Strategy development for the Croatian airport system

Workshop documentation
Zagreb, March 9, 2005
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Disclaimer All information in this workshop documentation is preliminary, subject to change and confidential

This workshop documentation was compiled in the course of the project "strategy development for the Croatian airport system" It is based on personal interviews with the general management of the Croatian airports and data provided by them The data collected was verified by the interview partners in preparation of the workshop

Guidelines are preliminary suggestions by Roland Berger and subject to change during the second phase of the project The presentation does not reflect the workshop findings. They are documented in the minutes distributed together with this file All information is of private and confidential nature and should be treated accordingly

5 6

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All nine Croatian airports were interviewed personally six airports were visited on site
Airport Zagreb Airport Dubrovnik Airport Split Airport Date of interview November 4, 2004 (on site-visit) January 26, 2005 January 26, 2005 (on site-visit) January 26, 2005 (on site-visit) January 25, 2005 (on site-visit) January 27, 2005 (on site-visit) February 1, 2005 (on site-visit) February 9, 2005 February 23, 2005 Interviewee (Position) Mr. Matkovi- (General Manager) Mr. Peovi- (Director General) Mr. Rogulji- (Grand Operations and Technical Director) Mr. Tadin (Maintenance Coordinator) Mr. Matijaca (Legal & Personnel Affairs Manager) Mr. aljina (Assistant General Manager) Mr. Kurili- (Head of Technical Department Mr. Rotta (Travel and G.A., Executive) Mr. Segari- (Assistant General Manager, Commercial Affairs) Mr. Pa@enko (General Manager) Mrs. Strahonja (General Manager) Mrs. ari- (Commercial Manager) Mrs. TelaroviMr. Horvat (Direktor) Mr. Benvin (Loinjska Plovidba Holding d.d., President) Mr. Karni@i- (Director)
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Pula Airport

Zadar Airport Rijeka Airport Osijek Airport

Mali Loinj Airport Bra@ Airport

Agenda Workshop "Croatian Airport System" (March 3, 2005)

What A. Welcome and introduction B. Development and current status of the Croatian airport system C. Croatian airport system within the international context D. Outlook on air traffic development in Croatia Lunch break E. Discussion of guidelines for air transport in Croatia F. Next steps Who Mr. Bilas Dr. Meyer Mr. Sindemann Dr. Meyer When 10:00 h - 10:15 h 10:15 h - 11:15 h 11:15 h - 12:00 h 12:00 h - 12:30 h

all all all

12:30 h - 13:30 h 13:30 h - 14:50 h 14:50 h - 15:00 h

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A.

Welcome and introduction

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Framework of the project

Commercial aviation is a key element of a modern economy and contributes significantly to the creation of wealth in a country It enhances the development of tourism (both inbound and outbound) and facilitates both exports and foreign direct investments Additionally, the players in the aviation sector (airlines, airports, ATC) themselves are major employers and also contribute significantly via related industries (maintenance, security, technical services) to the welfare of a nation Due to the homeland war in the 90s and the Kosovo crisis, the Croatian aviation system is still suffering from a backlog in traffic development In preparation of the most probable accession to the European Union, the aviation system is currently under revision Concerning the future role and positioning of the airports, it is the goal of this project to assess the current state of the aviation system, derive a strategic framework for a demand-based future development, and therefore improve Croatias overall traffic infrastructure
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Goals of the meeting

We want to agree on a common understanding of the current status of the Croatian airport system discuss a joint forecast on air traffic in Croatia develop guidelines for the future development of the airport system

We do not want to discuss the performance and plans of individual airports prepare or take a decision on the existence of an individual airport decide on changes of the organization and ownership structure of the airport system

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B.

Development and current status of the Croatian airport system

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The Croatian airport system consists of nine airports1) with international traffic

Rijeka Airport (RJK)

Varadin

Zagreb Airport (ZAG)

Pula Airport (PUY)

Rijeka Pula

Karlovac

Zagreb

Slavonski Brod

Osijek
Vukovar

Osijek Airport (OSI)

Mali Loinj Airport (LSZ)

Zadar

Zadar Airport (ZAD)

Sibenik

Split Airport (SPU)

Split Dubrovnik

Bra@ Airport (BWK)

Dubrovnik Airport (DBV)

1) Beside the nine airports, there are numerous airfields in Croatia

Source: Ministry of the Sea, Tourism, Transport and Development VIE-4989-90000-062-012 9

