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JULY/AUGUST 2009 | ISSUE 3

ISSUE 3 : July/August 2009

TAkINg ON ThE BIg guNS

Azran osman-rani, Ceo of Air Asia x, is determined to create a successful long-haul carrier with rock-bottom unit costs

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ISSUE 3 : JULY/AUGUST 2009

MAnAging direCtor Aip Philip Tozer-Pennington Tel: +44 (0)207 579 4841 Email: philipt@aviation-industry.com

NEWS 04 INTERNATIONAL LOW COST AIRLINE NEWS International LCC news from across the globe: April 2009 to June 2009.

editor Daniella Horwitz

tel: +44 (0) 207 579 4847

JournAList(s) Mary-Anne Baldwin tel: +44 (0) 207 579 4843 Sarah Morgan tel: +44 (0) 207 579 4843

INTERVIEW 14

speCiAL Correspondents Africa: China: Russia-CIS: South America: Europe:

Kaleyesus Bekele Lu Haoting Vladimir Karnozov Elias Gedeon Terry Spruce

MAgAZine design & produCtion Dean Cook tel: +44 (0)1273 467579 The Magazine Production Company Website: www.magazineproduction.com E-mail: deancook@magazineproduction.com

AIR ASIA X: WARRIORS Of ThE LOW-COST, LONg-hAuL MODEL Low-cost carriers have transformed the short-haul market, but few are brave enough to suggest that they will have a similar impact on long-range routes. Alex Derber reports.

fOCuS 22

EuROpEAN LOW-COST MARkET Strong LCCs will fly through the recession, but as Sarah Morgan discovers, the weak will fall by the wayside.

dispLAy Advertising Philip Tozer: philipt@aviation-industry.com

LOW COST AIRLINE WORLD (ISSN Print: 1759-1112 – Online: 2040-3402) (USPS 022-324). Published bi-monthly.

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AIRLINE fOCuS 28

MARkET CONSOLIDATION? A LOOk AT SpANAIR AND VuELINg As two of Spain’s regional operators go through major restructuring, Mary-Anne Baldwin asks whether the region is to see the introduction of a ‘super carrier’.

ENVIRONMENT 34 CARBON NEuTRAL COMpLIANCE The aviation industry has set a longer term target of becoming carbon neutral. But what does this term really mean, what are the potential pitfalls in achieving it, and is true carbon neutrality really feasible? Stephen Mooney, VP of corporate communication at Carbonetworks, explores the issues.

40 gAININg CARBON NEuTRAL STATuS fROM fuTuRE COMpLIANCE

Printed in England by Headley Brothers Ltd..

The aviation industry is coming under increasing regulatory pressure to become

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carbon neutral. What will have to be done to ensure compliance, and what will the

experience, and so an advantage over competitors, as the global carbon market develops,

Low Cost Airline World, part of UBM Aviation, has used its best efforts in collecting and preparing material for inclusion in Low Cost Airline World but can not and does not warrant that the information contained in this product is complete or accurate and does not assume and hereby disclaims, liability to any person for any loss or damage caused by errors or omissions in Low Cost Airline World whether such errors or omissions result from negligence, accident or any other cause. This publication may not be reproduced or copied in whole or in part by any means without the express permission of UBM Aviation Industry Press limited.

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implications be? One could be that the airlines subject to the EU ETS will gain vital says Miles Austin, head of European regulatory affairs at EcoSecurities.

MAINTENANCE OpERATIONS 44 LOOkINg AfTER A WORkhORSE — 737Ng MAINTENANCE. The 737NG (737-600/-700/-800/-900) is the backbone of many fleets operating domestic routes and the world’s most widely-flown jet. Daniella Horwitz looks at the aircraft and its maintenance requirements.

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Welcome to: Low Cost Airline World An industry journal with global distribution dedicated to the low cost carriers and their suppliers.

LCCS SpARkLE IN ThE gLOOM

S uSuAL, ONE can hardly believe that we are now more than halfway through the year. Looking back, we can reﬂect that the first half of 2009 saw a dismal collection of aircraft orders. Boeing collected zero net orders in the first five months of the year as 65 orders were countered by an equal number of cancellations; Airbus had 11 net orders after 21 were dropped. Traditionally, Airbus and Boeing announce their new orders at the Paris Air Show, but this year the orders were very thin on the ground. However, there were a few deals at Paris that offered hope for the future, particularly in the low-cost sector. Early on in the week, AirAsia X, the long-haul low-cost affiliate of Malaysia’s AirAsia Group, placed a firm order for 10 A350 XWBs. The airline will use the aircraft on a network linking its Asian hub in Kuala Lumpur with destinations worldwide, especially in Europe and Australia. Azran Osman-Rani, CEO of AirAsia X is determined that his airline will be the first to operate a successful long-haul long-cost model. Read about his vision in our exclusive interview (page 14). All eyes were turned on Hungarian low-cost airline Wizz Air, which made the last-minute and rather unexpected, announcement of an order for 50 A320s. The airline, having recently celebrated its fifth birthday, has already aggressively expanded into central and eastern Europe. While everyone is suffering from the strain of the current financial climate, it is good to know that some airlines still have the confidence (and capital) to place large orders. In Europe particularly, the recession has been the catalyst for the demise of premium carriers; the rise of the low-cost carrier; and the merger of regional airlines. These market factors are discussed in our European low-cost market focus (page 22) and a comparison between Spanair and post-merger Vueling (pg 28). I hope you enjoy this issue. Here’s to a better second half of 2009!

Daniella Horwitz

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Skywest scheduled charter flights increase 41.3 per cent during May Skywest, the leading airline of Western Australia, has recorded a 41.3 per cent increase in its scheduled charted flights for May 2009 compared with the same month in the previous year. However, compared to May 2008, passenger figures for the month fell 17.5 per cent, while revenue for passengers dropped 8.9 per cent. Load factor was down 5.9 per cent. Additionally, the Australian and South East Asia regional Airline has extended its Coastal Network Licence, which allows it to operate to the coastal airports of Western Australia, until 30 June 2010. Jeff Chatfield, chairman of Skywest, said: “The decision to extend the contract for a further year… creates short-term certainty for the regional communities we service. We remain committed to the long-term future of regional aviation in Western Australia.”

Ryanair condemns “useless aviation regulator” Ryanair, Dublin Airport’s largest airline, has condemned the draft decision from Ireland’s “useless aviation regulator”, Cathal Guiomard, which proposes to allow further cost increases at Dublin Airport from January 2010. Ryanair said there was no justification during a recession for further cost increases at a government-owned airport monopoly, or for these being sanctioned by a governmentappointed regulator. “At a time when airports all over Europe are lowering charges, this regulator is hopelessly out of touch with economic reality. These further cost increases, when added to the government’s suicidal €10 tourist tax, means that further traffic and tourism declines in Ireland are inevitable,” the airline said in a statement. ($1 = €0.72)

LOW COST AIRLINE WORLD

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Bishop and Lufthansa agree plans for bmi takeover

Sir Michael Bishop and Lufthansa have reached an out-of-court settlement over their quarrel regarding the put option for a 50 per cent plus one share in bmi. Lufthansa will not be required to purchase shares in the airline, with Bishop agreeing that the: “specific performance of the put option will not be available” in a Lufthansa statement. With effect from July 1, 2009, a third company, LHBD Holding, will acquire the investment company, BBW Partnership’s full stake of 50 per cent plus one share in bmi for £48m. Lufthansa in turn, will have a 35 per cent stake in LHBD. bmi will remain UK-owned until it attains its necessary traffic rights, Lufthansa is then expected to acquire 100 per cent of LHBD Holding. Lufthansa said in its statement: “By this transaction, Lufthansa is expanding its interest in an airline whose strategic asset is its control of more than 11 per cent of all the take-off and landing slots at London Heathrow, Europe’s largest airport.” Lufthansa will pay £175m for the cancellation of the put option which was exercised by Bishop on October 10, 2008. The option was part of a shareholders’ agreement between BBW, Lufthansa and co-shareholder Scandinavian Airlines (SAS) dated November 9, 1999. ($1=£0.62)

Air Asia wants MAHB to lower airport tax at LCCT Low-cost carrier AirAsia, wants Malaysia Airports Holdings (MAHB) to recommend a reduction in airport tax to the government for international passengers, at the Low Cost Carrier Terminal (LCCT). Datuk Aziz Bakar, group chairman, said that the current rate of MYR51 charged for international travellers was unfair, and should be reduced to MYR10, as the LCCT did not have advantages such as aerobridges when compared to the Kuala Lumpur International Airport (KLIA). “Malaysia Airports should be recommending to the government to lower the charge as it is the entity operating the airport,” he told reporters. Aziz said AirAsia had helped bring about the multiplier effect to the country’s economy through its passengers. He was responding to questions about the MYR65m in airport tax owed by AirAsia to Malaysia Airports and which was brought up in Parliament on June 23. “We have been paying the charges. But the MYR65 million is part of the payment we are holding back, until we resolve this issue,” he explained. ($1 = MYR3.54)

Martinair’s Frank de Jong jailed for eight months Frank de Jong former VP-European cargo sales for Martinair, will serve eight months in prison and pay a fine of $20,000 having been found guilty in a conspiracy to fix international cargo rates. Martinair agreed to pay $42m in penalties to US authorities last summer. De Jong is now the fourth airline executive to be sentenced to jail as a result of an investigation into 15 airlines over price-fixing. Martinair is also currently being investigated by the Australian Competition and Consumer Commission.

First Airbus rolls out of Tianjin to Sichuan Airlines The first aircraft from Airbus’ final assembly line in Tianjin was delivered on June 23. “Our Final Assembly Line here in Tianjin and this first aircraft delivery outside Europe mark an important milestone in our strategic long-term partnership with China and the Chinese industry,” said Tom Enders, Airbus president and CEO.

Second 787 moves to flight line Boeing said it has moved the second 787 to the flight line to begin fuel testing. The company plans to use six aircraft for the flight-test programme which begins in June. This Dreamliner, designated ZA002, will focus on systems performance. Boeing has said it will deliver the first aircraft in the first quarter of 2010, almost two years behind the programme’s original first delivery date in May 2008.

ATA reported 26 per cent fall in US’ May traffic The Air Transport Association of America (ATA) has reported that US passenger revenue for May fell 26 per cent compared to the same month in 2008. It is the seventh consecutive month marking a fall in passenger revenue. The number of US passengers traveling during May fell 9.5 per cent. Average price per mile fell 17.6 per cent. Cargo traffic, measured by revenue ton miles, fell 22 per cent year-on-year in April 2009. It was the ninth consecutive month of decline for cargo.

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AirAsia X chooses AFI KLM E&M for A330 component support Malaysia’s AirAsia X has signed a contract with Air France Industries KLM Engineering & Maintenance (AFI KLM E&M) covering component support for its ordered fleet of 25 A330s. Two aircraft have already been delivered and the remainder will go into service between now and 2013. The contract includes repairs, pool access and the corresponding logistics services. The company said it will expand its Singapore logistics centre and possibly develop further “local capabilities.”

Virgin signs up for six A330s Virgin Atlantic Airways, the UK-based parent company of a number of low-cost airlines, has signed a firm contract to buy six A330-300 long-range aircraft and is leasing a further four from AerCap. The aircraft will allow Virgin to offer enhanced services between the UK, the US and the Caribbean.

Frontier Airlines makes $2.4m profit in April Frontier Airlines Holdings has reported a net profit of $2.4m for April, marking its sixth consecutive month of making a gain. Consolidated operating profit was $5m compared to an operating loss of $21.9 m for the same period in 2008. Total consolidated net income was $2.4m compared to a net loss of $26.9m for April 2008. $1.1m was paid out in bankruptcy costs. Operational results for April included a 16.1 per cent year-onyear mainline capacity reduction. Mainline total unit costs were 8.49 cents, falling by 19.5 per cent compared to April 2008. “We have seen the payoff of our year-long restructuring and cost-reduction efforts,” said Sean Menke, Frontier’s president and CEO.

LOW COST AIRLINE WORLD

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Wizz Air orders 50 A320s

Wizz Air, the largest central and eastern European low cost-carrier, signed a MoU to buy 50 more A320s on day three of the Paris Air show. The deal is worth $3.8bn at list prices and takes the airline’s total orders up to 132 aircraft. The airline is yet to secure financing for the order, but has sourced payment for the first five or six aircraft due to be delivered by Airbus, according to Jozsef Varadi, CEO of Wizz Air. All Wizz Air aircraft will be configured in a single-class layout, seating up to 180 passengers. No choice of engine has been made yet. The new A320 order, due to be delivered between 2014-2016, will allow Wizz Air to reinforce and expand its extensive network established at 11 operating bases, in Poland, Hungary, Bulgaria, Romania, Ukraine and the Czech Republic. It will also allow the airline to add new destinations to its 130 existing routes. “The new order is consistent with our growth plan and underpins our aspiration to become the airline of choice in central and eastern Europe. The aircraft economics of the Airbus A320 is instrumental for us to deliver the business at the lowest possible cost in order to make our low fares accessible to an ever increasing customer base. This new commitment also reflects on the robust nature of our business, even in a challenging market environment,” said Varadi. It’s a simple case of evolution, those that can adapt to fit the changing environment will be those that continue through it and out the other side. Wizz Air is positioning itself well to achieve this, pushing growth to become a dominant force in the low-cost sector and thus it is better equipped to fend off competitors. “In only five years Wizz Air, supported by lead investor Indigo Partners, has developed into a formidable success story, and we are delighted they did it with our Airbus aircraft.” said Tom Enders, Airbus president and CEO. “This milestone commitment is yet another demonstration of the market superiority of the A320.”

