Fly Dubai  Jazeera Airways  NasAir  Wataniya Airways  ...  Azul Brazilian  Gol Airlines  EasyFly  ... FlyScoot (2012) Note: The LCCs mentioned above are of course not exhaustive…
  4. 4. P R O P R I E TA R Y I N F O R M AT I O N 3© 2014 1BlueHorizon Group - www.1bluehorizon.com All rights reserved1BHG | THE LOW COST CARRIER RECIPES The full liberalization of civil aviation is progressing with opportunities coming in Africa, Caribbean and Latin America Closed Markets Liberalization New Business Models Power Play & Consolidation Stable Market Segmentation Protected markets Large carriers with governmental support Financially solid / state owned Liberalization of markets Emerging airlines to serve profitable routes Traditional carriers still have highest market shares Liberalization of markets allows emergence of LCC Strong initial growth of LCC carriers Build-up of an LCC network (P2P) LCC growth slows down Traditional carriers and LCC consolidate to super carriers Synergies and economies-of- scale Super carriers split markets by customer segment, price and service offering Stable market split between carriers Africa Asia Europe North America Caribbean Latin America ChinaRussia Malaysia India ‘ R e d H o r i z o n ’‘ B l u e H o r i z o n ’ Middle East Source: 1BlueHorizon Group Research & Analysis
  5. 5. P R O P R I E TA R Y I N F O R M AT I O N 4© 2014 1BlueHorizon Group - www.1bluehorizon.com All rights reserved1BHG | THE LOW COST CARRIER RECIPES Air traffic liberalization typically shows significant passenger growth development patterns - Typical Range of Air Traffic Growth Rates - … Source: IATA, InterVistas, GAD Post- liberalization Pre- liberalization Global Average Min Max 12-35% 4-7% 2-5% Typical Pre-Liberalization Setting Governmental authorities understanding air services as provisioning of transportation infrastructure (esp. for domestic markets) Protection of (state-owned) flag carriers against ... – … international competitors (esp. for international markets) – … market forces of supply & demand (esp. for domestic markets) Typical Post-Liberalization Setting Leaving elaboration of operated networks and routes to market forces of supply & demand Often requires privatization of (formerly state-owned) flag carriers upfront Emergence of alternative airline business models (LCC) Typically a fast network / route expansion is experienced shortly after the liberalization step
  6. 6. P R O P R I E TA R Y I N F O R M AT I O N 5© 2014 1BlueHorizon Group - www.1bluehorizon.com All rights reserved1BHG | THE LOW COST CARRIER RECIPES … and it clearly appears from analysis of the distribution of alternative customer Travel Method) that in fact LCCs are creating new demand in the market – Basically a LCC creates 1BlueHorizon Source: Liberalization of European Air Transport 2011 No data 4% Shift within airline market 37% New demand 59% Otherwise by rail Otherwise by car Others Otherwise would have not travelled 71% 15% 6% 8% Is the Low-Cost Carriers the ultimate model, the wonder recipe to save the whole airline industry? Unfortunately not!
  7. 7. P R O P R I E TA R Y I N F O R M AT I O N 6© 2014 1BlueHorizon Group - www.1bluehorizon.com All rights reserved1BHG | THE LOW COST CARRIER RECIPES Typical Legacy Carrier Cost structure / operating expenses versus Low Cost Carrier with the fuel as key fluctuating cost Source: The Aviation & Aerospace Almanac, ICAO Air Transport Reporting Form EF-1, 1BlueHorizon Group Research & Analysis Labor, Flight Crew 15% Ticket Sales 2% Airport, Landing 18% Depreciation, Amortization 15% Maintenance, Overhaul 5% Fuel & Oil 22% Route Charges Others 13% 10% 19.6% 16.4% 25.4% 7% 10.1% 12% 2.4% 7.1%  Inclusive Aircraft rental (3%)  Passengers services (10.5 %)  Station Expenses (10.8 %)  Landing fees (4.1 %)  Flight Crew (7.4 %)  General Administration (12.2 %) Key Costs for an airline are:  Fuel  Labor  Maintenance Key Costs for a LCC are:  Fuel  Airport  Labor
  8. 8. P R O P R I E TA R Y I N F O R M AT I O N 7© 2014 1BlueHorizon Group - www.1bluehorizon.com All rights reserved1BHG | THE LOW COST CARRIER RECIPES At this stage it is important to clarify what is 1BlueHorizon Group® understanding and definition of the Low-Cost Carrier Model ■ Low-Cost Carriers (LCC) are also known as a no-frills (LCC/NF), Less Frills Carrier, discount, budget carrier, Low-Fare/High Value Carrier (LFHV), Budget Carrier, Cheap Flight or even New Generation Carrier… ■ The term originated within the airline industry referring to airlines with a lower operating cost structure than their competitors. While the term is often applied to any carrier with low ticket prices and limited services, regardless of their operating models… ■ It has been suggested that the Airbus A380, able to hold up to 853 passengers in an all Economy layout, would enable true low-cost long-haul service. While the per-seat costs of such an aircraft would be lower than the competition, there are fewer cost savings possible in a long-haul operation and therefore a long-haul low-cost operator would find it harder to differentiate itself from a conventional airline… ■ Low-Cost Carriers want to be different than their competitors, the reason why they implement different operational model, different recipes to build success… ‘1BlueHorizonCookbook’ highlights the main Model Recipes Low-Cost is a mood, is a management strategy, is a mind set ‘If you think well 1BlueHorizon, you will cook well your airline... Source: 1BlueHorizon Group Analysis
  9. 9. P R O P R I E TA R Y I N F O R M AT I O N 8© 2014 1BlueHorizon Group - www.1bluehorizon.com All rights reserved1BHG | THE LOW COST CARRIER RECIPES Rolling out an innovative airline with ‘1BlueHorizonCookbook’ support requires the design of seven fundamental building blocks (1BHG Framework) Note: 1The costs for an ASK = available seat kilometer are defined as the fraction of all costs which can be attributed to one available seat flown over 1 km distance Source: 1BlueHorizon Group | Framework Operational model: – High-frequency shuttle services instead of connecting traffic (via hubs) – Fleet structure Distribution model: – Direct sales (online, call center) – Indirect sales (travel agents/CRS) Tariff model: – Low entry prices (limited volume) – Auction model Required maximum unit cost (per ASK1) Required minimum average yield per flight Break-even seat load factor Master plan for physical roll-out and business building Opera- tional model Distri- bution model Tariff model Cost structure Demand / Destin. portfolio Product concept Operational Implementation 1 2 3 4 5 6 7 Business Model