The "big three" of Croatian airports account for 91% of the current traffic
Number of Pax, 2004 ['000]
91% 9%

Remarks/comments
1.400
x 3.8 x 9.5

Some 3.35 m Pax for all Croatian airports Huge gap between the "big three" (ZAG, DBV, SPU) and the remainder of the smaller airports
= 373

866

788

153 57 ZAG DBV SPU PUY RJK 57 ZAD 26 BWK 9 LSZ 3 OSI

ZAG is 3.8 times bigger than the average Croatian airport and 9.5 times bigger than PUY (airport # 4)

Source: Airport data; Roland Berger

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10

BACKUP

Along key criteria the airports show a very mixed pattern (1)

ZAG Location Dominant type of traffic No. of scheduled destinations ILS categorization Airports within ~ 200 km Continental (Capital) Scheduled 22 ILS CAT III RJK LJU

DBV Coastal Charter 17 ILS CAT I SPU BWK SJJ

SPU Coastal Scheduled 21 ILS CAT I DBV BWK ZAD

PUY Coastal Charter 5 ILS CAT I RJK LJU MBX TRS

RJK Island Charter 1 ILS CAT I ZAG ZAD PUY TRS VCE LJU LSZ PUY TRS LSZ 100 55

ZAD Coastal Scheduled 5 ILS CAT I RJK LSZ SPU BWK

BWK Island Charter 11) SPU ZAD

LSZ Island General aviation 0 RJK PUY

OSI Continental Scheduled 1 BEG

Catchment overlap (< 90 min 75 km) Public ownership [%] Republic of Croatia [%] 100 55 100 55

ZAD BWK 100 55

RJK LSZ TRS 100 55

SPU BWK LSZ 100 55

SPU BWK 49 33

RJK PUY ZAD 86 n.a. 100 55

1) Scheduled flight due to rotation pattern of OU; not "on purpose"

Source: Airport interviews; Roland Berger VIE-4989-90000-062-012 11

BACKUP

Along key criteria the airports show a very mixed pattern (2)

ZAG Capacity restriction

DBV

SPU

PUY

RJK

ZAD

BWK

LSZ

OSI

Terminal Terminal Terminal Terminal Terminal Terminal Terminal Terminal Terminal capacity capacity capacity capacity capacity capacity capacity capacity capacity 60,000 200,000 600,000 1 m Pax 1 m Pax 100,000 36,000 2 m Pax 1.2 m 1) Pax Pax Pax Pax Pax Pax New terminal building Reconstruction of domestic building, sorting area, platform area Building of 3 air bridges Extension of taxiway Extention of the apron New fire brigade building Upgrading to ILS cat II n.a. Apron enlargement Enlargement and rearrangement of terminal building Building of 6 hangars New terminal building, will be put in use summer 2005 New terminal building Runway enlargement Terminal enlargement

Planned infrastructure investments

1) Figures based on capacity of the new terminal building (to be opened 2005)
Source: Airport interviews and data VIE-4989-90000-062-012 12

The dominant carrier at Croatian airports is OU with a divers mix of OAL per airport
Breakdown of Pax per carrier1), 2004
42.1% 15 % 12% Lufthansa 3% Australian Airlines 25.6% 28 % 5% 3% 2% 18% 23.3% 4.4% 1.7% 1.7% 0.8% 0.3% 0.1% RJK 14% ZAD BWK OSI
13

85% 42%

72% 54%

ZAG
Croatia Airlines 1) Scheduled operations only
Source: Airport data, Roland Berger

DBV

SPU

PUY

Others

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70% 56% 69%

86% OAL

58 % 16% Air Adriatic 3% British European 39% OAL

Skandinavian Airlines Malev Czech Airlines OAL

46% OAL

30% OAL 44% OAL 31% OAL

BACKUP

Scheduled and charter traffic are of similar importance overall virtually no LCC traffic for the time being
Breakdown of Pax per traffic type, 2004
42.1% 1.7% 4.7% 25.6% 1% 23.3% 4.4% 1.7% 1.7% 0.8% 0.3% 0.1% RJK ZAD BWK LSZ OSI
14

41% 55% 75% 93.6% 59% 44% 25%

ZAG

DBV

SPU

PUY

Scheduled

Charter

LCC
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Source: Airport data, Roland Berger