LCCs becoming more popular in Finland The low-cost carrier (LCC) segment is one of the few to have increased in air traffic over the past 12 months in Finland. Growth during the year has been 12 per cent and a record number of passengers were carried by low-cost airlines. In May 2009, a total of 75,600 passengers travelled with LCCs, a record for a single month. Growth in passenger numbers, as a 12-month average, was 16.3 per cent and 22 per cent in operations. “Passengers, including business passengers, are becoming increasingly cost conscious when booking trips. In addition, the supply of low-cost prices has increased and is encouraging people to travel,” says Kimmo Holopainen, Finavia’s business development manager.

TAM takes new A320 from GECAS TAM Linhas Aereas has received a new A320 from GE Capital Aviation Services (GECAS), the lessor and financier announced. The aircraft will be used to expand TAM’s fleet and is one of 19 aircraft on lease from GECAS. The Sao Paulo, Brazil-based airline currently operates a fleet of 132 aircraft.

flydubai signs pilot training contract with Emirates-CAE flydubai, the 737-800 operator, has contracted Emirates-CAE Flight Training (ECFT) to provide initial and recurrent pilot training for a five-year term. The teaching programme at the Dubai centre will include simulator training on ECFT’s Boeing 737NG Level D full-flight simulator, crew resource management (CRM) and classroom-based teaching.

GOL hires new auditors GOL Linhas Aereas Inteligentes, the largest low-cost airline in Latin America, announced that its board of directors has resolved that, as of June 2009, Deloitte Touche Tohmatsu Auditores Independentes will replace Ernst & Young (E&Y) Auditores Independentes as the company’s independent auditors. The company believes that the change of its independent auditors will help to continuously strengthen its internal controls and the preparation of its financial statements, and is in its best interests. There has been no disagreement with E&Y concerning accounting principles and practices, financial statements, disclosure or auditing scope.

AirAsia X signs up for 10 A350 XWBs AirAsia X, the longhaul low-cost affiliate of Malaysia’s AirAsia Group, has placed a firm order with Airbus for 10 A350 XWBs. Readers may recall that the likelihood of this deal was mentioned back in December 2008. The airline will use the aircraft on a network linking its Asian hub in Kuala Lumpur with destinations worldwide, especially in Europe and Australia. AirAsia X has selected the A350-900 variant for its fleet, which will be configured to seat more than 400 passengers in a two-class layout.

July/August 2009

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NEWS

WestJet announces winter schedule increases WestJet is to increase its routes by doubling the number of Canadian cities with links to Mexican destinations. As from November the new winter schedule will increase services to Cancun, Puerto Vallarta, Mazatlan and Cabo San Lucas. “WestJet and WestJet Vacations are quickly becoming the dominant force in Mexico,” said Bob Cummings, executive VP, guest experience and marketing. “As part of our strategy, we continue to increase the number of non-stop routes and increase market share in Mexico and elsewhere.”

Ryanair makes first annual loss Ryanair has reported its first annual loss, as a result of higher fuel costs and a drop in Aer Lingus’ shares. The Irish airline made a net loss of €169m ($239m; £146m) in the year to March 31, compared with a profit of €481m a year before. Though annual sales increased 8.4 per cent to €2.94bn, fuel costs rose to €1.26bn from €791.3m a year before. The company was also forced to write down the value of its 29.8 per cent stake in Aer Lingus by a further €222m, after Aer Lingus’ share price fell.

Wizz celebrates fifth year Low-cost airline Wizz Air recently celebrated its fifth birthday; the airline launched its first service from Katowice, Poland to Luton, London on May 19, 2004. Its services now reach 15 destinations across eastern and central Europe and the Ukraine. Jo-Ann Lloyd, marketing manager at London Luton Airport commemorated Wizz at it had: “In the past five years... opened up eastern and central Europe with low-cost travel and has given us our first flights to the Ukraine.”

LOW COST AIRLINE WORLD

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Air Berlin reports 1Q loss is on target

Zest Airways signs up for A320 Zest Airways of the Philippines has placed a firm order with Airbus for a singleaisle A320. The aircraft will join an existing fleet of two A320s that the airline purchased in the open market in 2008.

Air Berlin has said its profit and revenue for the first quarter of 2009 hit its target despite a 6.2 per cent fall in passenger numbers. Seasonal operating loss (EBIT) reached minus €87.3m versus minus €68.6m taken in the first quarter last year. Revenue was up 1.2 per cent to €661m. The airline’s EBIT was minus €87.3m compared to minus €68.6m for the first quarter of 2008. Net profit for the first three months of 2009 was minus €88.4m compared to minus €59.6m. Joachim Hunold, Air Berlin’s CEO, said: ‘’Air Berlin has performed better than other European airline companies. We were able to increase our charterbusiness revenue, especially due to improved capacity management on our long-haul flights.’’ ($1=€0.72)

“The worst year in the history of aviation” says Branson A major US carrier will disappear as a result of the global recession the damage made in 2009, the worst ever year for airlines, says Sir Richard Branson, CEO of the UK-based airline and parent of a number of low-cost airlines. Branson also suggested that other “casualties” could follow. Conversely, of course, Virgin Atlantic is well prepared to weather the storm. On the plus side, 2009 will also be the best year for airline passengers, as fares plunge to levels not seen in 20 years. “It is a fantastic time to travel. If people have got the cash, this is the year to go abroad and visit friends and relatives,” the tycoon said. Branson, speaking at a Tokyo press conference to mark Virgin Atlantic’s 20th anniversary of flying to the Japanese capital, also again warned against a potential merger between British Airways and American Airlines. “It is the equivalent of Coca Cola and Pepsi merging, it would not be good for consumers and would inevitably push up fares on transatlantic routes out of Heathrow,” he stated. “If it is allowed to go ahead it would wreak havoc in the airline industry.”

Ryanair calls on government to scrap tourist tax and prevent job losses

Ryanair, Europe’s largest low-cost carrier, has called on the Irish government to scrap its €10 tourist tax to prevent a further collapse in Irish tourism and related jobs next winter. In the first five months of 2009 over 1 million fewer passengers travelled through Irish airports, resulting in the loss of at least 1,000 jobs and over €600m in tourism revenues. The Belgian, Dutch, Greek and Spanish Governments have recently scrapped similar tourist taxes and/or airport charges in order to reverse falling passenger numbers and prevent further tourism and job losses. Ryanair’s Stephen McNamara said: “This €10 tourist tax is nothing short of tourism suicide. For this tiny tax revenue of just €125m per annum, the Irish government will lose over 2,500 jobs and more than €1.5bn in tourism spend, the VAT receipts on which would exceed €300m.”

AirAsia records 591 per cent increase in operating profit AirAsia Berhad has recorded a 591 per cent increase in its core operating profit, which rose to RM166m ($47.49m) for the period ending March 2009. Revenue for the quarter rose 33 per cent to RM714m ($204.27m), while passenger numbers increased by 21 per cent to 3.1 million. Load factor for the airline was 70 per cent, yield (revenue per ASK) was up 12 per cent. “Thai AirAsia has outperformed industry performance considerably and has captured a significant market share,” the company said in a statement.

Aer Lingus forced to lower fees paid to its board Aer Lingus has been asked by Ireland’s transport ministry to lower its annual fees to its board, after petitioning from rival Ryanair. Colm Barrington, Aer Lingus’ chairman, has reportedly received a letter from Julie O’Neill, secretary general of the Department for Transport, saying that Noel Dempsey, Ireland’s transport minister: “has asked that I convey to you his view that it would be desirable if the board were to review the level of such fees having regard to current norms for companies with similar market capitalisation and in similar circumstances to Aer Lingus.”

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Flybe angered by BA’s decision to reduce its share value Flybe is in dispute with its stakeholder British Airways (BA) after it cut £13m from the value of its stake in Flybe. BA, which holds a 15 per cent stake in the airline, has reduced its value to £30m. The privately owned Flybe contested BA’s decision to impair its shareholding, saying that is expects to make a profit this year and that it currently has cash reserves of £57m. A spokesman for BA told reporters that while BA admits Flybe’s revenue is in growth, the national carrier’s figures predicted a lower revenue than was previously forecast. BA announced an annual lost of £401m. ($1=£0.63).

bmi-Virgin Atlantic codeshare adds nine destinations bmi and Virgin Atlantic have finalised the signing of a codeshare deal which will bring an extra nine new destinations to its network from London Heathrow. The agreement allows bmi to sell direct flights between London Heathrow and Chicago, Los Angeles, Washington, San Francisco, Boston and Miami, as well as Dubai, Nairobi and Delhi.

Air Berlin opens new hangar at Düsseldorf Air Berlin officially opened its new hangar 7 at Düsseldorf airport. Measuring 220m (720ft) by 90m (295ft), the EUR65m facility ($87m) can accommodate up to three widebody aircraft and is the largest aircraft maintenance hangar in the North RhineWestphalia region. A photovoltaic system measuring 1,269m2 (13,950ft2) has been installed on the roof. For a period of 20 years, the airline claims it can avoid up to 2,475 tonnes of CO2 and feed up to 2,737,442 kWh into the public mains network.

LOW COST AIRLINE WORLD

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CAA/BAA oppose UK government’s “special insolvency regime”

The Civil Aviation Authority (CAA) has hit out at government plans to overhaul the financial regulation of UK airports’ operator BAA, saying it would expose airport users to additional risks. BAA (owner of Heathrow, Gatwick and Stansted) was also skeptical, saying its lenders had criticised the plans to introduce a “special insolvency regime” for large airports to ensure they stay open even if the operator is made insolvent. The Department for Transport’s proposals have partly been inspired by apprehension over the highly leveraged finances of BAA, which has £13.1bn in debt. There are concerns that introducing the insolvency plan would prevent lenders from exerting their rights to appoint an administrator and sell off assets to recover losses. ($1 = £0.63)

IATA call for reform as predicted global loss is upped to $9bn The current crisis is aviation’s “most difficult ever”, said Giovanni Bisignani, The International Air Transport Association’s (IATA) director general and CEO, before calling for drastic reform of the industry. The body revised its forecast for 2009’s global loss to $9bn, almost double its March estimate. Bisignani said the industry took three years to recover from the seven per cent revenue slump which came after 9/11. Speaking during his State of the Industry address for the 65th IATA Annual General Meeting and World Air Transport Summit, in Kuala Lumpur, Bisignani said: “I am a realist and I don’t see facts to support optimism. The industry is in survival mode. Whether this crisis is long or short, the world is changing. That means resizing and reshaping.” He called for a reshaping of the services provided by travel agents, a modernisation of labour practices, the use of NextGen capabilities and a reformation of western global distribution charges (GDS) charges ($4 per transaction) to be in line with China (which charges $0.50). He said airline’s relationship with governments “must move from punitive micro-regulation to joint problem solving,” and that: “We don’t want bailouts. All that we ask for is access to global capital. If we cannot pay the bills, saving the flag on the tail will not save jobs.”

Oil zooms up to over $71 a barrel US light crude has risen 1.5 per cent, or $1.08, to $71.09, while London Brent crude has risen 1.3 per cent to $70.53 a barrel. Oil bottomed out at $35 a barrel in February this year, but hope that the recession will soon be over has led to the doubling of the oil price in June. Analysts say the oil market is rallying because of the weakness in the US dollar (which makes dollar-denominated commodities cheaper), more money moving into commodities, and a US government report revising global demand expectations upwards. On June 9, the US Energy Department’s Energy Information Administration predicted that oil prices would average $67 a barrel in the second half of 2009. A month ago, it forecast $55.

Boeing predicts long-term upturn worth $3.2tn The commercial aircraft market will be worth $3.2tn over the next 20 years, said Boeing in its 2009 Current Market Outlook (CMO). The manufacturer forecasts a need for 29,000 new commercial passenger and freighter aircraft by 2028. With its prediction that passenger traffic will grow an average 4.9 per cent each year for the next 20 years, Boeing believes airlines will seek younger, more fuel-efficient aircraft to match passenger demand, satisfying the need for a wider choice of flights and fares. The manufacturer said single-aisle aircraft will hold the market share with 67 per cent and twin-aisle aircraft will have the largest market share by investment dollars. Around 40 per cent of the demand for twinaisle aircraft will come from Asia Pacific; 23 per cent will come from Europe.

