Low cost carrier LCC potential in CAREC Aviation

Low cost carrier (LCC) potential in CAREC Aviation and Tourism Webinar, 10 March 2021 Brendan Sobie CAREC Senior Aviation Specialist

What is a low cost carrier (LCC)? • Focus on keeping costs to a minimum and operating as efficiently as possible, enabling lower fares than full service carriers (FSCs) • Usually charges separately for all in-flight services (meals, drinks, entertainment), checked luggage and seat assignments • Typically operates only one aircraft type and outsources most functions including maintenance, cargo and handling • Pursues very high aircraft utilization levels by quickly turning around aircraft after every flight and operating overnight when possible • Typically configures its aircraft only with economy class with a higher density than FSCs, enabling it to fly more passengers per flight • Focus on point-to-point routes and usually do not offer connections 2 airblue (Pakistan)

Why are LCCs important? • By offering significantly lower fares than FSCs, demand is stimulated resulting in an accelerated rate of growth • LCCs make flying affordable for a large portion of the population, particularly in emerging markets with a growing middle class • LCCs facilitate tourism, leading to significant increases in visitors • LCCs open up new routes and help create new source markets and increase visitor numbers in established source markets as fares are reduced • LCCs and their positive impact over the last 30 years is well documented in North America, Europe and - more recently - in South Asia, East Asia, the Middle East and Latin America. But Central Asia has not yet benefitted from LCC proliferation 3 Eznis Airways Pakistan (Mongolia) International Airlines

QUICK QUIZ How many low cost carriers or low cost divisions are based in CAREC (excluding China)? A) Two B) Five C) Eight D) Eleven 4

QUICK QUIZ … The Answer LCCs in CAREC (excluding China) Airline Country airblue Pakistan Air Manas Launch Aircraft Destinations Year (current) (pre-COVID) 10 10 10 Kyrgyz Rep. 2013 1 0 2 Buta Airways Azerbaijan 2017 8 6 22 Fly. Arystan Kazakhstan 2019 8 14 16 1 0 2 28 30 52 Eznis Airways Mongolia TOTAL 5 2004 2019 Notes: Aircraft includes aircraft currently grounded Buta and Fly. Arystan are low cost divisions not LCCs as they use AOCs from their full service parents Eznis relaunched in 2019 as an LCC under new ownership Air Manas was established initially as Pegasus Asia in 2013 and adopted the Air Manas brand in 2015 Buta Airways replaced AZALJet, which launched in 2016

LCC capacity share: CAREC lags behind 30% Global Average 49% ASEAN 15% CAREC 30% EU 6 Notes: Based on OAG scheduled seat capacity for 2019 CAREC share excludes China and includes low-cost divisions

LCC seat share by country, 2019 Sour. Sou 7 Note: based on OAG schedules and adjusted to include lowcost divisions

LCCs … state of play in CAREC • Georgia is the only CAREC country with an LCC market share on par with the global average • Kazakhstan experienced the fastest LCC growth in 2019, up from only a 2% share in 2018, due to the launch of Fly. Arystan and has continued to grow rapidly during the pandemic • There are only five LCCs based in CAREC (excluding China) but two do not have their own airline operating certificates (AOCs) and two do not currently operated scheduled services • 11 foreign LCCs also serve CAREC, mostly from the Middle East and Europe. Some are not true LCCs and follow hybrid models 8 Buta Airways (Azerbaijan) Pakistan International Airlines

CAREC LCCs … Limitations • There were only two international LCC routes within CAREC prior to COVID: Baku to Batumi and Tbilisi (Buta Airways) • Buta Airways focuses on international services outside CAREC, mainly the Middle East, Russia and Ukraine • Fly. Arystan will have 34 domestic routes this summer but only one international destination (Istanbul) • airblue has only five domestic destinations and focuses mainly on international services to the Middle East despite Pakistan having the second largest domestic market in CAREC • Air Manas and Eznis are very small, each with only one route prior to the pandemic 9 Air Manas (Kyrgyz Republic)

Foreign LCCs in CAREC Airline Weekly seats Countries flydubai 45, 247 9 Air Arabia 32, 934 7 Wizz Air 21, 196 2 Pegasus 8, 306 7 flynas 6, 560 3 Salam. Air 3, 220 1 Ryanair 3, 024 1 Spice. Jet 2, 478 1 Air Busan 648 1 Sky. Up 378 1 10 air. Baltic 290 1 • flydubai is the largest LCCEznis in CAREC and serves all Airways Pakistan International countries except Mongolia (Mongolia) Airlines • Air Arabia is the second largest • Wizz Air is the third largest and is the only foreign LCC with a base in CAREC (Kutaisi in Georgia) • Pegasus is fourth largest and owned a 49% stake in Air Manas until 2019 • Pakistan and Georgia are by far the largest markets foreign LCCs, accounting for 38% and 29% of total foreign LCC seats in CAREC (excluding China) prior to COVID Note: based on OAG schedules for early February 2020

Opportunities • Foreign LCCs can drive growth in CAREC by opening bases and establishing new JVs Eznis Airways Pakistan (Mongolia) • Air Arabia, Pegasus and Ryanair and Wizz are all keen to expand in CAREC; Ryanair, International Europe’s Airlines largest LCC, began serving Georgia in 2019 • Fly. Arystan could also become a platform for LCC expansion throughout Central Asia as it expands and considers establishing franchises in other countries • Scale is critical in establishing a successful LCC; the partnership model is therefore attractive in CAREC given the small size of individual markets • Uzbekistan has been planning to launch an LCC since 2018; while this has been set back by COVID it remains a market ripe for LCCs • Any country looking at establishing a local LCC needs to carefully think about its strategy and align it with the overall air transport strategy and tourism 11

The Fly. Arystan example • Launched in May 2019 and carried 1. 5 million passengers in 2020 – a major achievement given the impact of COVID and making Fly. Arystan one of the largest CAREC airline brands • Expects to carry over 3 million passengers in 2021 • The fleet is growing from 7 to 10 aircraft in the first half of 2021 • Over half of Fly. Arystan’s seats were sold in 2019 at one-way fares below USD 24 with an average load factor of 85% • Fly. Arystan’s low fares and expansion have enabled Kazakhstan’s domestic market to recover fast and resume growth • Six new routes launching by early May for a total of 35 (34 domestic and 1 international), including several previously unserved point to point routes 12 Fly. Arystan

The Kutaisi Airport example Kutaisi Airport annual passenger traffic (thousands) 13 Source: Georgian Civil Aviation Agency • CAREC’s only LCC airport Fly. Arystan • Rapid growth since opening in 2012 • Traffic tripled from 2016 to 2019 with growth of at least 40% every year • Wizz Air base initially opened in 2016 • Wizz accounted for over 90% of scheduled seats at Kutaisi in 2018 and 2019

Conclusion • LCCs could drive improved international connectivity between CAREC countries, facilitating tourism and boosting travel along the Silk Road • LCCs can also drive domestic growth in several CAREC countries and facilitate local travel and tourism • CAREC can clearly support more LCCs and benefit from LCC growth - from both local and foreign carriers • But the regulatory environment needs to improve to support LCC expansion and proliferation • High airport costs and taxes are among many impediments 14 Ryanair

QUICK SURVEY Should LCC opportunities be further studied as part of the CAREC Aviation program? A) Yes B) No 15

Thank you! Большое Спасибо! sobieaviation. com brendan@sobieaviation. com 16