9%

13%

62%

85% 87%

91%

38%

15%

BACKUP

Traffic to and from Western Europe dominates the airport system

Breakdown of Pax per destination1), 2004
42.1% 10% 2% 25.6% 4% 6% 19% 36% 2% 23.3% 3% 26% 52% 36% 47% 60% RJK ZAD BWK LSZ OSI
15

4.4%

69% 52%

71%

10% 3% 15% 20%

ZAG2)
Western Europe 1) Data for BWK and LSZ n.a.
Source: Airport data, Roland Berger

DBV
Central Europe Northern Europe Eastern Europe

SPU

PUY

Domestic

2) Data from 2003

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53% 53% 40%

5% 3%3%

1.7% 1.7% 0.8% 0.3% 0.1%

Except ZAG, all other airports show high seasonality with DBV and SPU having a comparably smoother profile than the remainder
Pax per month, 2004 [%]
30

25

20

15

10

0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

ZAG

DBV

SPU

PUY

RJK

ZAD

BWK

LSZ

OSI
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Source: Airport data, Roland Berger

Beside significant growth rates, the smaller airport are still well below critical mass
Growth, CAGR (1999-2003) [%]

60

RJK

50

40

DBV

30
OSI PUY SPU

20

ZAD

10
LSZ BWK

ZAG Pax [000], 2003

0 0

200

400

600

800

1.000

1.200

1.400

Airport
Source: Data provided by airports, Roland Berger VIE-4989-90000-062-012 17

All three bigger Croatian airports could soon reach their terminal capacity unused capacity throughout the rest of the system
Capacity utilization1), 2004 [%]
Total capacity [m Pax] 2.0 1.2 1.0 1.0 0.6 0.2 0.062) 0.04 0.1

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% ZAG DBV SPU PUY 29% 15% 10% RJK ZAD BWK LSZ 70% 75% 79% 43% 23% 3% OSI

1) Annual average terminal utilization not considering restrictions due to peak times in the summer season and restrictions due to equipment or runway 2) Capacity for the new terminal building (to be opened for operation in summer 2005)
Source: Airport data; Roland Berger VIE-4989-90000-062-012 18

Productivity strongly varies between the airports

Pax/Employee1), 2003

2,654

1,897 1,530 1,433 949 1,526 1,032

Croatia: 1,321

789

78 ZAG DBV SPU PUY RJK ZAD BWK LSZ OSI

1) Not based on full time equivalents, but on number of employees

Source: Airport data, Roland Berger VIE-4989-90000-062-012 19

ZAG has the highest average fee for a typical aircraft the other airports do not show big differences
Fees per aircraft1) [000 HRK]

27.8 22.9 24.1 22.1 22.2 21.5 23.1 Croatia: 23.4

ZAG

DBV

SPU

PUY

RJK

ZAD

OSI

1) Landing, handling, lighting and passenger service fee for A320; parking fees were not included (first four hours are not charged); no discounts included; Airports Bra@ and Loinj not included (do not handle A320)
Source: Airport data (telephone interviews) VIE-4989-90000-062-012 20

Subsidy per Pax and airports unveils huge differences

Subsidies per Pax1) [HRK]
Total subsidies1) [m HRK] 9.8 13.9 1.6 1.6 1.2 12.4 0.8 0.8 4.7

1,957

348

93 8 ZAG
1) Average 2000-2003 2) Excluding OSI
Source: Airport data VIE-4989-90000-062-012 21

29 DBV

50 3 SPU 14 PUY RJK ZAD

28 BWK LSZ OSI

= 722)

BACKUP

In the past four years, the Croatian government granted subsidies of over HRK 40 m per year to the airport system
Total airport subsidies [m HRK]

50.5 39.8

49.3

47.6
= 46.8 (2000-2003)

2000

2001

2002

2003

Source: Airport data, Roland Berger

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22

Excluding subsidies, only ZAG and SPU broke even in 2003

Profit & Loss, 2003 [m HRK]
15,5

10,7

2,6 0,2 -0,07

1,4

0,4 -1,6

1,2 -0,2 -0,5 -2,2

0,1 -1,1

-2,2

-3,1 -7,3

-7,3 BWK LSZ OSI

ZAG

DBV

SPU

PUY

RJK

ZAD

Profit/Loss including subsidies

Source: Airport data

Profit/Loss excluding subsidies

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In general, profitability is correlated to size

Airport development (Profitability/Size)
Profitability [%]

10 -10 -30 LSZ -50 -70 -90 -110 -130

-380 -150

SPU PUY DBV

ZAG

RJK BWK ZAD

OSI

250

500

750

1,000

1,250

1,500

Size ['000 Pax]

1) Profit/loss excl. subsidies/revenue excl. subsidies

Source: Airport data VIE-4989-90000-062-012 24

C.