Ryanair makes surprise decision to link with comparison website Ryanair has for the first time signed a licensing agreement with a price comparison website, after fierce battles against similar comparison websites. Momondo. com’s travel search engine will display Ryanair fares with full access to the airline’s timetable and pricing information so that customers can compare Ryanair fares against competitors. Momondo will then direct customers to the Ryanair site to make bookings. The airline, the largest of Europe’s low-fare carriers, has signed a licensing agreement, which is subject to a €100 charitable donation by Momondo, Stephen McNamara, spokesman for Ryanair, said the listing will ‘’prove to more and more consumers that Ryanair’s guaranteed lowest fares can not be beaten,’’ and that ‘’Ryanair will continue to fight against ‘tickettout’ screenscrapers which are reselling Ryanair seats without authorisation’’. ($1 =€0.72)

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Ryanair hits out against appointment of Dilger as DAA chairman Ryanair hit out against the decision to appoint David Dilger as chairman of the Dublin Airport Authority (DAA). Ryanair said Ireland’s government was “clueless” in its decision to go ahead with the “inappropriate” appointment and that “the ‘golden circle’ of failed bank directors is alive and well and still being appointed to Boards of Semi-State companies.” Michael O’Leary, Ryanair’s CEO, said: “The fact that Mr Dilger was a participant in the nearbankrupting of Bank of Ireland necessitating its bail out by the government makes him one of the golden circle of ‘banksters’ who should be unfit to be chairman of a semi-state company, even one as badly run as the DAA airport monopoly.”

Southwest Airlines closes sale and leaseback of three 737-700s Southwest Airlines has closed the second tranche of its sale and leaseback deal with BOC Aviation. Southwest sold three 737-700s for $104m, all of which were leased back to the airline with immediately effect for a period of 16 years.

Lufthansa given EU Commission approval of bmi takeover The European Commission has given its long-awaited approval of Lufthansa’s proposed buy-out of bmi. The commission said it thought the deal would not affect competition within Europe and highlighted that Lufthansa and bmi are already linked on many routes due to both parties being members of Star Alliance. “The Commission therefore concluded that the transaction would not significantly impede effective competition,” it said in a statement. “The same conclusion was reached for all other routes where the parties currently do not cooperate, as the combined entity would continue to face sufficient competition on these routes.”

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S7 unanimously elected to join oneworld S7 Airlines, is to join oneworld, the worldwide airline alliance. The Russian domestic airline was unanimously elected by the alliance’s existing 10 member airlines. S7 will become a member of oneworld during 2010. British Airways is to be S7’s sponsor, supporting the airline during its integration process, which includes adapting its IT systems and putting in place employee training and communications programmes. The Russian airline, which flies to 72 destinations worldwide, will add 54 cities and eight countries to those destinations covered by oneworld. Vladimir Obyedkov, S7’s CEO said: “It will enable us to offer our customers a truly global network... [and] strengthen us financially, through revenues from passengers transferring to our network from our oneworld partners and the cost reduction opportunities the alliance offers.”

Southwest allows pets to fly alongside passengers Southwest Airlines is soon to open its cabin doors to pets, allowing small cats and dogs to fly as hand luggage for a low fee. At a cost of $75, the airline’s new service, with the slogan “Freedom to Fly”, will have cats and dogs riding in carriers beneath their owners seats. Pet-friendly tickets are already available to buy. “We know from customer and employee feedback that our new pet customers will be a welcomed addition to any flight,” said Gary Kelly, Southwest Airlines chairman, president, and CEO. The airline said the new venture is one of many plans to increase revenue.

GOL 1Q net income reaches $29.44m GOL Linhas Aereas Inteligentes, Latin America’s largest low-cost airline, took a first quarter net income of $61.4m Brazilian Reais (BRL) ($29.44m) versus net losses of BRL20.5m in the same period last year. GOL said its takings were due to “strategic positioning”, “focusing operations on the domestic market and South America”, and benefits from its consolidation with Varig. Operating costs and expenses totaled BRL1,411.9m, 9.2 per cent less than during the first quarter of 2008. GOL restructured its fleet plan rescheduling delivery of 20 Boeing aircraft from 2011 and 2012 to between 2011 and 2014. ($1 = BRL2.09)

Decline in seat capacity eases off, says OAG The rate of decline in seat capacity is lower than at any point since October 2009, OAG, the world’s leading provider of aviation data, has said in its monthly report, Frequency and Capacity Trend Statistics (FACTS) issued in June. However, David Beckerman, VP OAG Market Intelligence, said: “We shouldn’t assume that this is the start of recovery and growth; the outlook remains uncertain and figures are still down year-on-year, but it does indicate a glimmer of economic confidence.” Compared to the previous month, June has so far marked a four per cent decline in scheduled flights, equivalent to 104,216 fewer flights. Seat capacity fell by 6.7 million, equivalent to two per cent. The total number of flights scheduled to operate worldwide this month is 2.43 million, offering 297.5 million seats. Last month global frequency and capacity figures fell five per cent and three respectively year-on-year.

WestJet’s 1Q results show 28.7 per cent slump in earnings WestJet Airlines’ first quarter earnings fell 28.7 per cent, it announced. The Canadian carrier earned C$37.4m ($32m) slipping from C$52 million, which it took during the same period last year. Earnings per share were 29 Canadian cents, down from 40 Canadian cents a share during the first quarter of 2008. Revenue decreased 3.3 percent to C$579.3 million. The airline saw its load factor fall 1.5 percentage points to 80.4 per cent after its surprising move to increase capacity by 7.2 per cent over the period. Sean Durfy, WestJet’s chief executive, said: “While the weakened economy had a negative impact on our first quarter financial results, our margins continued to be among the strongest in North America.” ($1=C$1.14)

Claims Aer Lingus faces bankruptcy: “total rubbish” Aer Lingus has shot out against Ryanair, rejecting its claims that Aer Lingus was facing bankruptcy as “total rubbish”. Colm Barrington, chairman of Aer Lingus, said during an American radio interview: “Talking about Aer Lingus being out of money, being bankrupt in 18 months - total, total rubbish.” Ryanair filed official complaints against Aer Lingus last year as it accused the airline of publishing false financial guidance in its defence against a hostile bid by Ryanair, which already holds a 30 per cent stake in the company. Barrington said: “Things are quite tough out there, so it’s very difficult to predict what the full year is going to be right now,” but he rejected Ryanair’s claim it was fast reducing its limited cash reserves. Aer Lingus had €1.2bn ($1.6bn), with net debt deductions of €600m, it would still retain €600m, Barrington said.

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Flybe to employ Jeppesen charts and services Flybe, Europe’s largest regional airline, has signed an agreement with Jeppesen to provide charts and “Airside Services”, a product from the Boeing subsidiary designed to help airlines’ transition from paper to electronic systems, by reducing paper dependency. Manuals including charts and other documentation are thereby assigned to the aircraft rather than individual crew members and directly delivered to the aircraft cockpit.

SBAC report reflects state of British aerospace industry The Society of British Aerospace Companies (SBAC) has announced its annual findings on the UK aerospace sector during 2008. Revenue for the UK in 2008 was up 0.85 per cent from £20.39bn in 2007 to £20.57bn, yet orders were down 23.2 per cent at £35.04bn from £45.61bn. Overseas operations rose 2.2 per cent, increasing sales by £8.12bn and orders by £11.14bn. Sales to the EU were up seven per cent while those to the US fell by nine per cent. Sales to the rest of the world however, were up 45 per cent. The latter market now makes up 79 per cent of the global market, and the EU accounts for a third of those orders. In terms of employment, the workforce has fallen by 11.1 per cent while remaining workers are carrying the pressure with productivity per employee up 15 per cent. Research and development expenditure has fallen by 32.2 per cent from £2.41bn to £1.83bn. ($1=£0.61)

Change at Ryanair Holdings Ryanair Holdings has appointed Juliusz Komorek to succeed Jim Callaghan, who resigned, as company secretary.

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Ryanair pulls plans for fat tax... but shows us that money is all that matters Ryanair will not implement the controversial idea to impose a ‘fat tax’, only because it cannot enforce it within the limits of its 25 minute turnaround, nor via its online check-in process. More than 16,000 passengers voted in a Ryanair online poll to find a new way to cream money from customers in additional charges. According to the results, 4.6 per cent voted to charge for every waist inch over 45in. (male) and 40in. (female); 3.11 per cent wanted to charge for every point in excess of 40 points on the body mass index; and 2.37 per cent wanted a charge for a second seat if a passenger’s waist touches both armrests. This follows the airline’s contentious suggestion to charge passengers ‘a pound to spend to have a penny’ — an idea which had the media, the public and trade bodies reeling. Yet while we expected an about-turn to appease the nation, Michael O’Leary dryly said: “All this pious stuff about if you’re serving teas and snacks, you can’t charge for entering the toilet. All right then.... we’ll let you enter free, but you’ll have to pay a pound to get back out again.” He told a UK newspaper that the charge would bring an estimated £15m ($24.85m) per year and said: “eventually it’s going to happen... The problem is Boeing can’t come up with a mechanism on the toilet door to take coins. We’re suggesting they go back and look at a mechanism where you’d swipe the credit card for a quid on the toilet door. They’ve gone off to look at that.” It’s doubtful that any aviation fair trade body would support either of these plans. Some have suggested that Ryanair are aware such proposals would never go ahead and that this is simply a publicity stunt to show just how cheap the airline is. It’s a pity however, that O’Leary seems unable to recognise the difference between cheap and inexpensive. It seems unlikely that that this kind of cheap publicity will win favour with passengers. What a joke! But the customers of course, aren’t laughing. Type ‘Ryanair’ into Google and there’s a 2:3 ratio of Ryanair’s own sites compared to the majority number of customer blogs and chatrooms discussing the pitfalls and poor service of the no-frills, no-thought airline. That’s a 2:3 majority of bad press. Most would think that during these times it would have a more strategic fight to haul in the lion’s share of a declining market, but if Ryanair’s vote was an index of the public, it just goes to show – when a recession hits, all that matters is money.

Vueling to save €65m per year from Clickair merge

Vueling will likely save €65m ($86.05m) per year due to its merger with Clickair, it said in prelude to its shareholders meeting. Overall cost savings for the next three-year period are expected to meet €75m. Vueling, the Spanish airline in its new post-merger form, is also predicting average annual sales to reach €800m. ($1 = €0.75)

Alex Cruz CEO, Vueling

bmi wins unprecedented battle against airport bmibaby and bmi have won a battle against the Durham Tees Valley Airport (DTVA) after the airport attempted to sue the company for over £12m in losses. In a landmark case that will better secure the fates of other struggling airlines, the court ruled in favour of bmibaby and bmi (its parent and guarantor) and against the DTVA. The airport claimed it was severely hit as a result of bmibaby’s decision to cut short a contract to fly two 737s to and from the airport because bmi, despite major effort and significant investment, could not make the arrangement commercially viable. Mark Franklin, the head of aviation at DLA Piper UK, who represented bmibaby and bmi said: “The prevalence of agreements between airports and low-cost carriers is now such that, while carriers can take comfort from the fact that this case has resulted in a justifiably successful outcome for bmibaby, many carriers may consider it appropriate to dust off their existing airport contracts to check if their understanding of their rights and obligations fully matches the terms of those contracts as the risk of onerous terms being implied by the contract can never be dismissed”. ($1 = £0.66)

Germanwings extends Lido OC usage Lufthansa (LH) subsidiary Germanwings has signed a fiveyear agreement with Lufthansa Systems for the use of “Lido Operations Center” (Lido OC) flight planning software, which promises fuel savings of up to five per cent. The system uses its own aeronautical database to calculate an optimal route for each flight. It takes all relevant information into account, including weather data and current aeronautical restrictions, and also generates flight briefing documents.

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Your success is our concern

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INTERVIEW

Air Asia x: warriors of the low-cost, long-haul model Low-cost carriers have transformed the short-haul market, but few are brave enough to suggest that they will have a similar impact on long-range routes. Though a shake-up isnâ&#x20AC;&#x2122;t likely in the near term, the seeds of a nascent low-cost, long-haul industry have been sown. Alex derber reports.

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“What we’re sitting on is a unique market circumstance where demand is really ahead of capacity so it’s a lot easier. Would we launch AirAsia X from London to New York? Forget it, it’s crazy! Or would I do Dubai-London? No way!” Azran Osman-Rani, CEO of AirAsia X (From L-R) AirAsia Group CEO Dato’ Sri Tony Fernandes, AirAsia X CEO Azran Osman-Rani, Transport Minister of Malaysia YB Dato’ Sri Ong Tee Keat, AirAsia Regional Head of Commercial Kathleen Tan and AirAsia Director Fam Lee Ee.

ecession, financing woe, a weak pound: the problems faced by Sir Freddie Laker would be as compelling today as they were in 1982. Yet before Laker’s Skytrain collapsed under the weight of unsustainable interest payments and cut-throat pricing by its rivals, the mould-breaking low-cost transatlantic service had been a success. In 1981, with bankruptcy looming, Laker remarked that the airline business had become “a hell of a poker game”. Indeed: the next three decades saw several chance their hands on the low-cost, long-haul (LCLH) model, each to fold ignominiously. The most recent casualties have been Zoom Airlines and Oasis Hong Kong. Both blamed high fuel prices — also the bane of Laker — for their respective demises, but many thought the malaise ran deeper. “Ultimately, Oasis was a low-cost airline with a high-cost operation,” concluded one commentator. Others surveyed the scale of competition on Zoom’s transatlantic routes and wondered how the carrier, which did keep a lid on costs, had even got as far as it did. The failures hardened attitudes to the viability of budget long-haul travel. One airline, however, didn’t implode: an offshoot of Asia’s most successful low-cost carrier, AirAsia X (AAX) began operations in 2007. It first concentrated on the Australia-Asia market, but has since added routes to China and, in March 2009, to London. Its base is in Kuala Lumpur, Malaysia, a well-sited springboard for onward travel in Southeast Asia. Though its London route will only start to generate positive returns next year, AAX as

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a whole expects a profit of at least $40m in 2009. This, plus heavyweight backing from the likes of AirAsia and Richard Branson’s Virgin, has convinced many that AAX is here to stay. Jonathan Naylor, a director at AviaSolutions aviation consultants, says: “I remember years ago the threat from short-haul low-cost was a bit derided by full-service airlines, but it was gradually accepted that they would change the face of the short-haul market. People are generally seeing now that there is a role for long-haul, low-cost [airlines].”