  10. 10. P R O P R I E TA R Y I N F O R M AT I O N 9© 2014 1BlueHorizon Group - www.1bluehorizon.com All rights reserved1BHG | THE LOW COST CARRIER RECIPES The LCC Recipes from ‘1BlueHorizon Cookbook’ allow any airline to follow a different operational model with significant differentiation and cost difference Note: As example the Southwest Airlines used recipes Source: 1BlueHorizon Group Research & Analysis A single passenger class Recipe doable for Air Carriers?       A single type of aircraft reducing training and servicing costs Development of one of more hubs to maximize destination coverage and defend their market A minimum set of optional equipment on the aircraft, further reducing costs of acquisition and maintenance, as well as keeping the weight of the aircraft lower and thus saving fuel Often pilot conveniences are excluded such as ACARS and auto throttle No in-flight entertainment systems made available For your Project?       1/5
  11. 11. P R O P R I E TA R Y I N F O R M AT I O N 10© 2014 1BlueHorizon Group - www.1bluehorizon.com All rights reserved1BHG | THE LOW COST CARRIER RECIPES LCCs capitalize on their simple and efficient business model and their extremely lean cost structure Note: As example the Southwest Airlines used recipes Source: 1BlueHorizon Group Research & Analysis No seat recliners, seat pockets, window blinds or seat headrest covers Recipe doable for Air Carriers?       A Fast turnaround times (allowing maximum use of aircraft Unreserved seating (encouraging passengers to board early and quickly, thus further decreasing turnaround times) A simple fare scheme, such as charging one-way tickets half that of round-trips (typically fares increase as the plane fills up, which rewards early reservations) Newer more fuel efficient aircraft (launch customer to be involve din the new or improved aircraft development) Flying to cheaper, less congested secondary airports and/or flying early in the morning or late in the evening to avoid air traffic delays and taking advantage of lower landing fees For your Project?       2/5
  12. 12. P R O P R I E TA R Y I N F O R M AT I O N 11© 2014 1BlueHorizon Group - www.1bluehorizon.com All rights reserved1BHG | THE LOW COST CARRIER RECIPES The LCC Recipes from ‘1BlueHorizon Cookbook’ are tips on how to consider the airline differently Note: As example the Southwest Airlines used recipes Source: 1BlueHorizon Group Research & Analysis Simplified routes, emphasizing point-to-point transit instead of transfers at hubs (again enhancing aircraft use and eliminating disruption due to delayed passengers or luggage missing connecting flights) Recipe doable for Air Carriers?      Encourage the use of direct flights. Luggage is not automatically transferred from one flight to another, even if both flights are with the same company Generation of ancillary revenue from a variety of activities, such as à la carte features and commission-based products Emphasis on direct sales of tickets, especially over the internet (avoiding fees and commissions paid to travel agents and computer reservations systems) Passengers paying charges for extras, such as hold luggage, online check in and priority boarding For your Project?      3/5
  13. 13. P R O P R I E TA R Y I N F O R M AT I O N 12© 2014 1BlueHorizon Group - www.1bluehorizon.com All rights reserved1BHG | THE LOW COST CARRIER RECIPES The LCC Recipes from ‘1BlueHorizon Cookbook’ are the cornerstone of the airline project or restructuring Note: As example the Southwest Airlines used recipes Source: 1BlueHorizon Group Research & Analysis Employees working in multiple roles, for instance flight attendants also cleaning the aircraft or working as gate agents (limiting personnel costs) Recipe doable for Air Carriers?      A disinclination to handle special service passengers, for instance by placing a higher age limit on unaccompanied minors than full service carriers Aggressive fuel hedging programs Avoiding using jetways wherever possible to board and alight passengers by using a mobile stairway which is a cheaper alternative Not supplying meals in a flight, but offering snacks, sandwiches and drinks instead to purchase on board For your Project?      4/5
  14. 14. P R O P R I E TA R Y I N F O R M AT I O N 13© 2014 1BlueHorizon Group - www.1bluehorizon.com All rights reserved1BHG | THE LOW COST CARRIER RECIPES The LCC Recipes from ‘1BlueHorizon Cookbook’ are not finalized, plenty need to be added under 1BlueHorizon creation Note: As example the Southwest Airlines used recipes Source: 1BlueHorizon Group Research & Analysis No refunds or transfers to later flights in the event of missed flights, i.e. If the aircraft leaves on time without a passenger who arrived late, he will have to buy a wholly new ticket for the next flight Recipe doable for Air Carriers?     Developing freight activities (cargo) with the aircraft belly hold to generate additional revenues Seeking the extra mile by maximizing revenue per flight, which implicitly includes all ancillary revenues as well as the airfares paid To pay for using the toilet (if the passengers don’t use it then it is potentially more space for seats!) (empty for a new recipe) For your Project?      5/5
  15. 15. P R O P R I E TA R Y I N F O R M AT I O N 14© 2014 1BlueHorizon Group - www.1bluehorizon.com All rights reserved1BHG | THE LOW COST CARRIER RECIPES The selected recipes from ‘1BlueHorizonCookbook’ are the cornerstone of the business model, but never underestimate the specific situation in the region you are in - Examples of implications/critical questions Source: 1BlueHorizon Group | Framework & Analysis Opera- tional model Distri- bution model Tariff model Cost structure Demand / Destin. Product concept Operational Implementation 11 22 33 44 66 77  Lowest price vs. value for money  Convenience of travel chain  Specific process needs/amenity expectations in the particular country  No frills vs. frills for money  Competitive scenarios  Home base? Maintenance locations?  Achievable average stage length?  Achievable frequencies per route?  Achievable block hours per day?  Fleet size, A/C type?  Master plan for launch  Funding  Managerial/operational capacities  Availability of fleet, maintenance  Creation of service contracts and required processes  Achievable productivity, salary level  Realizable airport/handling fees  Product/frills concept (cf. 6)  Fleet homogeneity, maintenance  Fuel subsidies? p y  Customer/demand segments  Accessibility of latent demand (leisure, religious/ethnical travel)  Sustainable destination portfolio for LC operation within the country  Catchment area/airport affinity 55 Business Model  Booking behavior of local (National) passengers  Customer segments (cf. 5)  Favorable pricing logic (e.g., auction model)  Internet penetration/acceptance of online booking within the country?  Presence of travel agencies?  Availability of call centers/ respective resources?