Croatian airport system within the international context

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25

The Croatian airport system is very small in terms of the overall traffic volume
Airport Pax [m], 2004
UK Germany Spain France Italy Sweden Netherlands Ireland Denmark Belgium Austria Portugal Finland Czech Rep. Cyprus Poland Hungary Croatia Malta Luxembourg Slovenia Slovakia Lithaunia Estonia Latvia
156 146 81 20 19 17 16 13 13 8 6 6 5 3 3 1 1 1 1 1 1 44 41 91 193

EU251): 36

Peer countries

Croatia

EU country
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1) Greece excluded
Source: ACI; Croatian Airports

The country surface covered per airport in Croatia is within a normal range
Country surface covered [km2] per airport, 2004
France Spain Sweden Germany Finland Poland Italy UK Hungary Portugal Austria Czech Rep. Ireland Latvia Croatia Slovakia Estonia Lithuania Denmark Netherlands Belgium Slovenia Cyprus Luxembourg Malta

499.542 410.934 348.223 304.473 304.465 294.020 92.340 91.951 82.444 77.276 68.890 63.589 x3 56,542 48.800 43.211 43.211 42.394 33.883 30.278 20.151 9.240 2.586 316 241.590

545.630

EU251): 154,143

Peer countries

Croatia

EU country
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1) Greece excluded
Source: ACI; CIA World Fact Book; Roland Berger

Croatia has on average smaller airports than any other EU251) country
Average airport size [Pax/airport], 2004
Netherlands Denmark UK Germany Ireland Hungary Belgium Italy Spain Cyprus Austria France Malta Portugal Sweden Czech Rep. Poland Luxembourg Slovakia Finland Lithuania Estonia Latvia Slovenia Croatia
1) Greece excluded
Source: ACI; Croatian Airports; Roland Berger VIE-4989-90000-062-012 28

10.222.476 9.624.068 8.750.893 5.010.479 4.327.691 4.245.853 3.755.894 3.241.519 3.182.004 2.742.506 2.675.781 2.668.984 2.591.064 1.956.660 1.562.937 1.461.140 838.000 731.782 719.850 716.099 EU251): 3,602,321 712.451 463.502 x10 Peer countries 375,257 7.441.112 6.812.973

Croatia

EU country

Overall, the positioning of Croatia within the international context is far away from peer countries
[km/airport]

700.000 600.000
France

500.000 400.000
Finland Sweden

Spain

Germany Poland Italy UK

300.000 200.000

Czech Republic

Portugal

Austria Hungary Ireland Belgium

100.000 Croatia Latvia 0 0

Estonia Malta

Lithuania Slovenia

Cyprus

Denmark

Netherlands

2.000.000

4.000.000

6.000.000

8.000.000

10.000.000

Luxembourg

Size of average airport 12.000.000 [# of Pax]

# of Pax in Croatia

# of Pax per country

# of Pax per peer country

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Source: CIA World Fact Book, ACI, Croatian Airports, Roland Berger

Compared with other countries the overall productivity at Croatian airports is generally lower
Airport productivity [Pax/employee2), 2003]
2,654 Maximum (DBV)

Croatia

45 Minimum (OSI) 1,434 Median (PUY)

6,482 Maximum (SZG)

Austria

4,090 Minimum (LNZ) 6,324 Median (GRZ)

6,610

Maximum (PSA)

Italy

1,323 Minimum (VCE) 5,126

Median (TRS)

1) Included in the analysis: Austria (GRZ, INN, LNZ, KLU, SLZ); Italy (GOA, PSA, TRS, VCE) 2) Not based on full time equivalents, but on number of employees
Source: Telephone interviews, ACI
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D.