New model airline At the root of AAX’s success is cost, or reduction thereof. Cost per available seat kilometre (ASK) stands at 2.8 US cents, about half that of Ryanair and significantly less than other airlines in the region can boast. “Most Asian airlines are operating at about seven cents per ASK and the European and American airlines are at about eight to 10 cents per ASK. What we’ve done is create a model that focuses on that unit cost difference, whereas I think quite a few airlines that have tried to do this have got sidetracked with competing with the big players, so they must have a longhaul product that includes all these services and amenities, and they never achieve such drastic cost differences,” says Azran OsmanRani, CEO of AirAsia X. To achieve rock-bottom unit costs, AAX exploits its aircraft to the maximum. At its inception the company targeted aircraft utilisation of 18.5 hours a day, a figure few believed possible. In fact, AAX records 17.5 hours per day, slightly below its target, but still

well above any of the competition. To add to that, its A330-300s carry 380 passengers, 100 more than its rivals. Yet a focus on cost is nothing new. Osman-Rani believes his company’s choice of market has also been crucial. He reiterates the point that routes flown by previous LCLH carriers, such as London-New York (Zoom) and London-Hong Kong (Oasis), were vigorously competed over, whereas AirAsia X only faced one incumbent operator, Malaysia Airlines, on starting its Kuala Lumpur-London and Kuala LumpurMelbourne services. “What we’re sitting on is a unique market circumstance where demand is really ahead of capacity so it’s a lot easier. Would we launch AirAsia X from London to New York? Forget it, it’s crazy! Or would I do Dubai-London? No way!” he adds. Two other carriers from Asia-Pacific are also making headway in the LCLH market: Jetstar International and V Australia. The latter flies transpacific, connecting Australia with the US; the former offers flights between Australia and Southeast Asia plus other destinations, though it doesn’t compete directly with AAX. “AirAsia X has more or less simply slotted in [to the Asia-Pacific market] as another carrier,” comments Peter Harbison, executive chairman of the Centre for Asia-Pacific Aviation. “There are some targeted responses, but not massive, as it has largely generated new traffic.” If AAX really has captured ‘a unique market’, one could speculate that Asia is the only region presently capable of sustaining an LCLH carrier. Route networks aren’t as developed as those in North America and Europe, and the sheer distances involved — Kuala Lumpur to

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Shanghai is 2,300 miles — often exceed the capabilities of short-haul operators. “Perhaps Asia is a natural place for it to be,” says Naylor, who has conducted extensive analysis of AAX’s business model. “But there are plenty of other parts of the world where if the markets were to liberalise sufficiently to allow access to international carriers you could see long-haul, low-cost working: South America to Europe on some key VFR flows, for example.” While a superior cost structure and sensible route strategy constitute the bedrock of AAX’s operations, its leverage of consumer internet understanding has been its most innovative and insightful ploy. Eight-one per cent of passengers flying into Kuala Lumpur from Melbourne and Australia’s Gold Coast book onward journeys, yet AirAsia X offers no connecting or interlining services. It expects passengers to organise these themselves and, for a low enough fare, they will. “With the power of the internet today, people

can get from point A to C via point B without requiring what’s assumed as a must-have: a single ticket, connection times of less than two hours and so forth,” says Osman-Rani. “From Melbourne to Kuala Lumpur to Phuket (Thailand), for example, they will buy two tickets. They get through arrivals and check themselves back in.” Of course, the airline’s links to AirAsia facilitate this process, but AAX also exploits the power of non-affiliated low-cost carriers (LCCs). Its choice of Stansted, an airport served by Europe’s three biggest LCCs, exemplifies this. Fifteen per cent of passengers booking London-Kuala Lumpur flights with AAX are non-UK European nationals. Essentially, AAX has tapped into a ready-made huband-spoke network, as Osman-Rani relates: “With low-cost, long-haul you have to think differently from traditional low-cost. It’s not about point to point. It’s about leveraging that network effect. Not by some sophisticated, code-sharing, interlining model, but by using the internet and by choosing airports that have the connectivity, and that’s why we went to Stansted instead of Manchester, even though Manchester was much lower cost.”

Getting what you pay for AirAsia X launched its London service with one-way tickets for £99. As some commentators have already noted, the flight, at 13 hours, is the world’s longest without a meal included. Naturally, the airline offers food for an extra charge along with several other products, such as an in-flight comfort kit. Bags to check-in are charged according to weight. The absence of complementary amenities will come as no surprise to those inured to the privations of low-cost flying, but AAX’s post-promotional fares might.

“With the power of the internet today, people can get from point A to C via point B without requiring what’s assumed as a must-have: a single ticket, connection times of less than two hours and so forth,” Osman-Rani LOW COST AIRLINE WORLD

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July/August 2009

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INTERVIEW

AirAsia x flights booked with meal (£7x2) and 15kg bag (£5x2) Fares available from airline websites on 01/05/09 using 1 day flexibility

As the graph shows, it can actually be cheaper to book flights up to a month in advance with Malaysia Airlines, AAX’s only direct competitor on the London route. Osman-Rani insists that consumer demand is as price elastic for long-haul travel as it is for short-, and claims that “the psychological level [for consumers] is 50 per cent of what the legacy carriers are charging”. However, it appears that AAX only approaches such savings if tickets are bought seven months in advance. Nonetheless, one shouldn’t dismiss AAX’s budget credentials on the above basis: Kuala Lumpur-London may be AAX’s most eye-catching route to Northern Hemisphere readers, but the core of the airline’s business remains in Asia-Pacific, and the AustraliaSoutheast Asia market remains “brutally competitive”, according to Harbison. As London is around twice the distance from Malaysia as is Melbourne, one tentative conclusion that could be drawn from the data is that the credentials of ultralong-haul, low-cost operations are yet to be proved. But even this requires qualification: Malaysia Airlines, in response to its low-cost rival, has introduced a new fare category, MHlow, but it is questionable how long Malaysia’s struggling flag carrier can maintain this. “In the short term, because of the perishable nature of airline inventory, if they are losing market share it makes sense for incumbent airlines to cut their prices to make sure their loads are reasonably strong, but that may not be sustainable,” comments Naylor. Riding the recession “We are on the cusp of dramatic changes in the airline system if this economic downturn continues,” says Harbison. The launch of AAX’s London route occurred just as recession in the UK began to bite: the stockmarket had bottomed out; unemployment was rising; the pound remained weak; and deflation was on the horizon. Not, one might imagine, ideal conditions in which to test consumer confidence. Nevertheless, AAX pushed ahead with its originally planned start date. “I think half my board was very nervous,” admits Osman-Rani. “This was one key argument I used: ‘Today, the number of people who are originating from KL or London and going to the other city via a

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transit point — a Middle East hub, or via Singapore, or via Thailand, or via Hong Kong — is more than what it would take to fill up our A340-300 [AAX leases an A340 for its London service] every day. So, what that means is that people are price sensitive because they are willing to wait for a two-to-six-hour transit window to save $300 over Malaysia Airlines. If we can offer a product that is $500-600 cheaper and it’s a direct service, it becomes a lot more compelling’.” In 2009, AAX has had to “fight very aggressively” for an average 77 per cent load factor. And though the downturn will be felt industry-wide, Naylor believes the timing is unfortunate for new LCLH carriers: “I think, ideally, they would have liked to be another year or so down the line before all this happened. The last big downturn, post-2001, was probably beneficial to the stronger low-cost carriers in the short-haul market. But it’s more difficult to stimulate the market on long haul. On short haul if you put in low fares you can get people doing discretionary weekend trips. For longhaul clearly that’s more difficult.” Osman-Rani, however, insists that “with the right level of marketing and the right prices, people will still travel”, and points to record sales campaigns for AAX in February and March 2009. He also notes that AirAsia was founded during the post-9/11 slump, subsequently weathered SARS, the Asian tsunami, bird flu, the Bali bombings and coups in Thailand, and still emerged as the dominant player in the Asian low-cost market, and comments: “What we’ve learned with Asians and just about everyone else is that at $100 they’re still concerned about SARS, concerned about the Bali bombings, but for $8 — who cares?” One positive in these bleak times, for some airlines, is low oil prices. AAX doesn’t have hedges at present and is riding a benign spot market. “We definitely won’t hedge for 2009. We are studying 2010/11 very closely. At the right price we probably would,” says Osman-Rani. But if oil prices were to rise again, there might come a point where AAX’s operations become difficult to sustain. “It certainly came close last year,” comments Osman-Rani. “At the $140-mark it was difficult, but at that point I remember our cost structure was about

“I think, ideally, they would have liked to be another year or so down the line before all this happened. The last big downturn, post-2001, was probably beneficial to the stronger low-cost carriers in the short-haul market. But it’s more difficult to stimulate the market on longhaul. On short-haul if you put in low fares you can get people doing discretionary weekend trips. For long-haul clearly that’s more difficult.” Jonathan Naylor, a director at AviaSolutions aviation consultants LOW COST AIRLINE WORLD

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INTERVIEW

4.5 cents per ASK including fuel. Then, we only had one plane. The key thing is, as long as we maintain a significant cost difference over legacy airlines, i.e. by 2.5 to 3 US cents, then what will happen is they have to keep pushing their prices up further.”

A LONg-hAuL, LOW-COST fuTuRE? The A330-300 will form the backbone of AAX’s fleet for the next decade. The airline currently has three in service and 25 on order. OsmanRani says he doesn’t intend to follow the example of some major airlines and renegotiate that contract. The carrier is also interested in ordering 25 A350s, to be delivered from 2015, two years after that aircraft’s scheduled first delivery. The A350 will grant AAX, and perhaps others like it, access to longer, thinner routes, in particular Asia-North America. AAX would also gain better access to the European market with the A350, but OsmanRani says London will remain the focus for now. “I would rather get it [London-Kuala Lumpur] up to at least a double daily service before we spread ourselves too thin,” he adds. The efficiencies and range of the A350 and 787 make them attractive propositions to

The efficiencies and range of the A350 and 787 make them attractive propositions to prospective and current LCLH operators. However, hefty setbacks to the 787 and A380 programmes have exposed the capricious nature of aircraft launch dates. July/August 2009

LCAW Issue 3 July-August 09.indd 19

LOW COST AIRLINE WORLD

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INTERVIEW

Low-cost flying is more a novelty in the long-haul market than a significant feature of it, but this could change. After all, network carriers in Europe dismissed the emerging low-cost carriers in the early 1990s, only to see the short-haul market wrenched from their grasp by the end of the decade. prospective and current LCLH operators. However, hefty setbacks to the 787 and A380 programmes have exposed the capricious nature of aircraft launch dates. Osman-Rani, though, appears unperturbed by a potential delay to the A350: “We’re not looking at the A350 as a core part of what we really need in the first few years. So, if there were any delays, fine, we won’t go into North America or Europe in a big way. We’ll focus on Asia-Pacific and, to be honest, over the next five years, that’s where the bulk of the growth is going to come from.” Low-cost flying is more a novelty in the longhaul market than a significant feature of it, but

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this could change. After all, network carriers in Europe dismissed the emerging low-cost carriers in the early 1990s, only to see the short-haul market wrenched from their grasp by the end of the decade. By 2020, is it not conceivable that legacy carriers will be facing strong competition from LCLH operators? Developing this idea, Naylor raises an interesting point: “We had a trend for some all-premium carriers that was a bit stillborn... but in the very long term you wonder whether you’ll get a situation where fullservice airlines are losing out to top end from premium carriers, and facing pressure

at the bottom end from low-cost, long-haul, and whether their attempts to keep everybody on one plane will come under stress.” Harbison believes that economic pressures will force all new entrants to the long-haul market to adopt a low-cost model. However, he offers an alternative prognosis to Naylor’s. Noting that carriers such as AAX already offer some premium seating, he asks whether LCLH operators will gradually evolve into full-service airlines. “The answer to that depends on: a), the market; and b), the strategy of the operator — but there is an almost gravitational pull in that direction.” n

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strong LCCs will fly through the recession, but the weak may struggle and die The recession may be a positive thing for a number of low-cost carriers (LCCs), but others will fall by the wayside as the economic downturn clears the market. sarah Morgan reports.