  16. 16. P R O P R I E TA R Y I N F O R M AT I O N 15© 2014 1BlueHorizon Group - www.1bluehorizon.com All rights reserved1BHG | THE LOW COST CARRIER RECIPES The implementation of the business model based on selected recipes from ‘1BlueHorizonCookbook’ should follow a defined framework... Source: 1BlueHorizon Group | Framework for illustrative purpose Coverage 1) Core Questions  Market potential, achievable market shares  Required cost structure  Appropriate positioning of product and brand  Conceptual design of product Action  Inquiry of current/future transportation streams (also other carriers)  Discussion of attractive destinations (traffic stream, yields, competition)  Evaluation of the offers of competitors and different airports of that region  Economical evaluation of different scenarios (simplified business plan)  Benchmarking of the cost structure of charter airlines + low cost carriers  Determination of target cost structures (top-down)  Definition of valuation rate  Benchmarking of the positioning of other LCC  Analysis of brand attribute of main line vs. low cost carriers  Analysis of the own positioning  Client segmentation, characterization and -quantification  Benchmarking of business models of other LCC  Discussion of product concept (service level, rates, restrictions) Source Result  Traffic data  Flight plans of relevant competitors (e.g. from OAG)  Other transportation streams (e.g. IATA, MIDT, AEA, ICAO)  Official Saudi Arabia sources: – Presidency of Civil Aviation – SV flight plan/fares  Current cost/yield structure  Annual report, Press Releases of competitors  Booz Allen database  Analyst report  Future traffic streams  Possible market share  Target size of business (Fleet, frequency shares etc.)  Operation approach (destinations)  Yield return  Target passenger/-utilization  Target productivity airplane  Cost structure  Market and competition analyses concerning the brand perception  Own brand positioning  Own client-/ passenger data  Target positioning of the brand  Target client segment  Mission statement  „Best Guess“ of (external/internal) experts  Brainstorming with the team  Operation Approach (destinations)  Product-/price concept (rough)  Target size of business (Fleet, frequency shares etc.) 1 2 3 4 5 6
  17. 17. P R O P R I E TA R Y I N F O R M AT I O N 16© 2014 1BlueHorizon Group - www.1bluehorizon.com All rights reserved1BHG | THE LOW COST CARRIER RECIPES … and the operational implementation of the seventh fundamental building blocks can occur in 14 operational modules Network structure/ design  Position  Destinations  Frequencies, Schedule etc. Pricing/ Yield Management  Tariffs  Classes  Logic of pricing/yield management Flight operations  Resource scheduling  Capacity requirements  Organization Product concept/- management  Board products „Frills“  Ground products Sales/Distribution  Choice of distribution channels/partners  Reservation system  Key account management Ground Ops  [s. Flight Operations] Fleet composition  Choice of airplanes  Planning Roll-Over  Funding Communication  Marketing strategy (channels etc.)  Communications concept  Partner Maintenance  Own added value  Make or buy Branding  New Brand?  Positioning  Concept for launch, communication Accounting  Client accounting (e.g. credit cards)  Profit and loss account  Reporting Supplier manag./ Sourcing  Fuel  Airport management  Other suppliers Concept/ Layout Commercial processes Commercial processes Operational Processes Operational Processes IT-Profile  Internet platform  Reservation/ distribution systems  Operation systems  Controlling systems  System integration 22 66 1010 33 44 55 99 131312121111 77 88 1414 Project management  Planning of business  Planning of organization  Controlling of project  Controlling of implementation 7 Source: 1BlueHorizon Group | Framework
  18. 18. P R O P R I E TA R Y I N F O R M AT I O N 17© 2014 1BlueHorizon Group - www.1bluehorizon.com All rights reserved1BHG | THE LOW COST CARRIER RECIPES Even the temptation to start a new venture is big due to the fact that the Airline business is known to be ‘sexy’, the Go / No GO decision should follow an uncompromising six-step evaluation approach Source: 1BlueHorizon Group | Framework Understand the Strategic Objectives of the project owner in the selected Marketplace Conduct Workshop with Key Stakeholders to Reach a Go / No Go Decision 6 Define and Evaluate Alternative Options for a New Entrant in the Domestic Marketplace Assess Market Demand in the Domestic Marketplace Evaluate the Competitive Landscape & Profile Leading Players in the Domestic Marketplace Determine the Implications of the Proposed Changes in Aviation Regulations for the Domestic Marketplace 3a 1 2a Define and Evaluate Alternative Options for a New Entrant for the Regional Marketplace Assess Market Demand in the Regional Marketplace Evaluate the Competitive Landscape & Profile Leading Players in the Regional Marketplace Determine the Implications of the Proposed Changes in Aviation Regulations for the Regional Marketplace 2b 3b 4a 4b 5a 5b Domestic Assessment Regional Assessment
  19. 19. P R O P R I E TA R Y I N F O R M AT I O N 18© 2014 1BlueHorizon Group - www.1bluehorizon.com All rights reserved1BHG | THE LOW COST CARRIER RECIPES Source: © 1BlueHorizon Group | ‘Start me Up A-Plan’ Framework Would you like to see your Aircraft in the air flying at your brand? You are at the Idea Phase of your new airline. Do not fall into same mistake that many investors do. Prior to your investment, listen to our professionals by keeping in mind that airline business requires more sophisticated management skills and experience than having capability of operation of an aircraft, and more detailed financial and commercial analysis other than changing numbers in standard excel sheets. Best Strategy with a wide vision can be established at the Idea Phase of Your New Airline. Do not try to fly with your wings, as it can hurt falling from high altitudes, due to the fact that recovery plan should be identified clearly before you take off… © 1BlueHorizon start me up A -plan 1BlueHorizon ‘start me up A-plan’ (Afor Airline) Airline Model highlight the usual ten main phases to be carefully developed to avoid any pitfall
