Wright Airways

Briefing pack

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Agenda

• Overview and market research

• Profitability data

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Management’s perspective

“I haven’t used consultants before, but I’ve called in Bain to

help me think about the future growth of my business –
Wright Airways.

We’ve been operating short-haul flights in Europe now for 10

years. However, times have been hard with strong
competition from low-cost carriers and margins squeezed. I
think the Open Skies agreement presents a great opportunity
for Wright Airways to enter the long-haul market.

However, I want an outside perspective on the profitability of

three new route options, how I can reduce costs on the
existing routes, and what my immediate priorities should be.”
Willy Wright, CEO of Wright Airways
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Wright Airways: Group Overview

Willy Wright
CEO

Jimmy Jones Billy Bernard Martin Marks

Tom Tucker Simon Smith
Flight Ground Investments
Engineering Commercial
Operations Operations & Alliances

Operations Commercial

Holly Hall Eve Evans

Daniel Davies Alan Anderson
People & Org General
CFO CIO
Effectiveness Counsel

G&A
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Wright Airways revenues have grown over the
last 5 years
Wright Airways revenue
Growth
rate
£500M
447 449 03-07

400 388
345 359

300

7%
200

100

0
2003 2004 2005 2006 2007 % pt
change
Operating
8% 6% 6% 7% 5% -3%
profit margin*
Note: *Operating profit margin = (Revenue – operating costs) / revenue
Source: Wright Airways management accounts 5
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Wright Airways revenue in 2007 was £449M

Wright Airways revenue (2007)

Total =
180 157 112 £449M
100%
Areas
represent
80 Business split of
revenues

60

40
Economy

20

0
London - Paris Manchester - Frankfurt London - Madrid
Overall
Operating
3% 6% 7% 5%
profit margin
Source: Wright Airways management accounts
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Wright Airways overview

London – Manchester – London –

Paris Frankfurt Madrid

Schedule 0700 0650 0835

1100 1400 1800
1400 1950
1800

Fleet B-737 A320 F-50

MD-83

Landing fees £9/£12 per £6/£6 per £9/£6 per

(origin/destination) passenger passenger passenger

Costs per flight:

• Fuel £3,000 £5,000 £7,000
• Crew £4,000 £4,000 £5,000
• Aircraft insurance £800 £800 £800

Total cost per seat* £75 £82 £110

Note: Costs/revenues are per round trip

*Includes landing fees, fuel, crew and aircraft insurance 7
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Fuel is the biggest cost item for all Wright
Airways aircraft…
2007 Wright Airways fleet operating expenses
Acft Insurance
“Maintenance costs can be
100% reduced by simplifying the
Crew
fleet - reducing complexity
80 Landing
Fees
is priceless.”
60
Jimmy Jones
Fuel

40
“Low cost carriers make all
20
Main-
tenance their money from cheaper
Leasing
landing fees, service/crew
0 and having no high-cost
B-737 MD-83 A320 F-50
business class.”
Number of seats
Business 25 25 20 20 Simon Smith
Economy 120 120 120 115

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… and cost of fuel has grown dramatically since
2004

Average fuel costs for Growth

a commercial airliner Rate
00-08
£5/km
16%
4
“Big airlines are hedging, and
this has saved them up to
3 30% in fuel costs due to
recent price hikes”
2 Simon Smith

0
20 0
20 1
20 2
20 3
20 4
20 5
20 6
20 7
08
0
0
0
0
0
0
0
0
20

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The EU-US Open Skies Agreement opened up
London Heathrow to full competition in 2008…

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…causing some airlines to experience declining
profitability on popular destinations

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Market research shows that demand for
transatlantic routes is growing at ~6% pa
Passenger growth of UK outbound flights by
destination (Mar 07 - Mar 08)

10.0% 9.3

7.5 7.3
7.5

5.9
5.5
5.0

2.5 2.3
1.5 1.2
0.8 0.7 Total
0.4 0.3 0.1
0.0 First/
Business

Economy
-2.5 -2.0
Boston Dallas Dubai Hong Kong Johan- New York San
nesburg Francisco

Source: International Air Transport Association 12

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Level of competition varies by route

Number of daily flights departing from London Heathrow

Econojet
40
Robin Air
32
Eastern jet
30
Royal Airways

All American
20
Springbook
Airways
13
11
10 Superjet
10 9
7
4 Anglo jets

British Sprint
0
Boston Dallas Dubai Hong Kong Johannes- New York San
burg Francisco

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Airlines compete for business/first class
customers with a wide range of offerings
• Access to business class lounge
- Complimentary services (E.g., airport lounge spas)
- Food & beverage
Pre-flight
• Dedicated check-in counters
• Priority boarding

• Enhanced in-flight entertainment

• Larger baggage allowance
On board • Flat-bed seats
• Business class dining
• Personalised service

• Access to arrival lounges

On arrival
• Dedicated immigration queues

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Agenda

• Overview and market research

• Profitability data

15
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Roger Miller, the partner on this project, has
given the team the following advice

“I’ve just spoken to Willy and he wants us to model profitability based on

the B-777 standard seat configuration. He also said his team has some
great cost data, so let’s just use that.

In terms of revenue, Willy wasn’t sure on load factors*, but I think

there are some good analyst reports out there that should help us make
some solid assumptions. From previous experience, I would expect
these to be 60-70% for economy and 50-70% for business. I suggest
we take the average of key competitors (All American, Superjet, British
Sprint and Springbok Airways) to get to number of trips per day and
ticket price.

Overall, we would expect margins of 15-25% for a profitable long-haul

route.”
Roger Miller, Partner, Bain & Company
Note: *Load factor = (Revenue paying passengers) / (Available seats) 16
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 There are three aircraft that can handle the
transatlantic route

Boeing 777 Boeing 747 A-340

Range 9,695km 13,450km 14,800km

Typical cruising
905km/h 913km/h 896km/h
speed @35,000 ft

Wingspan 60.9m 64.4m 60.3m

Number of seats*
Economy 250 350 300
Business 50 100 50

Purchase price £135M £150M £140M

Note: *Standard seat configuration 17

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Analyst views on load factor for key routes

“Load factors on the London-New York route are good in economy and
business, with All American and Superjet operating at about 70%, and
British Sprint slightly lower at 65%. 70% is seen as the standard
benchmark.”
James Smart, Finance Inc

“The London-Jo’burg route is becoming more popular with business

travellers, but the business class load factor on Springbok Airways is about
10% lower than on the popular long-haul US routes (e.g. New York). The
load factor for economy is the same as for NY.”
Matthew Forbes, Airline Analytics 2008

“The London-Dallas route is quite quiet with relatively low load factors on all
the major operators (All American, Superjet etc) in both economy and
business. The average would be about 60% and 50% respectively.”
Rebecca Smith, Fund Securities Inc

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Market overview of ticket prices

Economy Business

Ticket price (2008) Ticket price (2008)

£900 £5.0K
800
4.2 4.3

4.0 3.8
650 3.6 3.6
600 600 3.3
600 570 3.2
3.0
520 500 3.0
480
2.5
380
2.0
300
All American

Superjet 1.0
British Sprint

Springbok Airways
0 0.0
LHR-DFW LHR-JFK LHR-JNB LHR-DFW LHR-JFK LHR-JNB

Average # Average #
return trips 2 8 2 return trips 2 8 2
per day per day

Source: Airline Analytics 2008

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