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The current state of the economy has already claimed some victims in the low-cost market. easyJet says it has been able to capitalise on the opportunities created as some airlines have gone under. It cites Sterling and Excel airlines as cases in point.

ryanair Ceo Michael oâ&#x20AC;&#x2122;Leary

hE pREVAILINg RECESSIONARy environment has increased the pace of consolidation in the global airline industry, especially in Europe. This has led to a dramatic reduction in routes and aircraft by major airline operators, further benefiting low-cost operators. In the European low-cost market the two main players are easyJet and Ryanair. easyJet carried 44,497,846 passengers (including seats that are flown whether or not the passenger turns up because easyJet is a no-refund airline) over the year ending May 2009, over the same period Ryanair carried 59,573,427. Both companies have seen their profits hit by the recession. easyJet was established on 18 October 1995 and started operations on 10 November 1995. It was launched by Stelios Haji-Ioannou with two wet leased 737-200s. The aircraft initially operated two routes: London Luton to Glasgow

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and Edinburgh. From there easyJet rapidly expanded to become a recognised leader in the low-cost market. Ryanair was set up by the Ryan family with a share capital of just ÂŁ1, and a staff of 25 in 1985. The first flights operated from Waterford in the southeast of Ireland to London Gatwick. The next year Ryanair obtained permission from the regulatory authorities to challenge the British Airways and Aer Lingus' duopoly on the Dublin-London route. By 1995 it had overtaken BA and Aer Lingus on this route. Now Ryanair operates a fleet of 196 aircraft and dominates the European LCC market alongside easyJet. The current state of the economy has already claimed some victims in the low-cost market. easyJet says it has been able to capitalise on the opportunities created as some airlines have gone under. It cites Sterling and Excel airlines as cases in point.

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easyJet Founder Sir Stelios Haji Ioannou

Eastern Europe steps up to the plate Wizz Air is a new player in the market, established in September 2003. It is a Hungarian airline operating out of eastern Europe. The lead investor is Indigo Partners, an American private equity firm specialising in transportation investments. The first flight was made on 19 May 2004 from Katowice, Poland. In its first three and a half months it carried 250,000 passengers, almost 1.4 million passengers in the first year of operations. Over the last 12 months Wizz Air has carried 6.5 million passengers with a fleet of 24 A320s. Wizz Air had a “significant” network serving routes from the UK to Poland, but when Polish people started to leave the UK: “We had to react very fast to this change and redirect the traffic to where Polish people wanted to go,” said Natasa Kozer, head of corporate communications and public affairs at Wizz Air. She believes this attention and flexibility puts the LCC in a very competitive position to weather the effects of the recession.

“There should be a process of consolidation … the recession now will help clean the market a little bit, but it doesn’t mean that the market has reached the highest level of its potential when it comes to passenger numbers. There is still room to grow, but only for airlines who can do it efficiently and whose service offering feeds the market.” Natasa Kozer, head of corporate communications and public affairs at Wizz Air LOW COST AIRLINE WORLD

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Bullish market for some

Jozef Varadi, CEO Wizz Air

Kozer does not feel that the European market has reached saturation point, but thinks that there are too many carriers in Europe: “There should be a process of consolidation … the recession now will help clean the market a little bit, but it doesn’t mean that the market has reached the highest level of its potential when it comes to passenger numbers. There is still room to grow, but only for airlines who can do it efficiently and whose service offering feeds the market.” So the reduction in mainline routes will only benefit the strong players in the low-cost market as it undergoes its own consolidation process.

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Both Wizz Air and easyJet have insisted that they will continue to be strong players in the market through the recession. easyJet has launched 13 routes this year. Wizz Air said they were constantly introducing new routes and have four new ones currently planned. Ryanair has opened talks with Boeing and Airbus about ordering up to 300 more aircraft in a deal that would make the low-budget carrier more than double the size of British Airways. Wizz Air ordered a further 50 A320s at the 2009 Paris Air Show. This confidence in the European market is mirrored by international LCCs announcing fleet expansions at the show — Cebu Pacific ordered five and AirAsia ordered 10 aircraft. The industry fuel bill is forecast to decline by $59bn to $106bn in 2009. Fuel will account for 23 per cent of operating costs with an average price of oil at $56 per barrel. easyJet is not set to benefit

from this fall in oil price as it hedged when prices were still high. Ryanair held off hedging the oil price and thus is in a stronger position. This move by Ryanair alongside its geographical diversification and competitive fares means that Mayuresh Kelkar, a ResearchOracle.com analyst, is “bullish” about its position in the market. However easyJet sees the legacy airlines as being its direct competitors rather than Ryanair, because Ryanair flies to secondary airports, whereas easyJet flies to city centre destinations. Andrew McConnell, easyJet spokesman, uses Barcelona as an example: “We operate to the city airport in Barcelona they [Ryanair] operate to an airport ... a good 45 minute-drive away.” easyJet has stressed that it is a “cost-saving” and not “cost-cutting” airline, making efficiencies through using new technology and rethinking times flown to ensure full aircraft. Ryanair were unavailable for comment, but it

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the current crisis and points out that the “ultra low-cost model” is a particular advantage in eastern Europe which has very cost-sensitive passengers with lower disposable incomes. easyJet is equally positive, predicting being able to report a profit by the end of the financial year, despite reporting a loss of £85.9m ($129.3m) for the six months to March 2009, though McConnell did not elaborate as to how it would be able to secure this predicted profit.

Survival of the fittest

has commanded a great deal of column inches with its plans to charge for the toilet, something easyJet said emphatically it had no plans to do. Whether this difference in approach will win easyJet further customers remains to be seen, it hasn’t dented Ryanairs fortunes thus far. On June 8, 2009 IATA reported that: “European carriers are expected to post losses of $1.8bn with collapsing demand for premium services in all major markets served by the region’s carriers (intra-Europe, North Atlantic and Europe to Asia).” In that respect easyJet are expecting the recession to serve them well as a dip in disposable income encourages people to move from legacy to low-cost airlines. This prediction is born out by Kelkar who says: “Low-cost airlines, unlike full-service carriers, stand to benefit from the recession as passengers seek cheaper and more cost-effective air travel. … We have also seen corporates begin to favour low-cost airlines in an effort to keep a lid on travel expenses. Finally, we expect growing competition between airports over declining passenger numbers to lead to lower airport charges, which will also assist the lowcost airline industry.”

Attracting new customers Vueling, a spanish LCC, holds a 24 per cent market share in Spain and flies 35 A320s now that it has merged with Click Air, another Spanish LCC. It says that the recession has meant that it is making "more and more headway in the business segment.” Alfons Claver, head of PR and investors relations at Vueling, expands: “Two years ago if you’d walked onto one of our planes you would see people going on holiday or going to see relatives. There were people who used to fly for business reasons, the typical creative professions, architects or salesmen. ... What we see now is a lot of corporate types onboard our planes. ... the typical big corporation guys, even bankers." This illustrates that whereas before corporations were not keen to sign up with Vueling: "now they’re knocking on our door because they want to sign with us... In a way with this recession we’re winning the

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business passenger." Vuelings’s corporate passenger growth is reflected in the airline’s top business route — Barcelona-Madrid route. In January 2008, the airline had an 11 per cent of market share on that route, by March 2009 it had a 25 per cent market share. Vueling may be one to watch as JetBlue is a minority investor and they are backed by Iberia’s majority share in the company. Meaning Vueling customers benefit from Iberia’s reward packages as well as being low-cost. Wizz Air sees its main competitors as other airlines, but it is also looking to compete with other forms of transportation. It expects to bring in customers who were previously put off by prohibitively high prices. Kozer says: “We carry a lot of people now who didn’t have the opportunity to travel before... There are still a large number of buses going from this part of the world to western Europe every day, so we pretty much think that our competitors are other means of transportation.” The airline does not limit itself to competing only with other LCCs, as Kotzer says: “We compete with pretty much everybody…We had the aspiration to become the largest airline in the region and I think we have reached that.” She is confident that Wizz Air’s position as a private company will allow it to grow despite

Looking into survival in the recession, Claver of Vueling observes: "Other low-cost carriers are more stuck in a pure growth scenario. I don’t know what would happen if they all of a sudden had to scale down or relocate. ... You see other LCCs looking for gaps either geographical- or market-based and they’ve got a pure growth model. Sometimes you have to prove that you can deliver in a stagnant scenario, which I think Vueling has demonstrated." easyJet and Wizz Air both speak of finding opportunities in the market without going into specific details. Ryanair’s purchasing plans are equally indicative of anticipating further growth. Neither easyJet nor Wizz Air, it seems, are envisaging cutting capacity, which may serve them well in the current climate, but the market can not expand indefinitely. It remains to be seen if they can successfully manage scaling down and if they can’t, whether Vueling will be in a position to capitalise on this when the time comes. The future for low-cost carriers looks relatively positive, when as a whole, airlines are expected to post losses of $9bn this year, as reported by IATA, with an unprecedented 15 per cent revenue drop that will see industry revenues shrink by $80bn to $448bn. However the mood for the market, which Mikhail Pogosyan, director general of Sukhoi, outlined at the Paris Air Show is: "Those who are strong grow stronger, those who are weak grow weaker." This will mean that smaller LCCs may well drop off the map, as Kozer predicts, allowing market leaders to shore up their positions. n

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The ‘C’ Word: Consolidation hits Spain’s regional aviation sector Consolidation, consolidation, consolidation; it’s the word of the day and it’s being chanted by Spain’s senior aviation management. As two of its regional operators, Spanair and Vueling, go through major restructuring, Mary-Anne Baldwin asks whether the region is to see the introduction of a ‘super-carrier’. LOW COST AIRLINE WORLD

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“ Sture Stolen, head of investor relations, SAS

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he Spanish aviation market has been one of the toughest markets in Europe,” confirms Sture Stölen, head of investor relations at Scandinavian Airlines System (SAS), and it’s no less competitive. The market, so heavily dependent on the tourist trade, has not been left unscathed by the industry-wide evils of high oil prices and low customer demand, but fierce competition in the region has perhaps injured it most. Although emerging during the market’s growth stage Vueling; Clickair; Ryanair; Iberia; Spanair and easyJet have of late, all jostled for space — the airlines’ collective efforts

have created over capacity, turning calm waters into shark-infested depths. To combat this, airlines are joining forces, consolidating to form larger, sturdier entities. But what will the ‘c’ word mean to its counterparts; will it spell ill-health?

It’s a family affair Not least to suffer from fierce and plentiful regional competition; Vueling’s future has at times seemed bleak. The airline has issued two profit warnings, saw its shares fall from €47 to €5.48 and was forced to push a clean-up and clean-out campaign of its senior management. Yet having received

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EU approval for the merger with Clickair in January, a new Vueling is budding. Pressing ahead with absorbing Clickair through a capital increase, it’s now close to tying up the last few threads of the unification. The two were well-matched, with similarsized fleets of about 20 mid-sized Airbus aircraft, similar routes and hubs in Barcelona. It’s a wise and strategic move for Vueling. The merger will make the airline one of Spain’s largest and a sturdy competitor against its larger counterpart, Spanair. Through merging, not only did Vueling abolish Clickair as a competitor, it strengthened its own brand and forged a nepotistic relationship with Iberia. As Clickair’s investor, Iberia is now a shareholder of the new Vueling; an invested partner, part of the family, and no longer a rival. Once the Vueling-Clickair merger is fully complete, Iberia will have a majority stake of around 45 per cent in the new airline. Inversiones Hemisferio, an investor in Vueling, will own around 15 per cent, while its other investor Nefinsa has also agreed to remain in the company’s capital for a period of two years. Air Nostrum, which took 20 per cent of Clickair, will hold just over 10 per cent of the merged company. However, it is believed Quercus Equity, one of Clickair’s owners, wanted to sell its stake after the airline hit delays to its breakeven target. Further to that is the belief that Iberia may buy Quercus Equity’s share or bid for full takeover of Vueling — enter Spain’s largest ‘super carrier’... and it’s about to get bigger. Iberia is poised at the moment for a different merger — with British Airways (BA). The deal

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Alex Cruz, CEO, Vueling

Once the Vueling-Clickair merger is complete, Iberia will have a majority stake of around 45 per cent in the new airline… enter Spain’s largest ‘super carrier’… and it’s about to get bigger. would be the largest in Europe after the Air France-KLM merger, and would form a new company comprised of two fleets and a dual listing in London and Madrid. Analysts are confident the deal will go ahead, however reports suggest it will be delayed. A Spanish newspaper cited sources close to Iberia as saying merger talks have all but frozen because of financial difficulties faced by both parties at the moment. Iberia reported a worrying first quarter with a consolidated net loss of €92.6m ($122.3m), a sharp decline from the €0.4m it lost in the same period last year. Delivery of new aircraft will be postponed and the airline has already parked five A320s this month. These concerns throw

doubt on whether a BA-Iberia merger would go ahead, yet, says Fernando Conte, chairman and CEO, the company is still “positive on the outcome of [merger] negotiations” with BA, despite the deal talking longer than expected. And if all things do go ahead accordingly, BA would also become part of Vueling’s extended family. Although stating that he does not have any short-term plans to forge links with BA, Alex Cruz, CEO of Vueling told AFM: “if and when BA and Iberia come together, they will open up new possibilities which if standing alone, we wouldn’t have considered. So it’s an area of tremendous interest... we can see opportunities of many different kinds.”