  20. 20. P R O P R I E TA R Y I N F O R M AT I O N 19© 2014 1BlueHorizon Group - www.1bluehorizon.com All rights reserved1BHG | THE LOW COST CARRIER RECIPES We therefore recommend to consider a multi-phased approach along four main Phases to move forward with the new airline venture Source: 1BlueHorizon Group | Framework PHASE IV Do it! Implementation PHASE I Should we do it? Go/ No Go  Understand the regulatory environment  Assess competitive activity  Analyze demand for air travel  Identify target segments  Define and evaluate potential options to be pursued  Go/ no go decision to proceed with next phase PHASE III How to do it? FinancingBusiness Planning PHASE II What to do? Major Activities Key Deliverables  Refine target segments  Define value proposition  Define network and fleet structure and operating requirements  Evaluate partnering options  Address regulatory issues  Build business case  Define implementation timetable  Go/ no go decision to proceed with next phase  Detail value proposition  Detail network and fleet structure  Detail operating requirements  Establish partnering agreements  Complete outstanding regulatory submissions  Build detailed financials  Obtain financing  Finalize network arrangements  Acquire fleet  Hire staff  Initiate partnerships  Implement operating procedures  Launch marketing activities  Launch operations  Assessment of regulatory environment  Competitive assessment  Demand assessment  Target segments  Option evaluation  Go/ No Go decision to proceed  Refined target segments  Value proposition definition  Network & fleet structure definition  Operating req. definition  Partnership options  Regulatory submissions  Financial assessment and business plan  Detailed value proposition  Network and fleet structure details  Operating requirements details  Partnership agreements  Regulatory submissions  Financial statements  Financing  Implementation timetable  Operational airline service(s)
  21. 21. P R O P R I E TA R Y I N F O R M AT I O N 20© 2014 1BlueHorizon Group - www.1bluehorizon.com All rights reserved1BHG | THE LOW COST CARRIER RECIPES Many Low Cost Carriers have not moved far enough towards customer satisfaction, leaving money on the table – The model of the future ? Costs Revenues Increasing Passenger Satisfaction IncreasingOperationalComplexity Innovation Legacy Carriers Traditional LCCs Doable by youFulcrum High Capacity Carrier (HCC) Low Cost Long Haul (LCLH) Low Cost High Revenue (LCHR) Note: Airlines that find the right balance - their ‘innovation fulcrum’ - can dramatically improve their performance Source: 1BlueHorizon Group | Framework HCC / LCLH / LCHR ‘1BlueHorizon®’
  22. 22. P R O P R I E TA R Y I N F O R M AT I O N 21© 2014 1BlueHorizon Group - www.1bluehorizon.com All rights reserved1BHG | THE LOW COST CARRIER RECIPES Emirates Airline (EK) is a good example of 1BlueHorizoncreation by implementing Low-Cost Model Recipes to a Legacy Carrier: The High Capacity Carrier (HCC) model for ‘Long Haul’ is born in the Middle East 9,128 +188% 169,469 92,294 28,700 58,786 30,527 ‘MEB3’ carriers have 3 times the ordered seat, in the next 10 years compared to the ‘EUB3’ in Europe Source: © 1BlueHorizon Group Analysis, Ascend, www.anna.aero (without the last Dubai Air Show orders…)
  23. 23. P R O P R I E TA R Y I N F O R M AT I O N 22© 2014 1BlueHorizon Group - www.1bluehorizon.com All rights reserved1BHG | THE LOW COST CARRIER RECIPES To support EK growth, the airline industry is fully vertically integrated in Dubai from the Regulator to the Airport, Airport Services and the airline Fleet: Dual Fleet of aircraft (by 2020)  Airbus A380  Boeing 777 & B777X ‘Long Haul’ Network:  Hub and Spoke system  Emirates Airline for ‘Long Haul’ (FlyDubai for ‘Short Haul’) Airport - One Hub:  Dubai International Airport (DXB)  The future Dubai World Central beyond 2020 Cargo operations:  Emirates SkyCargo with full Freighters  Fleet Belly hold for major ‘extra’ revenues Note: Vertical Integration is best understood by applying Michael Porter’s Value Chain model. It refers to the degree of integration between a firm’s value chain and the value chains of its suppliers and distributors. Air Services  Aircraft ground handling, Cargo, Travel, and Flight catering services Regulator  Dubai Civil Aviation Authority
  24. 24. P R O P R I E TA R Y I N F O R M AT I O N 23© 2014 1BlueHorizon Group - www.1bluehorizon.com All rights reserved1BHG | THE LOW COST CARRIER RECIPES As provisional conclusion, we are convince that 1BlueHorizoncreation is still there with the Low-Cost Long-Haul model emergence 6 Can an airline carve out a business model that makes a profit from long- distance routes at low fares? 6 Will the advent of a new generation of fuel-efficient aircraft — shrinking a fuel bill that can account for up to half an airline’s operating costs — makes the enterprise viable? 6 Definitely stretching the low-cost model to profitably operate intercontinental flights would open a new chapter in aviation… 6 1BlueHorizon Groupstrongly believe on the LCLH potential linked to the LCC… The evolving Long-Haul Low-Cost network airline model: AirAsia X with interline onto the Short-Haul LCC Air Asia connectivity? Scoot Pte Ltd. is a Singapore-based Low-Cost Long-Haul airline from its parent company, Singapore Airlines… Norwegian is the first Low-Cost Carrier providing Long-Haul transatlantic service between several destinations in the U.S. and Europe… Are the real opportunity to build a Low-Cost Long-Haul business mainly in Asia with growth market China and South Asia? ‘Gambling?’
