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There has never been a time in the history of the airline industry when we have seen so many aircraft long term grounded or capacity permanently disposed of and manufacturers wrestling with order deferrals and cancellations on such a scale. On the face of it this presents an ideal opportunity to start a new airline. But is it really a good time?
The old adage “how do you make a small fortune? Start with a large fortune and invest in an airline” still holds good. Yet legions of business plans are being hatched, the vast majority of which will never reach fruition or come to a costly end in a short space of time.
There is a real need for deep reflection and thorough due diligence before any business plan even sees the light of day. I find it astonishing how infrequently this happens and just how many plans are so lightweight and half baked. Perhaps I am cynical but it’s little wonder that there are so many airline start-ups failures.
Here are just some of the reasons why it’s essential to do your homework.
New Airbus A320 aircraft production line (Photo by Etienne De Malglaive/Getty Images)
The choice of new and used aircraft on offer right now is overwhelming. Lease rates have tumbled as have purchase prices for many types. The crisis facing the industry also means that sadly there are many thousands of flight and cabin crew, as well as engineers, looking for employment. So theoretically all parts of the resource jigsaw fit.
But there is no use behaving like a kid in a candy store, the key is knowing which is the right aircraft for the job and how many might sensibly be required. Indeed, to answer these questions there is a need to know what the job is in the first place!
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Planes and people may be available in abundance and at unbelievably low rates, but substantial liquidity is required to procure them and cash starts burning quickly well before any commercial flying begins. Regulators expect an airline to be able to fund itself for several months, even with zero revenues, if it is to obtain a license. Obtaining adequate funding for start up and initial operations is no simple matter and there is no escaping being able to provide credible answers to challenging questions on intentions.
In short words, there is no point in seeking aircraft and funding if numerous other elements have not been evaluated and opportunity and risk adequately assessed.
No better place to start than analysing market potential. It is essential to understand what type of market is being pursued. Is it, for example, new or established? What type of customer profile is expected or being targeted? Is it high or low volume? Does it offer year round potential or is it seasonal? These are all essential considerations influencing choice of aircraft along with determining the scale and breadth of operation.
Then there is the question of what pricing strategy will be pursued and what revenues this might be expected to be produce. Following on from this, what are the plans for marketing and distributing your product? Get this wrong and your services will not be visible, nor will seats get sold. Airline distribution is undergoing fundamental change, accelerated by the covid crisis, so it is something which requires intense thought and attention.
I am amazed at the number of airline ventures that commence with seemingly little or no thought about competitor response! Incumbents are not going to stand idly by and watch their lunch being eaten by a new entrant. Equally, if a new market is developed successfully, the airline industry does have a habit of playing the “me too” game and others are likely to look to join the party if they sense an opportunity.
Scenario planning must therefore include the impact on the business of competition. Never assume that no one else will do anything to stop you in your tracks!
Market potential may appear good however it is equally critical to understand not only what regulatory requirements must be met in order to secure an operating license, but whether there are other restrictions such as on nationality of ownership or concerning traffic rights negotiated between countries for international services. No assumptions can be made about any of these being straight forward or non-issues. On the contrary they could be show stoppers or prove to be time consuming inhibitors to launch plans.
Many would be airlines are too focussed on the apparently sexy stuff like route selection and marketing, without giving the requisite attention in their business planning to critical operational issues. Safety has to be a given and regulators will naturally pay close attention to this, but focus must also be given to the basics of punctuality and reliability of operation. No use having shiny new aircraft and a marvellous product if it all falls apart on the day.
Frequently start-ups under estimate resources or overestimate capability and end up falling flat on their faces when inevitable operational setbacks occur. Aircraft do break down, crew do go sick, bad weather happens and hence flights do get delayed and cancelled. Sufficient thought must be given to avoiding or minimising the impact of such things and to the impact on customers and reputation. This includes planning realistic time tabling which allows opportunity for recovery and also ensuring that adequate attention is given to maintenance and engineering requirements.
As per Murphy’s law, if something can go wrong it will go wrong and the airline business is no exception. There will be economic downturns, strikes, wars and terror attacks and yes, there will be more pandemics. All of this requires good downside scenario planning and again feeds through to the need for adequate liquidity.
There are many more factors which must be weighed if a start-up is going to succeed and that is my key message at this unusual time of profuse aircraft availability. Their availability alone cannot justify embarking on start up plans or guarantee success.
There are investors and lease companies willing to partner with start-ups but only if they offer a solid business plan. Bill Franke, founder of private equity company Indigo Partners, has invested in a number of successful start-up airlines including Mexico’s Volaris and Hungary’s Wizzair but these represent a tiny minority of business plans which have passed his desk, the majority being rejected from the get-go.
Veteran lessor Steven Udvar-Házy, Chairman of Air Lease Corporation, is willing to lease aircraft to start ups in the current crisis but not before forensically analysing their business plans and operating context and will limit exposure to only a few percentage points of total business.
Amongst those that look to have a fair chance of survival I would point to Breeze in the US, Flyr in Norway and Play in Iceland. All come with an immediate advantage, they have experienced management teams and have made a careful choice of aircraft type and product. Breeze has selected smaller regional jets to serve numerous smaller US markets currently lacking air services. Flyr is learning from the mistakes of Norwegian, focussing on a modest fleet of second hand Boeing 737 aircraft to serve its home market which it knows intimately. It is starting with a clean sheet of paper using digital technology to support simplicity of business processes and customer proposition. Play will use new generation Airbus A321 NEO aircraft to serve proven markets to and from Iceland, learning from what failed Icelandic low cost airline Wow achieved, but avoiding its over ambitious expansion and fleet diversification.
There is no single recipe for start-up success but there is certainly no substitute for detailed and careful preparation and assuming from the outside that things will not go to plan.