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As it is, Vueling will take advantage of the codeshare agreement Clickair had with Iberia. Since its birth, Clickair flights available via the web and global distribution systems have a shared code with Iberia; 40 per cent of Clickair’s sales came through GDS sales — that’s the highest percentage of all low-cost airlines worldwide. Despite being the majority owner, Cruz seems confident that Iberia’s motive is a friendly one. “Their main objective is to make sure that Vueling is a profitable company. Neither Vueling nor Clickair have a past of consistent earnings and I think one of the rationales of coming together and [of] the new Vueling will be to turn this into a profitable company as soon as possible...beyond that I do not think Iberia has any other objectives, short-term, long-term, or any other term.” It is hoped that combining forces will strengthen the new Vueling, including its Clickair components — enabling Vueling to expand and to compete. “I think we are the airline of Barcelona, without a doubt. [Vueling has] twice as much market share as the next competitor... The combined airline is going to position itself as the largest market share holders in some of its specific markets and its home.” Cruz also asserts that “it’s a reasonable assumption that we will continue to search for more markets that don’t touch Spain.” It’s a prospect that threatens fellow regional operator, Spanair, another airline to have undergone a major ownership rehaul of late.

Goodbye to old ties Spanair’s previous majority owner, SAS, recently sold the airline to a consortium of Spanish investors, IEASA, led by Consorci de Turisme de Barcelona and Catalana d’Inciatives in a restructuring reminiscent of Italian flag carrier, Alitalia, which was also saved by a group of investors from its region. SAS took a staggering 6.32bn Swedish Kronor (SEK) loss ($754.7m) in 2008, a mighty fall from the SEK636m ($81.96m) profit it took the

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year before. It was obvious that major changes were needed and SAS published details of its restructuring programme, ‘Core SAS’, which included plans to lay off 3,000 staff in addition to the 5,600 which had been cut due to divestments and outsourcing. Mats Jansson, SAS group president and CEO said Core will “lead to SAS becoming a more focused and less complex company”. The plan was to scale down and hone its operations, focusing on the business travellers in the Nordic market; around half of the job cuts were to come from Spanair. Finally, after a merciless battering, Spanish investors took majority control of Spanair when SAS sold it an 80.1 per cent stake for the ‘symbolic’ €1. Cue a sign of relief from SAS’s senior management — retaining a 19.1 per cent stake, it had at last cut around 80 per cent of its losses on the airline — yet it had also taken an eye-watering SEK712m ($87.9m) loss on the sale. It was something of an about-turn from SAS. The Scandinavian airline had tried for some time to sell-off Spanair, attempting to cut its losses along with its ties. SAS announced back in June 2007 that it would sell its shares but the divestment was cancelled a year later when it failed to receive an offer it thought substantial enough to “reflect the underlying value in Spanair”. Interestingly Iberia — which, it seems, was even then on the look out to form the ‘supercarrier’, was the only company to place an offer, but says Stölen, between laughing; “the bid from Iberia was very unattractive for us”. Let us hope that the final €1 sale price was ‘symbolic’ only of SAS’s financial instability, and not Spanair’s. When a parent company is so heavily involved, it is often hard to tell, but what we do know is that Spanair will still owe €99m to SAS, a sum which will be amortised, with interest, at a rate which is in relation to Spanair’s future profits. IEASA injected €100m into Spanair shortly after the takeover, while SAS offered a bridge loan of €15m. It seems the airline has been in some need of help, but

with holes in its own pockets, SAS could not longer afford to dole it out. The calves of SAS’s management are most likely now covered in bruises. Had they divested some of its shares to Iberia in 2007, the airline could have avoided taking the recent losses Spanair has made and would have become a partner in the ‘super carrier’ which now seems to be Vueling’s most favoured option. The industry is “suffering from the current financial crisis, from high fuel costs of a couple of months ago and at the moment especially, from over capacity. There is a part of the industry that is very much looking for consolidation and mergers are happening,” says Maria De Lasala Lobera, consultant at the Brussels office of Norton Rose LLP. “If the transaction continues the way it was foreseen, they will acquire control... They might not get one hundred per cent of the shares, but they’ve already created the option.” By taking full ownership of Vueling, says De Lasala Lobera, Iberia would simply be rubber-stamping a deal that has already been done. The structure of the transaction, which was completed in layers, meant Iberia’s 20 per cent stake in Vueling was converted to a 48 per cent stake in the new company after its merge, meaning “Iberia would by de facto, exercise control over Vueling,” says De Lasala Lobera. “They went to a lot of trouble to get this position,” adding it was “a long process, they had to give a lot of commitment to get it through — that shows there is a lot of interest.” Stölen also gives credence to this belief: “I’m not surprised that they are interested [in a full takeover]. It’s a competitive market.”

Rules and regulations Yet it remains unclear what Iberia’s next step will be. Stock exchange rules dictate that any company owning more than 30 per cent of a firm must make an offer for its full share capital, but exemptions to this rule are allowed. Iberia has toyed with plans to seek such immunity; it’s thought unlikely it will be forced to make a full offer as it has stated that it’s not intending

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to play an active role in the management of the company. De Lasala Lobera says although it is common for companies to ask for exemptions and the Spanish commission has previously awarded them, it is unclear whether Iberia will receive theirs. Iberia has been suffering financially and it’s more than likely its request is a direct response to its intention to cut investment spending by €80-€90m (around $115m). Iberia’s pot is at current, pretty dry and though it seems logical and desirable for it to merge with Vueling — which is currently profitable, having made €9m ($1.16m) in the first quarter of 2009 — it seems now is not the time. “Iberia is definitely under pressure these days,” says Stölen. The airline said it is “unlikely” to post a profit this year. The cost-cutting plan involves saving more than €200m this year and making operating savings of €110-€125m — primarily though capacity cuts, temporary layoffs, a hiring freeze, wage freezes and nonrenewal of temporary hiring contracts. Added uncertainty lies in that, should it wish to go ahead, the decision is not solely Iberia’s; it must still seek formal approval, in this circumstance from the European Competition Commission. But Stölen believes: “It’s possible it may be okay with the competition commission because there are so many players in the Spanish market, but still it’s going to be an issue that they will have to overcome.” “What the commission will look at is whether an airport will be congested by the frequency of the flights operated by the newly merged company and whether new entrants or existing carriers at that airport would be able to operate

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the same route and exercise competition,” De Lasala Lobera explains. “In order to get proper competition the airlines [wishing to merge] must divest a number of slots that make it interesting to a newcomer to start operating, not just the one specific route but be able to establish also, if not a base in that airport, at least a certain amount of business.” In the case of Vueling and Clickair, the commission considered Iberia, Clickair, Vueling and Air Nostrum as one entity, collectively it would have had around 80 and 100 per cent market share with large frequencies on each route; a stronghold Spanair would find near impossible to compete against. As such Vueling had to divest about 40 of its slots before its merger with Clickair, but neither Iberia, Vueling

“In order to get proper competition the airlines [wishing to merge] must divest a number of slots that make it interesting for a newcomer to start operating.” Maria De Lasala Lobera, consultant, Norton Rose LLP

nor Air Nostrum would have to relinquish any additional slots were Iberia to take full ownership. In this way both Vueling and Iberia have already incurred the cost of a full takeover, and so there is little reason for it not to go ahead. At the time of going to print, Iberia was just days away from receiving the official thumbs up or thumbs down to taking above the accepted 30 per cent limit on shares. “There is a final regulatory approval that allows Iberia to have more than 30 per cent,” said Cruz. “We are confidant that the stock exchange regulators will approve Iberia to have that percentage in Vueling. That is the last hurdle we have in this process.” Yet, says Stölen, even if the acquisition were to happen, he is not worried about Spanair’s future: “Consolidation is normally positive — so long as people do not come up with massive [amounts] of new capacity, it’s something that we can live with.” It seems secure with the notion of this ‘super carrier’, with any fear of its monopoly on the market relieved by the role of the Competition Commission. Yet consolidation poses other threats — there is strength to be found in joining forces. Synergies across many levels will bring economies of scale and reduced costs; staff cuts, shared knowledge and experience, and lower overheads, to name just some. Cruz said that “item by item… we are reviewing every single spend.” One cost saving has been found in advertising, Vueling and Clickair were “two companies that were fighting for exactly the same territory, in the same market, on very similar routes. Today we don’t need two marketing budgets, we need one.” The true potency of Spain’s theoretical ‘supercarrier’ is of course yet to be seen but one thing is for sure, if consolidation is the quick fix pill for struggling airlines, there’s no doubt it is also venom to its rivals. n

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Carbon neutral compliance The aviation industry has set a longer term target of becoming carbon neutral. But what does this term really mean, what are the potential pitfalls in achieving it, and is true carbon neutrality really feasible? Stephen Mooney, vice president of corporate communication at Carbonetworks, explores the issues.

recently did an online search of the term ‘carbon neutral’ on Google and discovered that the phrase appeared 3,320,000 times. I try never to rely on a single source, so I did the same search with Yahoo! to return 13,800,000 results. This sent me into a tailspin (no pun intended if you are reading this at 35,000ft), as I recalled a January 11th article in The Times newspaper stating that the impact of “performing two Google searches from a desktop computer can generate the same amount of carbon

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dioxide as boiling a kettle for a cup of tea”. Revelations this depressing make me want to drink the aforementioned tea laced with whisky, but I am concerned that the methane from the hops that went into the whisky may impact my ability to achieve carbon neutrality! This somewhat cynical view highlights some important questions: who ultimately owns carbon as we strive to create emission inventories, who is accountable for the inventory, and who is responsible for reducing it? Is it the power producer

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Two questions now swim around in my mind amid the whisky: is true carbon neutrality feasible, and if so, how should we be achieving it?

that provides Google and Yahoo! their power? The search engines? Or, alternatively, is it the end user? The question becomes truly mind-boggling when you try to account for emission reductions such as offsets, and their impacts. Take, for example, the development of a wind farm. Unquestionably, the development of alternative energy is one of a number of ways to move to a low carbon economy. However, the carbon impact of a coal-fired grid is not automatically solved with the creation of the wind farm, and the obvious reductions do not represent the whole story. Many factors must

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be considered, including the carbon impact in developing the hardware, the environmental impact of transmission of the power, and the absence of control to meet peak demand power consumption on the grid that cannot be met when it is not windy. Two questions now swim around in my mind amid the whisky: is true carbon neutrality feasible, and if so, how should we be achieving it? The first question, as per the search engine example, becomes one of definition; which emissions belong in whose inventory? Although firm global accounting and verification standards have yet to be established, there is

a consensus on what constitutes an emission as determined by direct and indirect scopes. Initial cap-and-trade markets such as the EU ETS have focused exclusively on direct (Scope 1) emissions from large final emitters of greenhouse gases. A single, tradable unit of carbon dioxide equivalent (CO2E) is calculated from the variable potency of six greenhouse gases, making conversion and monetisation of this emission quite straightforward. Carbon limiting caps are set on particular facilities based on previous year emission data and these organisations have the choice to reduce that to cap or trade for available allocation credits. Scope 2 emissions are the CO2E emissions acquired by an organisation through the purchase of energy. These have variable intensity depending on the type of power purchased. For example, energy purchased from natural gas or alternative sources like wind or hydro have materially lower Scope 2 emissions compared to energy purchased from coal-fired power stations. The purpose of this type of scheme is ultimately to lower unnecessary consumption of energy and to encourage the purchase of renewables, thus lowering global carbon emissions. Scope 3 is where the waters become muddy, as these emissions pose the greatest challenge to carbon accounting (and ultimately carbon neutrality) and are the least likely to be mandated under any compliance scheme. These emissions are loosely defined as occurring as a by-product

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of business operations. For example, emissions accumulated through employee airline travel are Scope 3 emissions. Using a flight emission calculator that takes into account aircraft type and distance travelled, an organisation can create a rigorous emission inventory; these types of tools are also available to calculate other Scope 3 emissions like employee commuting. Unfortunately, the calculation of Scope 3 emissions becomes significantly more daunting as the parameters expand. The search engine scenario from above is a good example. In this

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case, the Scope 1 inventory for Google’s data centres and operations likely belongs to its power providers. These providers can lower their carbon impact through a number of means, including generating power by lower carbon intensive hydroelectric or other means. While combined methods of generating power will vary the emissions weighting, the accounting is still straightforward. The Scope 2 inventory, as purchased electricity, likely belongs to the search engines. The weighting already having been established by the power providers, Google’s accounting can be determined by their utility bills — even simpler, right? If we stopped the accounting here, achievement of carbon balance for either

the utility or the search engine may be as simple as finding cleaner energy sources, reducing power output/consumption, or offsetting in other areas. And then… Scope 3. Who becomes responsible for the resultant use of Google’s service? How does the end user account for the emissions produced because of their Google search for offset providers? Is this counterbalanced by the fact that they are searching for offsets? It may seem absurd, however, that if the search engine did not exist I would not directly have used the energy to search or power my laptop to write this article. Instead I would have burned more energy and paper by getting in my car and driving to the library to write the