  25. 25. P R O P R I E TA R Y I N F O R M AT I O N 24© 2014 1BlueHorizon Group - www.1bluehorizon.com All rights reserved1BHG | THE LOW COST CARRIER RECIPES SOLUTIONS PACK 1BLUEHORIZON GROUP GENERATING THRUST TO PROPEL YOUR BUSINESS FURTHER... March 2014 We generate 1B l ue H o r i z o n® out of the Rough... www.1bluehorizon.com P R O P R I E TA R Y I N F O R M AT I O N A s s e t M a n a g e m e n t | M a n a g e m e n t C o n s u l t i n g | I n t e r i m M a n a g e m e n t A b u D h a b i | B e r n | L o n d o n | M a d r i d | M o n t r e a l | P a r i s       
  26. 26. P R O P R I E TA R Y I N F O R M AT I O N 25© 2014 1BlueHorizon Group - www.1bluehorizon.com All rights reserved1BHG | THE LOW COST CARRIER RECIPES Source: © 1BlueHorizon Group | Corporate profile 1BlueHorizon Group® value proposition is simple — Going the Extra Mile by generating trust to propel your business further O 1BlueHorizon Group® (Asset Management | Management Consulting | Interim Management) was established in 2007 as a network of International aviation professionals, providing objective, independent, evidence-based analysis, advice and implementation support. We build on the experience of our team to help clients realize real and measurable results, quickly. Start-ups, restructuring, cost cutting, project management office, due-diligence or exploiting growth opportunities, we have experts who have faced these challenges. O Our highly competent seasoned senior professional have experience from leading companies in both management roles within their disciplines and as senior level professional advisors throughout diverse and complex locations in the Middle East, Europe, Africa, Asia Pacific and North America. O Privately owned, 1BlueHorizon Group® is independent of any financial institution, manufacturer, operator, insurance company or maintenance provider assuring our clients the benefit of truly unbiased, comprehensive and flexible provision of service. O 1BlueHorizon Group® believes in working closely with client staff to transfer our knowledge and experience, which means 1BlueHorizon Group® continues to deliver value long after the project is complete. O A unique blend of languages, age groups, cultural backgrounds and skills qualifies 1BlueHorizon Group® to provide turnkey solutions for any and all of your aviation requirements - worldwide. O 1BlueHorizon Group® range of services is continuously tailored and adapted to suit the geographical scope and needs of our customers. P R O P R I E TA R Y I N F O R M AT I O N
  27. 27. P R O P R I E TA R Y I N F O R M AT I O N 26© 2014 1BlueHorizon Group - www.1bluehorizon.com All rights reserved1BHG | THE LOW COST CARRIER RECIPES Wataniya Airways - Chairman Mr. Abdulsalam Al Bahar with Mrs Ghaida Abdul Latif, vice chairman – director general & CEO of Syrian Arab Airlines. Flydubai - CEO Mr. Ghaith Al Ghaith Gulf Air - Ex CEO Samer Majali H.E. Mohamed Hamad bin Azzan Al Mazrouei, WRDC's Director General and Acting Under Secretary of the Court of the Ruler's Representative in the Western Region (al Gharbia) of Abu Dhabi Emirate Democratic Republic in Congo (Transport) AerospaceOne Company in India Jet Green in Pakistan Ababeel Air in Libya His Highness Sheikh Ahmed Bin Saeed Al Maktoum, President of the Dubai Civil Aviation Authority, Chairman of Dubai Airports, Chairman & Chief Executive of Emirates Airline & Group Note: Detailed references upon request For the last ten years we have been actively involved with our Senior personnel in major airlines, start-ups or Economic development ventures P R O P R I E TA R Y I N F O R M AT I O N
  28. 28. P R O P R I E TA R Y I N F O R M AT I O N 27© 2014 1BlueHorizon Group - www.1bluehorizon.com All rights reserved1BHG | THE LOW COST CARRIER RECIPES Family conglomerates (Governance, Portfolio analysis and investment Strategy) Economic development (Business review / Cluster / Project Management office) Air Transportation (Airline / Airport / General Aviation / Aerospace & Defense) Management Consulting Operational Improvement Our understanding of operational improvement is quite simple: Whereas restructuring is about stabilizing a company and fixing how it does things, operational improvement is about seeing a company through the transformation of becoming more competitive – going the Extra Mile. Asset Management Fleet Strategy & Planning With our Fleet Solutions, we can help you expand your fleet, transition from older models to newer aircraft types, or provide interim capacity. We back our support with a global team of technical experts and industry specialists who will provide you with the fleet solution and support that meets your specific needs. Interim Management Knowledge transfer Finding talent is difficult even at the best of time. Finding resources to assist for a short- term assignment of a proven heavyweight interim executive manager to manage a period of transition, crisis or change within an organization or to take on critical projects or senior positions for a limited time is even more difficult. Ahead of Strategies Three Practices Shareholders and management of companies with specialized needs often choose 1BHG for our unique custom turnkey solutions. If you want a business plan or a feasibility study to assess the case, or your are burning cash and running into trouble, or seek help to assess the case for entering immunized joint venture or looking for an interim management solution… 1BlueHorizon Group® highly competent seasoned professional will assist you to propel your business further… Going the extra mile ahead of strategies … 1BHG® Business model dedicated to particular Sectors is built around three Practices providing clients with turnkey solutions to maximize Value Creation Source: © 1BlueHorizon Group | Business model with Sectors (Horizontals) & Practices (Verticals) … no matter how complex the issues are! P R O P R I E TA R Y I N F O R M AT I O N