Outlook on air traffic development in Croatia

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31

Croatian airports have planned a cumulative traffic growth of +6% CAGR

Pax [000]
CAGR +6% OSI BKW ZAD RJK PUY SPU

9000 8000 7000 6000 5000

DBV

4000 3000 2000 1000 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 1015 2016 2017 2018 2019 2020
1) Forecasts available for ZAG, DBV, SPU and ZAD, growth in RJK, BWK, PUY and OSI based on GDP
Source: Airport data, Roland Berger VIE-4989-90000-062-012 32

ZAG

The cumulated forecasts of Croatian Airports are very close to the overall IATA forecast for Croatia
Pax [m]
Cumulative forecasts of Croatian airports IATA traffic forecast for Croatia

9.000 8.500 8.000 7.500 7.000 6.500 6.000 5.500 5.000 4.500 4.000 3.500 3.000 0
CAGR +5% CAGR +6%

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Source: Airport data, IATA

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Factors influencing air traffic development in Croatia biggest impact from tourism development and LCC-entry expected

Tourism development in Croatia

TO BE DISCUSSED TODAY
2 Possible entry of LCCs

Impact of European Common Aviation Area (ECAA) and EUenlargement

No major disruptive impact in air traffic development expected

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D.1 Tourism development in Croatia

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35

WTTC expects tourism demand in Croatia to double over the next 10 years yet expected tourism arrivals will lag behind

CAGR +9.2% Travel & tourism demand 170.0 [bn HRK]

160.0

CAGR +4.0%
130.0 120.1 110.1 100.1 90.1 80.2 63.4 63 70.2 68 71 73 76 79 83 86

150.0 140.0

tourist arrivals [normalized; 2003 = 63]

89 93 97 100

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

Source: World Travel & Tourism Council (2004); Croatian Bureau of Statistics (2004)

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Croatian tourism today is heavily concentrated on the Coastal regions

Accommodation capacity, 2003
Number of beds per location
Zagreb 1.1 Non tourist locations 1.5 Others 2.1

Comments 95.3 % of all beds offered in Croatia are at the sea coast Croatia is a sunshine-destination Touristic traffic flows are concentrated on the coastal regions

95.3

Sea coast

Source: Croatian Tourism Board 2003

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Seven out of nine airports in Croatia are located in touristic destinations

Number of beds and Pax 2003
Istria
Mass tourism, rural tourism Accommodation: ~227,000 beds Airport: Pula ~156,000 Pax

Varadin

Primorsko-Goranska
Mass and charter tourism Accommodation: ~160,000 beds Airport: Rijeka ~57,000 Pax

2 2
Pula

Rijeka

Zagreb Karlovac Slavonski Brod

Osijek
Vukovar

Zadarska
Nautical tourism,mass tourism Accommodation: ~92,000 beds Airport: Zadar ~56,000 Pax

Loinj Zadar
Sibenik

Splitsko-Dalmatinska and ibensko-Kninska

Nautical tourism,mass tourism Accommodation: ~200,000 beds Airports: Split ~789,000 Pax and Bra@: ~26,000 Pax

Split Bra@ Dubrovnik

Dubrova@ko-Neretvanska
Elite tourism, golf, nautical tourism, congresses Accommodation: ~55,000 beds Airport: Dubrovnik ~881,000 Pax
Source: Croatian Tourism Board 2003, airport data, regional masterplans

5
City Airport

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The overall impact of tourism on the future development of air traffic is assessed to be rather moderate

Number of tourists slowly catching up to pre-war heights High seasonality unveiling potentials especially in spring and autumn Shift from individual car tourism to more organized air transport bearing high potentials for the airport system Key actions in masterplans indicating more premium (aviation-based) tourism

Downside potentials for air traffic development Croatia already shows a very high tourism density overall growth is limited Market size of Croatia lacking critical mass to be among the key tour operator destinations High price level compared to peer countries limits growth potential Overall decline of hotel capacities negatively influencing need for air traffic Decrease of hotel capacities in crucial 3*** and 4**** categories limiting the growth of package tour/charter tourism

Upside potentials for air traffic development

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UPSIDE POTENTIAL

The number of tourists is slowly catching up to pre-war heights

International and national tourists in Croatia
Tourist arrivals [m] Overnight stays [m]
61.9 8.3 8.9 38.6 42.8 44.7 46.6

9.7 7.8

6.9

5.6 6.6 6.9 7.4

39.4

5.8 4.1 1.1 1989 2000

33.8 22.5

38.1

39.7

41.3

1.2 2001

1.4 2002

1.5 2003 1989

4.9 2000

4.7 2001

5.0 2002

5.3 2003

International tourists

Domestic tourists (1989 including Yugoslavia)

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Source: Statistical Office Croatia (DZS), WTTC

UPSIDE POTENTIAL

The high seasonality (compared to Austria) unveils potentials especially in spring and autumn
Comparison of seasonality: Austria and Croatia
Tourist overnight stays per capita in 2002 [#]
3,5 3,0 2,5 2,0 1,5 1,0 0,5 0,0