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Using a flight emission calculator that takes into account aircraft type and distance travelled, an organisation can create a rigorous emission inventory; these types of tools are also available to calculate other Scope 3 emissions like employee commuting. Unfortunately, the calculation of Scope 3 emissions becomes significantly more daunting as the parameters expand. article, a tertiary negative environmental impact that is often overlooked. On some level it might seem like Scope 3 is just too difficult to assign, and to quantify. Take another example. A municipality has emissions from the diesel it purchases to fuel its fleet of waste collection trucks. If the municipality changes its policy from collection to acceptance, it is no longer fuelling those trucks, and has effectively reduced its direct emissions. If we say it is too difficult to quantify Scope 3, the story stops there, and the municipality has neutralised that inventory. However, as a result of this change in policy, instead of a small fleet of waste collection trucks on the road, tens of thousands of residents are now transporting their own rubbish to a communal location. This is definitely not the most efficient approach carbon-wise (or timewise), and is controlled in many compliance systems under protection of leakage. This highlights the pitfall of not considering Scope 3. The answer to the question of carbon inventory ownership becomes clear; whether an organisation is a primary, secondary, or tertiary cause of the carbon, it is still an owner, and with ownership comes both risk and opportunity. In the search engine example it is likely that both the power provider and Google will fall under a compliance scheme at some point, as one is a direct emitter of greenhouse gases, the other is a high consumer of energy. It makes sound strategic sense to plan to lower Scope 1 and 2 emissions in preparation for compliance, basing decisions on the trading price of carbon versus the market penalty for doing nothing. The price of carbon is the key variable regarding achievement of carbon balance. These same principles can be applied to Scope

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3 emissions. Realising that a full inventory of Scope 3 is impractical and wonâ&#x20AC;&#x2122;t be likely to come under compliance anytime soon should not be a deterrent for examining what can be measured and reduced. The carbon reduced from implementing web conferencing instead of flying has bottom line benefits for a company. Occasional home office days for staff instead of employee commuting have extrinsic benefits. Using a flight emission calculator that takes into account aircraft type and distance travelled, an organisation can create a rigorous emission

inventory; these types of tools are also available to calculate other Scope 3 emissions like employee commuting. While the challenges around assigning ownership for Scope 3 category emissions makes them the least likely to be mandated under any compliance scheme, that does not make accounting for them dispensable. Every day new technologies and tools are made available (like the flight calculators) that assist in further quantifying the peripheral carbon impacts of business activities. What we can

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measure, we can monitor and reduce. The question, then, becomes how do we reduce, and account for that reduction? The issue of utilising offsets to reduce inventory is perhaps the most controversial. Offsets have come under high scrutiny in the media due to the extreme variability in the quality of standards to validate a tonne of emission reduction. Even standardised bodies regulated by the UN have seen some of their reductions exposed as questionable or fraudulent. While there are signs of improvement, the voluntary reduction market of offsets is even more of a wilderness. Whether a company operates in a voluntary, pre-compliance, or regulated market, business principles are the same. Before you buy offsets, make sure it makes business sense and do your homework on the reduction you buy. Many organisations are announcing their commitment to achieve carbon neutrality, either to comply with regulation, improve public perception, or even out of purely ethical acceptance of responsibility (imagine!). The variability in boundaries to define a complete carbon inventory and the lack of standards regarding who is accountable for the CO2 and its reductions makes carbon neutrality difficult, if not impossible, to determine conclusively.

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Without firm decisions on these boundaries and standards, such efforts by corporations will be misguided and often futile, and a level carbon playing field will be unattainable. While standards and accounting for carbon may still be in development and true carbon neutrality may be still in the distance, it is clearly apparent

If an organisation is seeking to achieve carbon neutrality for the purpose of compliance alone, it will need to examine what it is measuring and what it is trying to reduce. The organisation will also need to be clear as to why it is trying to achieve carbon neutrality.

that there are economic, political, public relations, and ethical benefits to producing a carbon inventory as materially accurate as possible. The same can be said of employing practical and quantifiable methods, including reduction and verified offsets, to turn that inventory from a corporate liability to an asset. If an organisation is seeking to achieve carbon neutrality for the purpose of compliance alone, it will need to examine what it is measuring and what it is trying to reduce. The organisation will also need to be clear as to why it is trying to achieve carbon neutrality. Reducing emissions should make good business sense to a companyâ&#x20AC;&#x2122;s overall bottom line, whether it is Scope 1, 2 or 3 emissions. Compliance schemes make it easy to monetise direct emissions either through direct or shadow pricing, and there is good business sense in doing so. Where Scope 3 emissions can be measured, the same business principles apply â&#x20AC;&#x201D; identify and reduce, or eliminate, unnecessary waste. Offsets, when closely scrutinised, can be a potentially valuable part of an emission reduction strategy. The benefit and risk of the offset must be analysed against the same monetary principles, and a companyâ&#x20AC;&#x2122;s existing and proposed emission inventory. n

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gaining carbon neutral status from future compliance The aviation industry is coming under increasing regulatory pressure to become carbon neutral. What will have to be done to ensure compliance, and what will the implications be? One could be that the airlines subject to the EU ETS will gain vital experience, and so an advantage over competitors, as the global carbon market develops, says Miles Austin, head of European regulatory affairs at EcoSecurities.

NE Of ThE key successes of the European Union Emissions Trading Scheme (EU ETS) has been in providing momentum to the Clean Development Mechanism (CDM). Providing regular annual demand for CDM credits has given project developers a relatively stable and predictable slice of annual demand to base investment decisions on. By contrast, government demand for Certified Emissions Reductions (CERs) may occur at any point from now until 2015. So it has been with some trepidation that the CDM community has been watching the negotiations around Phase III (2013-2020) of the EU ETS. The broad post-2012 approach advocated by the European Commission (EC) sets two emissions reduction targets for the European Union (EU): A 20 per cent reduction against 1990 emissions levels in the absence of an international agreement, and a 30 per cent reduction in the presence of one. This approach was subsequently approved by Member States in the form of the Council of Ministers and European Parliament. The CDM has broadened the abatement opportunities available to European industry. This has significantly helped to contain costs without compromising the environmental goal of the EU ETS. A recent Deutsche Bank study It takes two to contango, illustrated this perfectly. In the study, the lower 20 per cent pathway produced a significantly higher carbon price than the more difficult and environmentally beneficial 30 per cent pathway. The difference between the two was that the 20 per cent pathway allowed no use of CERs, in contrast to the 30 per cent path which did.

VOLuME Of CERS/ERuS ALLOWED IN One of the key features of last year’s European negotiations around Phase III was the heated debate in the European Parliament about the use of CERs. In Phase II of the EU ETS (2008-2012), the use of CERs by industrial installations is capped at 270Mt/yr. For Phase

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III, under the 20 per cent pathway, the limit for existing installations is somewhere in the region of 40Mt/yr, and under the 30 per cent pathway (although it is very hard to get an exact figure) seems to be in the ballpark of 120Mt/yr. The import limits represent a substantial reversal away from the EC’s previous commitment to CDM. Not that this would be immediately apparent from reading communications from the EC. In response to questions about the use of CERs post-2012, the EC will respond that the import limit is 1.7 billion tonnes. Which is correct if you count from 2008-2020, but disingenuous in response to questions about the Phase III import limit. If you take the annual Phase II (2008-12) CER import limit of 270Mt and aggregate it for the whole of that phase, it comes to circa 1.4 billion tonnes, this figure subtracted from the 1.7 billion tonnes leaves just 40Mt /yr for Phase III, a figure much lower in comparison to Phase II. The developing world is gradually waking up to the fact that the EC is apparently attempting to pull the wool over their eyes in this fashion. This cannot be a helpful contribution for building trust in Europe’s commitment to the new trading mechanisms that it will attempt to negotiate in Copenhagen.

Unless CDM host countries form an alliance to reverse Europe’s position at Copenhagen, there is little prospect of the CDM import limits improving. Europe will no longer be the hub of global emissions trading. The U.S, however, may well be the future global carbon hub. July/August 2009

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Implications for investment For those investing in the CDM, this sends a very clear signal — Europe is no longer a significant future market. The reversal in position, coupled with the current depressed CER prices, mean the previous Euro centric momentum of the primary CDM market is rapidly falling away. Unless CDM host countries form an alliance to reverse Europe’s position at Copenhagen, there is little prospect of the CDM import limits improving. Europe will no longer be the hub of global emissions trading. The U.S, however, may well be the future global carbon hub. The latest version of the Waxman Markey bill allowed for the import of some 800Mt/yr of ‘international offsets’. The bill introduces a discount rate on international offsets of 1.25. The discount rate coupled with lower U.S. willingness to pay will tend to orientate the U.S. market towards high volume, low cost projects such as industrial gas projects or forestry, rather than the smaller scale renewable energy projects that contribute to clearer developmental benefits.

Qualitative limits As well as drastically restricting the CER import limit, the amended EU ETS regulations also move to restrict the type of CERs that can be used. Currently the key restriction is that projects registered post-2012 are only eligible if they are in a Least Developed Country (LDC). The key abatement opportunities in LDCs lie in the land use change and forestry (LULUCF) sectors. The EC has already banned these credit types from use in the EU ETS, so there is little prospect of the apparent largesse towards them bearing any dividends. In addition to the restrictions just outlined, there will be further limitations on the type of CERs that can be used via a process called comitology. This is a regulatory process whereby a committee chaired by the EC decides on standards. In the case of the CDM, the committee is free to ban CERs from the EU ETS in Phase III on any grounds whatsoever, be it project type, host country, etc. The prime candidate for being banned from use in the EU ETS is Hydro Fluro Carbon (HFC). In the event that a project type is banned, the CERs are usable for a grace period of six months to three years. Which end of the spectrum the grace period falls at is entirely at the discretion of the committee. The six month to three year margin appears to have been arrived at arbitrarily. Large hydro projects, which have also been a source of considerable controversy, will in all likelihood not be banned, but a current voluntary EU standard will probably be made mandatory.

Economic efficiency vs political aims The CDM has always been, to steal a German phrase, an egg laying woolly milk sow. The CDM is designed to:

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• ensure economic efficiency by locating the cheapest available emissions reduction opportunities; • promote sustainable development; • encourage the transfer and development of new and innovative technologies; • build climate change capacity in the developing world; and • engage the developing world in the fight against climate change and transfer capital from the developed to the developing world. Remarkably, given its short lifespan, it has done. The qualitative restrictions being imposed by the EC currently counter the aim of economic efficiency. HFC is the cheapest abatement opportunity available. The fact that HFC projects have drawn so much flak suggests that contrary to public declarations, economic efficiency is at best a secondary political consideration. This is highly significant, as the CDM, indeed as with all emissions trading systems, are politically created and driven systems. In the absence of ‘political will’, demand will dry up as it has with the CDM in Phase III of the EU ETS. Currently, the EC is proposing some novel solutions to run alongside the CDM post-2012. However, the details are sketchy and seemingly mutable depending on the inclination of their audience. This isn’t good enough. If a much needed second wave of investment is to reach the developing world, then the EC must first decide, and then clearly articulate, what it wants emissions trading and offsetting to achieve and how to stick to it – be it restricting projects to particular types or locations. Making up policy on the hoof, as has been done with CER import limits from Phases II to III, now appears to be happening on the road to Copenhagen. Undermining investor confidence, which in ordinary circumstances would starve the fight against climate change of vital private capital, could be disastrous in a global recession.

The implications for aviation – EU ETS Phase II (2012) The implications for the aviation sector being brought into the EU ETS are numerous. Firstly, it is important to realise that the aviation sector is only in Phase II of the EU ETS for one year (2012). For this year, the aviation sector will be subject to a 97 per cent cap i.e. a three per cent shortage of allowances in comparison to historic emissions. Of the 97 per cent cap, 79 per cent will be allocated directly to airlines, 15 per cent auctioned, and three per cent held back for new entrants. This means that the operational shortage of allowances i.e. the difference between the historical emissions and the direct allocation to airlines, is 21 per cent. This gap can be filled by purchasing allowances at auction, purchasing aviation allowances from airlines or intermediaries and purchasing CERs and ERUs.

Any flight that takes off or lands within Europe is subject to the EU ETS, which has come as a surprise for some non-European airlines and has caused a degree of confusion. The EC recently published a list detailing all airlines covered by the EU ETS. The list also details which Member State will be responsible for administrating each airline. July/August 2009

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EU ETS, plus other players such as financial institutions. In addition to the potential decrease in the cap and increase in auctioning, the CDM import limit in line with the rest of the EU ETS is likely to be significantly lower. As outlined, the CER import limit for installations under the EU ETS has been cut from circa 270Mt/yr to somewhere in the region of 40Mt/yr. Following this ratio, the use of CERs by the aviation sector would be cut from 15 to 2.2 per cent. What will actually be allowed is not clear, and will also be subject to review.