  29. 29. P R O P R I E TA R Y I N F O R M AT I O N 28© 2014 1BlueHorizon Group - www.1bluehorizon.com All rights reserved1BHG | THE LOW COST CARRIER RECIPES Our three Sectors expertise covers the entire breadth of the Aviation and Defense sector, Economic development and Family conglomerates Airline Economic development Corporate governance structure  Portfolio analysis  Investment strategy  The family element  Performance Management  Organization Improvement  Privatization  Aerospace cluster  Logistic, Cargo, GH Airport Family conglomerate  Restructuring MRO, Aerospace & Defence  Performance Management  Organization and Change Management  Pricing and Revenue Management  Market Forecasting  Branding, Marketing and Sales General aviation Aerospace & Defence  Feasibility, Business Plan  Operations Improvement  Merger & Acquisitions  Due Diligence  Fleet Planning  Business review  Cluster strategy  Project Management office  Public–private partnership (PPP) Source: © 1BlueHorizon Group | Core competencies in the main three Sectors … and our clients well recognize this! P R O P R I E TA R Y I N F O R M AT I O N
  30. 30. P R O P R I E TA R Y I N F O R M AT I O N 29© 2014 1BlueHorizon Group - www.1bluehorizon.com All rights reserved1BHG | THE LOW COST CARRIER RECIPES Interim Manage- ment Managing Consulting Asset Management  The Management Consulting (MC) Practice is our ability to strike a rapport working side by side with you and quickly understanding what you need when the margin of error is thin… Providing a highly targeted surgical strike (to-the-point) to improve de performance and going the extra mile…  The Interim Management (IM) Practice help you by giving comfort and control with relevant seasoned advisors whenever and wherever they are needed… Whereas a management consultant provides an advisory role, Interim managers with performance improvement focus are directly responsible in delivering quick results, visible and measurable...  The Asset Management (AM) Practice works individually with each of our clients to develop creative strategies and solutions for all types of aviation equipment, with innovative financing models.… Source: © 1BlueHorizon Group | Practices Performance improvement Quick results / Hands-on Turnkey solutions Knowledge transfer Ahead of Strategies… The 1BlueHorizon® difference 1BlueHorizon Group® three dedicated Practices are built to propel clients business further with a comprehensive approach ahead of strategies GENERATINGTHRUSTTO PROPEL YOUR BUSINESS FURTHER... P R O P R I E TA R Y I N F O R M AT I O N
  31. 31. P R O P R I E TA R Y I N F O R M AT I O N 30© 2014 1BlueHorizon Group - www.1bluehorizon.com All rights reserved1BHG | THE LOW COST CARRIER RECIPES 1BlueHorizon Group® Asset Management Practice – AM at a glance Customers with specialized needs often choose us for our unique custom solutions Source: © 1BlueHorizon Group | Asset Management Practice (AM) at a glance If you’re seeking: O A dedicated team with proven aviation asset management experience with the entire scope of services from initial marketing through technical services, lease management and remarketing O Access to a world recognized industry research team with proven track record working for global clients O An opportunity to benefit from 1BHGB’s ‘one stop shop’ aviation portfolio of skills and services O Long term commitment to the industry with a global presence along an international network of Partners in the EMEA Region (Europe, Middle East and Africa) enabling us to stay in contact with potential customers on a daily basis O Access to high quality independent technical know how for all aircraft types O Someone who understands the needs of the investor community and its customers and has extensive experience… Then look no further than 1BlueHorizon Group® Asset Management Practice (1BHG - AM) to provide you with the highest possible standards of service and advice. Advantages of Operating Lease Aircraft Remarketing  When you use us to sell, re-lease or trade aircraft, you don’t just get the best transactional service on the market. You get the full benefit of our unrivalled marketing expertise, in-depth knowledge of the entire aircraft industry, enormous collective experience in the market and a vast network of contacts.  Potential targets are identified by our teams, working through established processes that get results…fast, and ensure maximum coverage of the potential customer base.  Our financial analysis capabilities can then prove decisive in helping you to choose the best transaction.  So whether selling, arranging finance or re-furbishing and re- configuring aircraft for re-marketing, we can provide services to add real value to the transaction - meaning you get the best possible deal. Remarketing is an ongoing activity driven by the market, opportunity and the owners’ strategy… P R O P R I E TA R Y I N F O R M AT I O N
  32. 32. P R O P R I E TA R Y I N F O R M AT I O N 31© 2014 1BlueHorizon Group - www.1bluehorizon.com All rights reserved1BHG | THE LOW COST CARRIER RECIPES 1BlueHorizon Group® Asset Management Practice – AM at a glance (cont’d) Sometimes all you need is clear, concise and professional advice Source: © 1BlueHorizon Group | Asset Management Practice (AM) at a glance P R O P R I E TA R Y I N F O R M AT I O N Advantages of Operating Lease Technical Services  Our experience in managing a range of aircraft types for clients around the world gives you the peace of mind that we are monitoring the technical condition of your aircraft when they’re on lease, and continuously reviewing their schedule of inspections to take into account changes in financial or technical performance of the lessee. We ensure that all the terms of the lease contracts are being strictly adhered to and putting us at the forefront in this highly valuable element of managing the aircraft lease.  Regular reviews provide you with detailed reports that are designed to clearly highlight any areas of concern, and provide advice as to the most suitable means of rectification.  Our skills in negotiating and managing tailor made vendor and third party maintenance and service agreements will protect your assets and ensure they remain attractive throughout their life.  Our expertise in the key area of maintenance reserve adjudication ensures that any reserves accumulated by the Lessor are applied correctly, thus retaining the full value of the asset throughout the lease term. Advantages of Operating Lease Our knowledge and experience of the commercial aircraft, freighters and business aircraft market, means we’re well placed to provide you with quality advice when considering aircraft acquisitions, lease advice, operational management, market reviews and outlook and or remarketing. Our market knowledge ensures you’re getting the best available data to make decisions on the price of your deal and we’ll provide assistance in discussing the prevailing market conditions for certain types and their potential impact on current and future values.