Comments

Croatia shows a low capacity utilization of fixed assets (hotels, apartments, etc.) over the year Doubling of overnight stays in low season (May, June, September, October) leads to a value increase of 30% (EUR 1.1 bn) additional income on top of today's EUR 3.8 bn Wellness offers, traditional events and mountain biking could be activities to extend the seasonal reach

Austria Croatia
l n br rch pri ay ne uly Ja Fe J M Ju a A M g pt Au Se O ct N ov D ec

Source: Croatian Tourism Board, Austrian Tourism Board

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UPSIDE POTENTIAL

The key actions in masterplans indicate a trend to more premium (aviation-based) tourism (1)
1 2 3

Istria

Primorsko-Goranska

Zadarska
Mass tourism Cultural monuments Organized: 28% Share of foreign tourists: 82%

Tourism strategy/ positioning

Car and charter mass tourism, bus Car and bus tourism tourism Organized: 30% New trend: Agro tourism Share of foreign tourists: 81% Mass tourism except Brijuni, Opatija and agro tourism in interior Organized: 39% Share of foreign tourists: 93% (above average) Currently strong focus on Russian tourists in charter Pula airport Motorway Istarski Y Prolongation of season Emphasis on golf, wellness and congress tourism Brijuni archipelago-cluster designed for elite tourism Definition of 7 clusters (zones) with distinct identity and varying tourist attractions Different products at different clusters Upgrading of existing facilities Rijeka airport Loinj airport Masterplan in progress

Transport

Zadar airport Masterplan in progress Nautical tourism, sport

Key actions according to masterplan

Source: DEG Masterplan for Croatia, Croatian Tourism Board 2003, telephone interviews with local Tourism Boards

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UPSIDE POTENTIAL

The key actions in masterplans indicate a trend to more premium (aviation-based) tourism (2)
4 5

Splitsko-Dalmatinska and ibensko-Kninska

Mass tourism Cultural monuments Organized-Split: 44%; ibenik 28% Share of foreign tourists: 85%

Dubrova ko-Neretvanska
Airline and charter destination Cultural tourism Congresses All-year round destination Large sea-side resorts (Peljeac peninsula, Cavtat) Organized: 49% Share of foreign tourists: 85%

Tourism strategy/ positioning

Transport

Split airport Bra airport Motorway Zagreb-Split nearly completed Masterplan in progress Tourism with strategic goals Modernisation and valorisation of existing touristic potentials Concept of touristic destination as such Creation of distinct tourism product (health-nauticalcongress tourism etc.) Introduction of European quality standards

Dubrovnik airport Coastal road (Magistrala)

Key actions according to masterplan

Prolongation of season Emphasis on art and culture tourism Wellness Golf, new marinas and casinos Health tourism New recreation capacities on nearby islands

Source: Masterplan for Dubrovnik, Croatian Tourism Board 2003, telephone interviews with local Tourism Boards

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DOWNSIDE POTENTIAL

The country already has a very high tourism density overall growth is limited
Comparison of selected European countries in 2002
Number of tourists per inhabitant

Comments Croatia has 1.6 tourists per inhabitant (per year) Only Austria has a higher tourism density

2.3

1.6

1.6 1.3 1.3 1.3

Major inbound markets in Southern Europe (e.g. GRC, ESP, ITA, and TUR) have lower densities
0.7 0.4 0.3 0.2 0.2

AUT CRO HUN GRC FRA ESP ITA GBR POL GER TUR

Source: World Tourism Organization (WTO) 09/2003

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DOWNSIDE POTENTIAL

The market size of Croatia lacks critical mass to be among the key tour operator destinations
Number of tourists at European destinations in 2002 [m]
Market share in Europe [%] 19.3 12.9 10.0 6.0 4.7 4.5 4.0 3.5 3.5 3.2 2.9 2.5 2.4 2.0 1.7 1.7 1.6 1.6

77.0

51.7 39.8 24.2 18.6 18.0 15.9 14.2 14.0 12.8 12.0 10.0 9.6 7.9 6.9 6.7 6.5

6.3

FRA ESP

ITA GBR AUT GER HUN GRC POL TUR PRT CHE NLD RUS CRO BEL

ISL

UKR

Southern Europe
Source: World Tourism Organization (WTO) 09/2003 VIE-4989-90000-062-012 46