Preparation for the EU ETS

The Phase II import limit on CERs and ERUs for airlines is 15 per cent of historical emissions, the same as the auctioning percentage. This is however only for one year. Any unused right to import can be banked through to Phase III, where Member State rules allow, and it must be used by 2015. To avoid potential conflicts with comitology, the CERs should be used six months into Phase III, i.e. by the end of June 2013. Furthermore, unlike Phase II, in Phase III when an installation hands in its CERs they are exchanged for EU emission allowances (EUAs). The EUAs are valid until April 2021 and are not at risk from comitology. That said, EUAs from Phase II are also bankable to 2020. If an airline avoids using its full 2012 EUA allocation by using CERs instead, the same dynamic applies without any exposure to comitology or Member State rules on banking the right to import CERs.

The implications for aviation â&#x20AC;&#x201C; EU ETS Phase III (2013-2020) For Phase III, the picture for aviation is that everything currently in place may change,

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subject to review. With that caveat in place, allocation is set at 95 per cent of historical emissions, 15 per cent will be auctioned and three per cent placed in the new entrants reserve. So the system shortage of allowances is five per cent and the operational shortage is 23 per cent; not significantly different from 2012 from this perspective. Both the total allocation and the auctioning percentage could well be tightened further. It is the declared intention under Phase III that the power sector should be subject to full auctioning by 2020. In various communications, the EC has drawn a parallel between the power and aviation sectors in the context of auctioning. This is based on the assumption that both have a comparable ability to pass costs on to their customers if they are competing on a level playing field. On this basis, the aviation sector could be subject to full auctioning by 2020. A further consideration is that in Phase III the aviation sector will no longer be separated from the rest of the EU ETS, meaning that at auction the aviation sector will be competing for the pool of EUAs against all the other sectors in the

In contrast to these significant unknowns there are a number of key deadlines that the aviation sector has to meet between now and 2013. Any flight that takes off or lands within Europe is subject to the EU ETS, which has come as a surprise for some non-European airlines and has caused a degree of confusion. The EC recently published a list detailing all airlines covered by the EU ETS. The list also details which Member State will be responsible for administrating each airline. By June 2009, airlines must have submitted an emissions monitoring plan to their administering Member State. Further monitoring of their emissions will begin on January 1, 2010 with the first verified emissions report due in April 2011. Similarly, emissions must be monitored in 2011. In addition, 2010 tonne kilometre data, as opposed to emissions data, must be submitted to the administering Member State by JanuaryFebruary 2011. This deadline is particularly important as it is this report that will be used to allocate EUAs to each individual airline. If an airline fails to submit a report it will still be subject to the EU ETS but will receive no free allocation. Consequently it will have to purchase all of its compliance requirements on the open market. Furthermore, having not received an allocation of EUAs it will not receive the right to import and use CERs and ERUs, and will thus be restricted to purchasing EUAs, which have historically always traded at a premium to CERs.

Preparing for the global carbon market Despite the significant unknowns surrounding auctioning, allocation and CER import levels, the EU ETS represents a key opportunity for airlines operating in and out of Europe to become familiar with carbon trading. Furthermore, by implementing energy saving measures, new technologies and fuels, they will gain an edge over other airlines that lack this experience as the global carbon market expands. The carbon market will inevitably continue to expand and become increasingly coherent given Europeâ&#x20AC;&#x2122;s long standing ambition in this area now being matched by growing enthusiasm on the part of the United States. n

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Looking after a workhorse — 737NG maintenance The 737NG (737-600/-700/-800/-900) is the backbone of many fleets operating domestic routes and the world’s most widely-flown jet. Daniella Horwitz looks at the aircraft and its maintenance requirements.

o date, the 737NG family has won orders for more than 5,000 aircraft; if one adds 737 Classics to the mix, that number jumps to over 8,100. As of June 1, 2009 about 2,917 737NGs (including BBJs) have been delivered. In the current business environment, it is difficult to say how many are currently in revenue service and how many are parked, but it is fair to say that the majority are in operation. The first -600 entered service on October 25, 1998 with Scandinavia’s SAS and the most recent -900ER was delivered to Indonesian carrier Lion Air on April 27, 2007. To date 238 of this latest model have been ordered by 10 customers and 50 are in service. The 737-700C, launched in 1997, is a special family member, as it is the only single-aisle convertible in production.

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Worldwide, the 737NG is regarded as the tried and tested fleet workhorse because of its reliability, low operating and maintenance costs.

Worldwide, the 737NG is regarded as the tried and tested fleet workhorse because of its reliability, low operating and maintenance costs. John Hamilton, 737 chief project engineer at Boeing, says the aircraft type is based on the Boeing philosophy of delivering added value to airlines. Hamilton expands: “The NextGeneration 737 continuously evaluates and incorporates value-added technologies and design innovations to improve performance and capabilities. Recent offerings include shortfield performance enhancements to increase payload capacity; reduced takeoff and landing field length; and carbon brakes to reduce weight for improved airplane operating economics.” AAR provides 737NG maintenance for many operators in North America and runs between nine and 11 lines at its Indianapolis facility. Derek Sheedy, AAR spokesman, says: “This

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The 737 workhorse

Europe, 600 in Asia, 180 in Latin America / South America, 115 in Australia, 110 in Africa and 60 in the Middle East. WestJet, one of the most profitable LCCs, offers scheduled services to 55 destinations in Canada, the US, Mexico and the Caribbean. It operates a fleet of 79 737NGs (-600/-700/-800 series) with orders for 42 more between now and 2013. The carrier publicly stated that it intends to be among the top five international airlines by 2016. “We have operated the 737 NG for over eight years and are satisfied with the cost of maintenance and the reliability numbers. The 737NG is operated by many of the world’s low cost-carriers, with over 2,800 built so far,” says Robert Palmer, WestJet spokesman. twin-engine single-aisle configuration seems to have endured the test of time. The primary reason this has become so popular is because it has filled the gap left as aircraft such as the 707, 727, DC-9 and MD-80/90 have reached retirement age.” Southwest Airlines, the most successful US low-cost carrier (LCC) and the biggest operator of 737NGs, is one of AAR’s main customers. As of April 16, 2009, Southwest operated 335 737-700s. Leading European LCC Ryanair follows with nearly 200 737-800s. Lessor giants GECAS and ILFC also have significant numbers of 737NGs on their books with 309 and 247 units ordered respectively (see right). The largest fleet operates in North America, followed by Europe and Asia. According to AirClaims, the geographical dispersion of the aircraft type is as follows: 950 in North America, 710 in

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Top 737NG operators

(by order quantity as of May 09) Southwest Airlines

424

Ryanair

338

GECAS

309

ILFC

247

Continental

236

Lion Air

178

American Airlines

164

Boeing Business Jets

143

Delta

142

GOL

127

Flexible maintenance Boeing offers extensive aftermarket support to 737NG operators. The manufacturer helps airlines optimise maintenance tasks and intervals in accordance with a particular operating environment. It also assists operators with setting up viable reliability programmes; provides support for regulatory approvals; analyses operational data; and recommends changes to maintenance programmes. Boeing can also facilitate the development of work packages needed to perform bridging/ transition checks to transfer aircraft from one maintenance programme to another in compliance with airworthiness and safety requirements. The OEM hosts a forum for 737NG operators known as TOPICS (Technical Operations Performance Improvement & Cost Solutions), with the objective of tracking and gaining visibility of key performance indicators, minimising maintenance costs, and sharing best practices among participating members. WestJet’s Palmer says: “From a maintenance perspective, the 737NG was our preferred choice based on our service experience with the 737-200 series aircraft that we had operated and maintained for many years. The Boeing had proven itself in many respects, including maintenance cost and reliability. Our existing relationship with Boeing had also demonstrated the support that was readily available from the manufacturer, as they are conveniently located in Seattle, close to Calgary (our major base).” The 737NG MSG-3 maintenance programme is designed to be flexible and save maintenance costs. Tasks can be packaged in a variety of ways

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MAINTENANCE OpERATIONS

Boeing targets a two per cent fuel reduction, structural improvements will reduce drag

to fit the unique characteristics of an operator such as stage length, utilisation or seasonal peaks and valleys. Boeing says that some carriers have used this flexibility to the degree that all MRO work for the first six years is done in overnight phase checks so that maintenance does not affect revenue services during the day. The majority of 737NG operators perform line maintenance inhouse. Base maintenance varies depending on the operator’s business model. WestJet carries out line maintenance activities up to the B check level. Heavy maintenance is contracted out to third-party providers. The airline says that the size of the current fleet does not provide the economies of scale required to be cost effective at the heavy maintenance level. Compared to the Classic, the 737NG has longer maintenance intervals, including 90 days between A checks and 7,500 flight hours or 30 months between C checks. Boeing recommends that operators plan their maintenance programme so that they use the full extent of these intervals. Lynne Thompson, Boeing maintenance engineering director, says: “Boeing has a policy of extending maintenance intervals as soon as experience and supporting data indicate that it is prudent to do so. Operators should incorporate these extensions into their programme as they become available.” The 737 has a high degree of commonality (about 95 per cent) within the family so it is possible to provide maintenance without

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having to acquire a large amount of unique spares for each model. For example, the 737NG uses the same engine — the CFM56 — for all four models, so one spare can power all. There is also commonality in 737NG pilot training — pilots trained on one 737 NG model can fly them all.

VIRTuAL MAINTENANCE TRAININg Chris Stellwag, spokesman for CAE, an integrated training solutions headquartered in Canada, says there has been increased demand for virtual training tools from the technical/ maintenance community as airlines look for increased efficiencies and enhanced safety, both of which result from the increased use of simulation. Operators are attempting to get the maximum value from their training budgets and are employing virtual training environments to improve the overall learning experience.

In the hands of experienced instructors 737NG virtual maintenance trainers (VMT) can be used to teach systems knowledge and to demonstrate normal operating or test procedures. With the advent of the web, the ability now exists to conduct remote training with staff at outstations, thus saving significant travel and accommodation costs. Scenario record and replay functionality also make it possible to capture small procedure demonstration modules, which can be made available for technical staff in a reference library. CAE provides a number of virtual maintenance training tools for the 737NG, including the 737NG VMT and engine run-up and taxi courseware. These tools make it possible for technicians to familiarise themselves with the required systems knowledge, normal, nonnormal, and emergency procedures before going on to practice engine run using the 737NG VMT, the full flight simulator, or the actual aircraft.

upgRADES In April 2009 Boeing announced the latest in a series of improvements for the 737NG. The 737 Boeing Sky Interior features new 787-style modern sculpted sidewalls and window reveals designed to draw passengers’ eyes to the windows and give them a greater connection to the flying experience. On a more practical note, the sidewall design integrates the air vent so that before-flight security checks

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Westjet operates a fleet of 79

go more quickly for maintenance staff. Seven airlines will be the first to incorporate the new spacious 737 interior starting in late 2010. The airlines are: FlyDubai, Continental Airlines, Norwegian Air Shuttle, Malaysia Airlines, TUI Travel, GOL Airlines, and Lion Air. Changes to the 737NG are more than cosmetic: Boeing is targeting a two per cent reduction in fuel consumption by 2011 through a combination of airframe and engine improvements. Aircraft structural improvements will reduce drag on the aircraft, reducing fuel use by about one per cent. Boeing’s engine partner, CFM, is contributing the other one per cent through hardware changes to its engine. Continental Airlines will make a 737-800 available to Boeing to flight test the performance improvements. New-technology blended winglets, which are available on the 737-700, -800 and -900ER, are also designed to further boost performance of the 737. These 8ft-long wingtip extensions are designed to enhance range, fuel efficiency and take-off performance while lowering carbon emissions, engine maintenance costs and noise. Boeing says they reduce fuel consumption and emissions by 3.5 to 4 per cent on missions greater than 1,000nm and reduce community noise by 0.5 to 2.1 EPNdB (Effective Perceived Noise Level in Decibels) on take-off and offer a slight improvement on approach.

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“From a maintenance perspective, the 737NG was our preferred choice based on our service experience with the 737-200 series aircraft... The Boeing had proven itself in many respects, including maintenance cost and reliability.” Robert Palmer, WestJet spokesman Southwest Airlines: the biggest operator of 737NGs

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The 737 classic: still going strong

737NG replacement? The market requires that a new single-aisle aircraft must have compelling advantages over the 737. “The 737 is the most efficient singleaisle airplane operating today, and we will need breakthrough technologies—beyond what is currently available or in development—to exceed its superb performance,” declares Hamilton. Customers are demanding a substantial improvement in operating efficiency compared to current single-aisle models. Targeted improvements for a new single-aisle are at least 15 per cent improvement in fuel efficiency and at least 25 per cent improvement in maintenance costs. Boeing maintains that achieving the required efficiency gains will

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require significant technology breakthroughs in composites, engines, aerodynamics, electrical and other systems. Thus the airframer will take more time to focus on the development of those technologies. Hamilton concludes: “Given what we know today, we expect a single-aisle replacement airplane will be ready sometime in the latter part of the next decade. Until then, we will continue to pursue technologies that will economically replace the 737 and A320 to ensure the earliest possible entry into the market. We also continue to invest in product enhancements and improve production processes to make history’s best-selling airplane family even more competitive.” n

The 737 has a high degree of commonality (about 95 per cent) within the family so it is possible to provide maintenance without having to acquire a large amount of unique spares for each model. July/August 2009

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