  33. 33. P R O P R I E TA R Y I N F O R M AT I O N 32© 2014 1BlueHorizon Group - www.1bluehorizon.com All rights reserved1BHG | THE LOW COST CARRIER RECIPES 1BlueHorizon Group® Managing Consulting Practice – MC at a glance Our goal is to provide leadership for helping you achieve higher levels of success Source: © 1BlueHorizon Group | Managing Consulting Practice (MC) at a glance P R O P R I E TA R Y I N F O R M AT I O N CXOs are increasingly focusing on corporate strategies to deliver outcomes that contribute measureable business value. Aligning technology investments to corporate strategies is the key to create competitive advantage, grow the business, and increase revenues. Our team members experience enables a richer understanding of client needs, the competitive landscape, the opportunity landscape, product build out, revenue drivers, and solutions tailoring.
  34. 34. P R O P R I E TA R Y I N F O R M AT I O N 33© 2014 1BlueHorizon Group - www.1bluehorizon.com All rights reserved1BHG | THE LOW COST CARRIER RECIPES 1BlueHorizon Group® Managing Consulting Practice – MC at a glance (Cont’d) Our Solutions Center is providing tailor made solutions with focus on results Source: © 1BlueHorizon Group Managing | Consulting Practice (MC) at a glace – 1BHG Solutions Center (non exhaustive)  Strategy & Leadership  Organization & Change  Due Diligence  Joint Ventures  Competitive Analysis  Network Strategy & Planning  Pricing Strategy / Yield Management  Capacity Management  Airline Alliance & Partnerships  Cargo strategy and Management  Aircraft Selection  Fleet Planning & Scheduling  Sales & Distribution  Ancillary Revenues  Airline Loyalty Programmes  Product Design and Marketing  Strategy & Leadership  Acceleration of economic growth  Cluster Strategy  Tourism Strategy  Organizational design & Reform  Project Management Office (PMO)  Personnel management and planning  Investment Promotion and Marketing (incl. Real Estate projects support)  Strategic studies  Roadmap & Performance reviews  Capability definition studies  Options development and analysis  Information & Knowledge management  Building Public-Private Partnership  Strategy & Leadership  Governance  Ways to structure for the next generation, understanding the additional dimensions that influence the conventional strategy framework - the family element  Portfolio analysis, including restructuring a poorly performing portfolio and disinvestment  Competitive Analysis  Due Diligence  Joint Ventures  Mergers & Acquisitions Economic development Family conglomerateAviation, Aerospace & Defense We highlight here some of the specific technical expertise of our team members. Of course, we do not list everything here so if you don't find something listed, please do not hesitate to contact us. We may still have strong capabilities to serve you... P R O P R I E TA R Y I N F O R M AT I O N
  35. 35. P R O P R I E TA R Y I N F O R M AT I O N 34© 2014 1BlueHorizon Group - www.1bluehorizon.com All rights reserved1BHG | THE LOW COST CARRIER RECIPES 1BlueHorizon Group® Interim Management Practice – IM at a glance Business solutions by an independent senior manager, for a limited period of time Source: © 1BlueHorizon Group | Interim Management Practice (IM) at a glance P R O P R I E TA R Y I N F O R M AT I O N ■ Organizations have become more streamlined and typically retain core management to deal with their transactional requirements. As such they no longer have the available resources to manage exceptional or unforeseen circumstances or have the in-house skills to deliver specific projects. ■ Interim Executives give organizations the opportunity to utilize management resources to handle these situations, whilst operating with a leaner structure. Interim Executives provide functional expertise gained from a wide range of organizations and industry sectors. ■ Interim Management is a short-term executive resource with proven skills to allow organizations to manage in a period of Transition, Change, Gap management or Crisis. ■ It provides flexibility to organizations when they need to inject a strong track record of management success combined with specific functional skills. There are many factors that make interim management an essential option for organizations, which include: ► Interim Executives can be in place within days. The speed of recruitment gives organizations the flexibility to respond to market forces allowing them to implement key decisions rapidly. ► Interim Executives bring knowledge. They will have had experience of dealing with a number of different challenges and situations which means they will be over qualified for the role and ensures they are equipped to handle any issues they are asked to deal with. ► Interim Executives are independent and impartial. They offer your organization a fresh outlook whilst providing you with effective solutions on how to handle situations. They remain objective in dealing with the processes and not seeking promotional advancement. ► Interim Executives have clear responsibilities to deliver outcomes from planning through to implementation, review and handover. ► Interim Executives bring considerable expertise and are able to transfer both specialized knowledge and ideas on best practice, giving additional value to their hands-on approach to delivering results. Interim Executives are not seeking permanent positions and are committed to an Interim career. As an interim is constantly judged on their ability to deliver against objectives, their previous experience provides organizations with the assurance they seek.