DOWNSIDE POTENTIAL

The overall decline of hotel capacities is negatively influencing the need for air traffic
[Number of beds]
Total beds2) 820,251 710,188 732,713 752,601 782,651 CAGR 2000-2003 [%] +3.3

Hotels and tourist settlements

178,867 157,502 191,249 158,908

160,089

-5.8

Private accommodation

246,995 273,734 273,833 294,479 317,850

+5.1

Camping

278,779 195,197 210,148 202,489 206,662

-0.6% +41.0%

Others1)

115,610 1985

34,958 2000

106,280 2001

96,725 2002

98,050 2003

1) Health resorts, workers resorts, children and youth resorts, misc. 2) Due to unfinished privatization process, some hotels and other accommodation capacities have not been completed yet
Source: Croatian Tourism Board 2003
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DOWNSIDE POTENTIAL

The decrease of hotel capacities in crucial 3*** and 4**** categories is limiting the growth of package tour/charter tourism
[# of beds]
Total beds 5 ***** 4 **** 120,000 93,8011) 96,607 96,380 CAGR 2000-2003 [%]

-7.0

7,200

500

2,983
2,305 72,000 42,482

3,542
8,283

3,245
5,840

+86.5 -6.7

3***

47,219

51,050

-10.8

2** 1*

36,000 4,300

38,387 33,200 7,644 4,363 31,347 4,898

-4.5 +4.4

2000

2001

2002

2003

1) Change from 2000 to 2001 due to reclassification of hotels in Croatia

Source: Croatian Tourism Board 2003
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BACKUP

All regions need more capacity, especially in 4**** segment

Number of hotels, 2003
1 2 3 4 Splitsko-Dalmatinska and ibenskoKninska 5 Dubrova@koNeretvanska

Category Istria

Primorsko-Goranska

Zadarska

5*****

4****

3***

39

29

39

26

2**

30

41

15

36

22

1*

12

Source: Regional Tourism Boards of Istria, Rijeka, ibenik, Zadar, Split, Dubrovnik

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D.2 Possible entry of LCCs

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Considering all key upsides and downsides, LCCs will not dramatically change the overall air traffic development in Croatia

LCCs growth is especially driven by new destinations to leisure spots Croatia has significant share and amount of private accommodation suitable for low cost travellers Significant unused capacity especially in smaller airports LCCs are able to generate/create traffic without heavily cannibalizing existing air traffic

Downside potentials for air traffic development High seasonality is a major obstacle for attracting LCCs with a full-year production logic High price level compared to peer countries prevents smart shoppers entering the market Croatian airports authorities are probably not willing and not capable of attracting LCCs with heavily discounted fees

Upside potentials for air traffic development

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The LCC business model is especially driven by new destinations to leisure spots
Basic business principles
Destinations based on production criteria, like efficient operating radius of fleet aircraft Airport costs at potential destinations on the required radius Short-haul, point-to-point routes between secondary airports High aircraft utilization on fully standardized fleet Maximum productivity, lean ground and gate services Limited passenger service (no baggage transfer, no seat assignment, no meals, no connections to other airlines) Maximum amount of direct sales (Call centers, online-sales) Very low ticket prices, high volume Entering routes with high local traffic volume ex the home base Expansion on thinner routes counting on induced traffic With market saturation selection of further bases
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Example: Ryanair's bases

Growth dynamics

Source: Roland Berger analysis

Low-cost carriers have grown rapidly in recent years in the European market
Low cost carrier traffic 1997-20021) [pax m] CAGR 32.9% p.a.
Scandinavia: 19

LCC presence July 2003 and number of destinations2)

31.5 25.7

Belgium/Netherlands: 5 Germany, Austria and Switzerland: 28 UK/Ireland: 34 Czech Republic: 1

20.4 14.8 10.9 8.1 4.3 5.4

France: 25

Turkey: 4 Spain/Portugal: 23 Italy: 24 Greece: 9

1997

1996

1997

1998

1999

2000

2001 2002E

1) Airlines analyzed are FR, U2, GO, Buzz, TV and WW (2002E); 2) Includes following: FR, U2, GO, BE, VZ, Buzz (French destinations only), TV, DI, HLX, LS, WW, DY, HV (all), NB, AB (all), 4U, VA (charter & LCC)
Source: OAG; Annual reports, Websites, Broker reports, Roland Berger

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LCCs are able to generate/create traffic without heavily cannibalizing existing air traffic
Example LON-GLA 1996-2002
Low cost carriers growth sources1) (%)

"Stolen" pax 37

The share of stolen passengers varies for every operated route due to the characteristics of travellers, the competitive situation, the geographic situation of the airport etc.
63 "New" pax

Low cost carriers not only cannibalize airline passengers but also from other means of transportation (e.g. bus, rail, ferry boats, etc.)