  36. 36. P R O P R I E TA R Y I N F O R M AT I O N 35© 2014 1BlueHorizon Group - www.1bluehorizon.com All rights reserved1BHG | THE LOW COST CARRIER RECIPES 1BlueHorizon Group® Interim Management Practice – IM at a glance (cont’d) Interim Management is delivering quick results, visible and measurable Source: © 1BlueHorizon Group | Interim Management Practice (IM) at a glance P R O P R I E TA R Y I N F O R M AT I O N Ability to create quickly a positive working environment during a period of change and transition… Self motivated and hard working with the willingness to provide and present results on a monthly basis… Aware of, but not driven by, internal politics, so making them ideal during periods of change... Excellent analytical skills. Ability to create roadmap to success rapidly… A fundamental management tool for shareholders, boards of directors, management committees and human resources directors… The four elements to any Interim Management assignment are Diagnose, Plan, Implement and Exit… A ‘hands-on’ specialist with significant experience and a proven track record in the related industry… The willingness to share expertise and experience… … whereas a management consultant provides an advisory role, interim managers are directly responsible and accountable to the business in their own right !
  37. 37. P R O P R I E TA R Y I N F O R M AT I O N 36© 2014 1BlueHorizon Group - www.1bluehorizon.com All rights reserved1BHG | THE LOW COST CARRIER RECIPES “1BlueHorizon Group is the only consulting firm that works successfully on all levels: Board level, middle management, implementation" “1BHG senior personnel come in with strong views but integrate perfectly in our teams" “1BHG has convinced us through it's excellent industry- and technology expertise" "The 1BHG team knows perfectly well how to push the necessary change" “1BHG guys are implementation - oriented and their cooperation with my people is very good " “1BHG Practice has very qualified people who really know a lot about our industry" Testimonials - What do our Customers think about 1BlueHorizon Group® "In each project step, we could clearly identify 1BHG's added value and improve the overall bottom line" P R O P R I E TA R Y I N F O R M AT I O N THE ONLY WAY TO DO GREAT WORK IS TO LOVE WHAT WE DO… A MILE OF RUNWAY WILL TAKE YOU ANYWHERE NO ONE HAS EVER COLLIDED WITH THE SKY Note: A list of qualifications is made available separately
  38. 38. P R O P R I E TA R Y I N F O R M AT I O N 37© 2014 1BlueHorizon Group - www.1bluehorizon.com All rights reserved1BHG | THE LOW COST CARRIER RECIPES Published books and decisive management theories that facilitate critical dialogue and support 1BlueHorizon creation A short selection of inescapable aviation related books “Baseline” (Philosophy) “Low Cost Carriers” “Courier services” “Various” Airlines’ Turnaround “Air Transport Management” Source: © 1BlueHorizon Group | Recommended bibliography (non exhaustive) P R O P R I E TA R Y I N F O R M AT I O N Partners Network – Aviation Sector
  39. 39. P R O P R I E TA R Y I N F O R M AT I O N 38© 2014 1BlueHorizon Group - www.1bluehorizon.com All rights reserved1BHG | THE LOW COST CARRIER RECIPES LEONARD FAVRE Partner, Group Managing Director 1BlueHorizon Group P.O. Box 34154 M +971 50 6164007 (U.A.E.) Abu Dhabi M +41 79 2080256 (Switzerland) United Arab Emirates leof007 leo@1bluehorizon.com www.1bluehorizon.com Abu Dhabi | Bern | Madrid | Montreal | Paris Any clarifications or questions regarding this document should be addressed to: P R O P R I E TA R Y I N F O R M AT I O N We are used to generate 1BlueHorizon® out of the Rough... Customers with specialized needs often choose us for our unique custom turnkey solutions to propel their business further… © 1BlueHorizon Group®. All rights reserved. Without the prior written consent of 1BlueHorizon Group®, it is not permitted to modify this document or create derivative works. High quality global airline industry insight requires investment. Please do not cut & paste the document. Email info@1bluehorizon.com to get / buy additional rights. The information contained in this document has not been independently verified. It does not purport to be all-inclusive or to contain all the information that a prospective investor in securities of the Company may desire or require in deciding whether or not to offer to purchase such securities, or any type of legal transaction. The information and opinions contained in this presentation and any other are material discussed verbally are provided as at the date of this presentation and are subject to verification, completion and change without notice. In giving this presentation, neither the Company nor its advisers and/or agents undertakes any obligation to provide the recipient with access to any additional information or to update this presentation or any additional information or to correct any inaccuracies in any such information which may become apparent.
  40. 40. P R O P R I E TA R Y I N F O R M AT I O N 39© 2014 1BlueHorizon Group - www.1bluehorizon.com All rights reserved1BHG | THE LOW COST CARRIER RECIPES
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