Note: Calculation based on theoretical vs. real market growth, traffic above market growth is seen as newly generated traffic 1) This split must be considered conservative. Other sources (Lehman Brothers,etc.) talk of a 80/20 split creative/stolen
Source: OAG, Roland Berger analysis
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This pattern was dramatically evident in the TRS/FR case

Case study: FR in TRS
Passengers between TRS and LON
120,000 100,000
81,000

Ryanair capacity and seat load factors

107,000

135,000

80,000 60,000 40,000

102,000

76% 72%
8,800

20,000

7,300

4,200

0 2000

2001 FR

2002

2001 Pax

2002

Connections via MXP/MUC/FCO

Source: Roland Berger

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E.

Discussion of guidelines for air transport in Croatia

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Why guidelines?
Air traffic significantly fuels the economic development of Croatia. A considerable amount of jobs are directly or indirectly linked to this industry. Furthermore air traffic links Croatia to the rest of the world and serves as a basis for tourism and exports In view of a possible accession of Croatia to the European Union (EU) as well as the development of an European Common Aviation Area (ECAA), air traffic in Croatia faces a significant challenge: airports as well as Air Traffic Control (ATC) have to provide adequate infrastructure to cope with an increasing demand Nowadays, Croatia has nine international airports. Apart from Zagreb, those are the coastal airports Dubrovnik, Split, Zadar and Pula, the continental airport of Osijek as well as the island airports Rijeka, Bra@ and Loinj. Nearly all airports are currently expanding their infrastructure or plan to do so in the near future. Concerning the financing of infrastructure, air traffic competes with railway transportation and road traffic "Guidelines" should provide answers to the question, how the airport system as part of the entire traffic infrastructure should be developed in order to best fulfill the need for an adequate air traffic infrastructure
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The framework
Roland Berger Strategy Consultants has been asked to moderate the discussion on potential guidelines for the air traffic system in Croatia. In preparation, Roland Berger has analyzed the (international) Croatian airport network in depth The discussion on guidelines needs to cover issues like: an adequate consideration of air traffic and therefore the future development of airport infrastructure within an integrated traffic system, a demand-oriented development of airport infrastructure in order to make best use of private as well as public funds, adequate access of airports to rail and road connections, the regulatory framework including possible financing models for airport infrastructure (ownership) as well as the strategy of Croatian airlines The entire work focuses on international Croatian airports, meaning non-international airfields are not considered in this study. Same applies to Air Traffic Control

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Potential guidelines The role of air traffic in Croatia

Croatia's economic development heavily depends on tourism as the attractiveness of the Coastal regions is the main natural resource of Croatia Croatia competes with other European and Non-European destinations. A state-ofthe-art traffic system is key in this competition Most valuable tourism is created by hotel capacity on international standards (3***, 4****) and corresponding point-to-point air traffic connections to the main outbound markets in Europe and beyond Air traffic needs to be an integral part of the entire Croatian traffic system including rail, road and sea transportation

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Potential guidelines The future development of airport infrastructure in Croatia

Development of airport infrastructure should always be based on the demand for air traffic which is forecasted at some 5 to 6% growth overall for the next 15 years Demand does not legitimate further airports in Croatia, but the existing network should be developed in an appropriate way The operations of airports and related investments should be self-financing The government of Croatia provides financial funds for the improvement of the accessibility of airports by road, rail and sea and coordinates the overall inter-modal traffic development. A long-term planning of infrastructural measures should be settled in a Croatia-wide "Masterplan" State aid should not distort competition between airports in any way. Regional funds, if applicable, should be applied in line with the governmental Masterplan
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Potential guidelines Regulatory framework for airports in Croatia

The regulatory framework should provide certainty for all parties concerned in the planning of future airport capacity, but at the same time is sufficiently flexible to adapt to uncertainties inherent in long-term planning The regulatory framework for Airport ownership in Croatia should be eased in order to allow for foreign ownership and/or partnerships Airports in Croatia need to comply with international environmental regulations (EU directives, ICAO framework) in order to reduce and minimize the impact of airports on those, who live nearby, and on the natural environment

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